Institutional erosion a hidden risk in event of QE tapering

While we don’t expect the looming announcement of QE tapering by the US Fed to trigger a sharp rise in US yields a la 2013’s ‘taper tantrum’, it is impossible not to have flashbacks to those days. Back then, Latin America had only one delegate in what became known as the ‘Fragile 5’ group of vulnerable EMs. Eight years later, however, the region is in an even weaker position to withstand another EM sell-off.

What you will learn:

• Colombia is in the weakest position in LatAm to withstand another sell-off. Like Brazil eight years ago, Colombia has all the ingredients – rising twin deficits, social unrest, polarized elections – to be extremely vulnerable once liquidity dries out.
• Another source of risk is the potential for institutional erosion in all major LatAm countries. Given the recent profound political changes in Chile and Peru, these two markets should no longer be ‘safe havens’ for investors.
• Mexico has been considerably more stable than its peers in South America. AMLO’s ‘cold war’ with the private sector brought investment to halt, but his draconian austerity policy gives bondholders no reasons to complain. No wonder Mexican assets outperform even as growth disappoints.