Will QE3 benefit the BRICS countries?

Today, the US central bank (Federal Reserve) announced a third round of the program called quantitative easing (QE3), which means the government will expand its holdings of long-term securities with open-ended purchases of US$ 40 billion of mortgage debt a month. The program is another attempt to boost the economy and reduce unemployment. The Federal Open Market Committee (FOMC)—a committee composed by twelve members where five of them Federal Reserve Bank presidents—also said the federal funds rate might be kept near zero through at least the middle of 2015.

Will the third round of the quantitative easing benefit emerging markets, particularly BRICS (acronym to Brazil, Russia, India, China and South Africa). This question has two possible answers, and both are correct: yes and no.

At the first moment, the QE3 program benefits emerging markets. As the American central bank will buy debts from commercial banks and other private institutions, it is inject money into the economy since banks will have more money to lend to companies. Entrepreneurs, in their turn, might invest to increase productivity reducing the unemployment rate. With more money circulating into the economy, part of them may have the emerging markets as a destiny, especially the largest ones.

Another benefit came from commodities. As the amount of money circulating into the economy will increase, investors tend to become more worried about inflation pressures. Then, they look for commodities, particularly precious metals such as gold, silver and cooper, to reduce their invest risks, and emerging markets are huge producers of such materials.

Commodities prices might rise also because the QE3 program is designed to benefit sectors like construction, housing and consumer staples. Approximately 98% of iron ore, for instance, is used to make steel and this material is used in construction. The major producer of iron ore is Brazil, China, Russia, India and Australia.

However, not everything in this history is a bed of roses. As the United States has been increasing the economy’s liquidity, one of the consequences is currency pressures, weakening the US dollar and strengthening the other currencies. So, emerging markets governments and central banks leaders can have to interfere in the market if their currency strengthens too rapidly due to surge in capital inflows.

As BRICS, especially Brazil, have been struggling to revive their economy, the QE3 program can bring more benefits than problems to the major emerging markets.


Post a Comment