Are the emerging markets finally decoupling from the United States?

• Position: Reports on Global economy

For the past few decades, every cycle of rising interest rates in the United States has brought economic contraction and widening interest rate spreads among emerging market borrowers--particularly in Latin America. We now approach a period where U.S. interest rates are again expected to rise further, perhaps significantly. Have the increasing depth of global financial markets and the improved efficiency and credibility of emerging market economic policies made international borrowers less vulnerable to the effects of a rise in U.S. interest rates than in the past?

PEDRO-PABLO KUCZYNSKI Minister of Economy and Finance, Peru

The omens are good.

It is too early to tell although the omens are good. The international setting is at present very favorable to commodity and semi-industrial exporters like most Latin American economies. Exports are rising fast, so are reserves, and all this makes following good policies easier. It will take a tougher international setting before one can tell if Latin American countries have really decoupled from the United States. Decoupling is not an attainable goal, but gaining a degree of financial independence is.

Domestic fiscal policies, always the Achilles heel of Latin economies (including the Latins of Europe), have greatly strengthened, well before the international improvement picked up speed. This is why Chile and Mexico are rated "investment grade" and others, such as Brazil and my own country of Peru, are rapidly gaining ground. In Peru, for example, the consolidated public sector deficit is down to about 1 percent of GDP (with a central government surplus), domestic interest rates have plummeted, and exports are up 70 percent in three years (up 50 percent by volume), while domestic inflation is comparable to that of the United States.

A key element in decoupling is building up domestic capital markets. Chile has been the pioneer: as private pension funds have grown, the financial effects have spread to insurance companies and mutual funds, giving local capital markets much greater depth, especially in the bond market with greater liquidity and longer maturities. In Peru, private prime corporate borrowers regularly tap the soles market, at fixed rates to seven years and variable rates up to twenty-five years, as does the government. We are studying prepaying a part of our Paris Club debt through a local issue, thereby reducing the foreign exchange exposure of our debt.

Finally, another key element is to reduce the burden of public debt as a percentage of GDE a natural outcome of pursuing prudent fiscal policies, especially during times of bonanza. Some Latin American countries still have debt ratios that are too high. In order to begin to gain a reasonable degree of financial independence, these debt ratios must come down sharply, especially at a times such as now.

2005 seems too soon to worry.

JEFFREY FRANKEL Harpel Chair of Capita/Formation and Growth, Harvard University, and...