- The Washington Times - Monday, January 8, 2001

Capital starved emerging markets could get a healthy boost from further interest rate cuts by the Federal Reserve. On Wednesday, the Fed cut the federal funds rate, or the rate at which banks lend to each other, by a hefty half a point. In a statement, the Fed hinted that additional rate cuts were in the offing, noting that a weakening economy, rather than inflation, was the main threat in the immediate future.

Carlos Asilis, chief emerging market strategist for JP Morgan, expects the Fed to cut interest rates by a total of 100 basis points this year. This would have a two-pronged effect on the emerging market world: countries' debt burdens would be reduced through cheaper financing and capital will begin to venture back to riskier but more profitable investments.

By the second half of this year, stocks in the United States and developing markets will have bottomed out and will be poised for a rally, predicts Mr. Asilis. "When U.S. stocks start picking up, you want to be in emerging markets because that's where you'll get the biggest bang for your buck," said Mr. Asilis. Mexico or Brazil could be particularly good bets, he added.

But developing countries will continue to feel pain for some time. Although the Fed's Wednesday rate cut is a step in the right direction, it alone will scarcely be felt abroad. For some countries, like Argentina in particular, the road to recovery will be rocky.

Since the Asian, Brazilian and Russian crises began in 1997, investors have been increasingly risk averse. The spread between AAA US Treasuries and sub-investment grade corporate bonds is at 364 basis points a record high. Emerging markets have suffered severely from this flight to quality. Since September, Argentina's interest rates on debt have climbed 1.5 percentage points.

But the outlook for emerging markets and U.S. stocks will improve considerably if the Fed continues cutting rates, as expected. And once these countries pick up, U.S. corporate export revenues will rise in tandem.

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