manuel sanchez : emerging markets amid heightened uncertainty remarks by mr manuel sanchez, deputy governor of the bank of mexico, at the credit agricole central bank seminar, rome, 23 october 2014. * * * i am honored to join you here today in the magnificent city of rome, a cradle of western civilization, one of europe ’ s great cultural centers, and a muse for poets and artists throughout the centuries. thank you for the invitation to share a few words with you on the topic of emerging markets. emerging economies now confront a new reality, one in which some apparent certainties have disappeared, and different challenges have arisen. i would like to touch on three subjects in this context, starting with the performance of emerging economies, moving on to financial market conditions, and concluding with a brief overview of mexico in particular. as always, my views are entirely my own and do not necessarily reflect those of the bank of mexico or its governing board. developments and the outlook for emerging economies two distinctive trends characterize developments in emerging economies during the last few years. the first is higher growth since the beginning of this century, relative to the previous decade. economic expansion has surpassed that of developed nations substantially, with china and india playing prominent roles. what forces have driven this phenomenon? although emerging economies are not all alike, as a group they seem to have benefited from generally sound policies implemented in the 1980s and 1990s. these include the strengthening of macroeconomic and financial frameworks and the liberalization of markets, reduced regulations, and greater openness to international trade. additionally, high and rising commodity prices and ample access to external credit during the 2000s have helped. by and large, better policy and institutional settings seem to be responsible for the fact that emerging economies were relatively resilient to the shocks of the great recession. indeed, in 2009, while the advanced economies contracted more than 3 percent, the emerging economies grew slightly above 1 percent. 1 nonetheless, since 2011, growth in emerging economies has been declining, the second notable trend for the group as a whole. although still above that of advanced nations, average output change in the last four years has been less than that observed prior to the crisis in this century. several factors may contribute toward an explanation of the slowdown. one possibility is structural. some emerging economies such as china may be reaching the production frontier derived from their reforms. they cannot grow at constant extraordinarily high rates indefinitely. another possibility, which could be complementary to the first, is that

be to external disturbances, own calculations based on the international financial statistics database, imf. dudley, w. ( 2014 ), “ u. s. monetary policy and emerging market economies. ” remarks at the roundtable discussion in honor of terrence checki : three decades of crises : what have we learned?, federal reserve bank of new york, new york city, march. bis central bankers ’ speeches empirical evidence to support this hypothesis is inconclusive. thus, the authorities should continue to watch the financial risks carefully. 7 the mexican economy during the last decade, mexico ’ s economic growth was, on average, lower than that observed in other emerging markets. several factors may help explain this. one is high integration with the u. s., where gdp has remained below the long - term trend since the crisis. another is that mexico is mainly a manufacturing exporter, and thus it did not overly benefit from previously booming commodity prices. third, long - stagnant total factor productivity reveals pervasive inefficiencies in the economy. furthermore, since the middle of 2012, mexico was hit by a succession of domestic shocks, including the bankruptcy of major housing developers and a contraction in public investment. in 2014, the economy started to pick up, driven first by more dynamic exports of goods and services, and more recently, by stronger private domestic demand. third - quarter data on industrial production and retail sales suggest that momentum continues. the broad - based outlook is one of gradual recovery during the rest of this year and in 2015. 8 both upside and downside risks to the growth scenario are present, with upside risks prevalent. these include the possibility of faster - than - expected u. s. economic recovery and positive effects from structural reforms implemented during the last couple of years to enhance productivity in many sectors of the economy. on the downside, less favorable international conditions could dampen activity. market reactions in mexico to external financial volatility in the last year and a half have been relatively manageable. the peso has depreciated less than many other emerging - market currencies, a noteworthy fact given the absence of intervention in the foreign exchange ( fx ) market. also, both the fx and bond markets have been orderly, with traded volumes and bid - ask spreads tight. furthermore, peso - denominated bond holdings by nonresidents have remained relatively stable for the last two years, despite being at high levels, suggesting that investors are taking