LATIN AMERICA’S LESSONS FROM CAPITAL ACCOUNT LIBERALIZATION José Antonio Ocampo Columbia...
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LATIN AMERICA’S LESSONS FROM CAPITAL ACCOUNT LIBERALIZATIONJosé Antonio OcampoColumbia University
Medium-term cycles of capital flows to emerging markets:
1975-81 -- Recycling of petrodollars, via bank loans, to oil-importing EMs1982, Aug.-- Mexico unable to service its debt on schedule, defaults
=> Start of the Latin American debt crisis, 1982-89
1990-97 -- New capital flows to EMEs following 1989 Brady Plan1994, Dec. -- Mexican peso crisis1997, July -- Thailand forced to devalue and seek IMF assistance => Start of East Asia crisis1998, Aug. -- Russia defaults on much of its debt => Contagion to Brazil.2001-02 -- Turkey and Argentina currency & debt crises
2003-07 -- New capital flows into developing countries2008, Sep. – Lehman Brothers collapse => Beginning of North Atlantic Financial Crisis
2009-13 -- Post-crisis surge in capital flows to emerging markets,
2013, May -- May 2013 U.S. Fed tapering began the contraction phase
But, so far, financing conditions have continued to be good
1.
2.
3.
4.
3
Net resource transfers to Latin America
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Figure 1: Net resource transfer, 1950-2012 (% of GDP at current prices)
via financial flows via FDI Total
Source: Authors’ estimates based on ECLAC data
4
Major phases of liberalization and regulation
1950-75 -- Extensive FX and capital account regulations in all LA▫ Exceptions: Mexico and Venezuela
1975-81 -- Capital account liberalization in Argentina, Chile and Peru, but Brazil and Colombia remain relatively closed; Domestic liberalization in Argentina and Chile
▫ 1982-89 -- Closing of the capital account during LA debt crisis
1990-98 -- Broad-based capital account liberalization in LA, including Brazil and Colombia, but with new instruments to regulate capital flows:
▫ Taxes on capital flows in Brazil, and URRs in Chile and Colombia.▫ Regulations on FX transactions, e.g. restrictions on domestic
financial deposits in FX. -- Semi-dollarized systems in Argentina and Peru, hyperinflations of 1989 and 1990; but not in Brazil despite its hyperinflation in early 1990s
2000-06 -- Further liberalization in Brazil, Colombia, Chile (FTA with U.S.), but reversal of liberalization in Venezuela and Argentina
▫ 2004-13 -- Peru used differential RRs on deposits in dollars and short-term external borrowing by domestic banks vs. deposits in the domestic currency
▫ 2007-08 -- Colombia used URRs before FTA with U.S.▫ 2009-11 -- Brazil used taxes on capital inflows after the North-
Atlantic crisis
1.
2.
3.
5
Comparison of capital account restrictiveness of Latin America vs Emerging Market Economies
Figure 2: Capital Account Restrictiveness in Latin America and EMEs
Source: Negative of Chinn-Ito index of capital account openness.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
1970 1975 1980 1985 1990 1995 2000 2005 2010
LA7 EMEs
6
Capital flow regulations in Latin AmericaFigure 3: Capital Flow Regulations in Latin America and EMEs
Source: Updated by Erten and Ocampo (2013) with data from Schindler (2009) and Ostry et al. (2012).
.1
.2
.3
.4
.5
.6
.7
.8
.9
1996 1998 2000 2002 2004 2006 2008 2010
LA7 EMEs
A. Capital Inflow Regulations
.1
.2
.3
.4
.5
.6
.7
.8
.9
1996 1998 2000 2002 2004 2006 2008 2010
LA7 EMEs
B. Capital Outflow Regulations
.1
.2
.3
.4
.5
.6
.7
.8
.9
1996 1998 2000 2002 2004 2006 2008 2010
LA7 EMEs
C. FX-related Regulations
.1
.2
.3
.4
.5
.6
.7
.8
.9
1996 1998 2000 2002 2004 2006 2008 2010
LA7 EMEs
D. Financial Sector Specific Restrictions
7
Lessons from capital account liberalization and regulation
• Surges in international capital flows generate pressure to adopt pro-cyclical macroeconomic management and to liberalize capital account and financial regulations, with large destabilizing effects:▫ Both the liberalization of the 1970s/early-1980s and that of the
1992-97 ended up in major crises.
• However, not all booms end up in crises: The critical issues are current account deficits and associated currency appreciation.▫ Reduction of external debts and accumulation of reserves serve as
additional buffers against capital flow volatility.▫ The domestic counterpart of the current account deficit is important:
the experience of the Southern Cone during the first boom and of a broader group of countries during the second was problematic, since external financing was essentially consumed.
• Maintaining some capital account regulations to directly manage capital flow volatility is important.▫ Brazil, Chile, Colombia and Peru used some of these tools effectively.▫ But these regulations should be used as a complement, not as a substitute
for domestic financial regulations – in some cases, their use as a substitute has made crises unavoidable and more severe.
8
Current conditions in Latin America: what can we expect?
The recent boom in external financing generated a strong recovery of investment, for the first time since the boom of the 1970s.
An additional strength was the reduction in external debt ratios, both gross and net of foreign exchange reserves:• More macroeconomic policy autonomy.• Better access to external financing
But Latin America spent –in fact, overspent— the terms of trade boom Significant vulnerability to the deterioration of the terms of
trade… … and therefore to the Chinese slowdown.
However, so far, access to financing has continued to be good: Almost unaffected by successive euro crises Marginally so by FED tapering Somewhat more by the fall in commodity prices.
9
Investment as a share of GDP
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
26%
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Figure 4: Latin America Investment ratio, 1965-2013 (2000 prices)
Source: ECLAC
10
External debt as a share of GDP
Source: Authors’ estimates based on ECLAC data
0%
5%
10%
15%
20%
25%
30%
35%
40%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
External Debt (gross and net) as % of GDP
Debt Net of foreign exchange reserves
11
Current account balance has deteriorated since 2002 when adjusted by terms of trade
Source: Authors’ estimates based on ECLAC data
-9.0%
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Current account balance, adjusted by the terms of trade (% of GDP)
Current account balance Adjusted by the terms of trade
12
But, so far, access to external financing looks good (1)
Source: ECLAC
0.0
5.0
10.0
15.0
20.0
25.0
Latin American bond emissions, 2003-Jun 2015(billion dollars)
Monthly Five-months moving average
13
But, so far, access to external financing looks good (2)
Source: JPMorgan
0
2
4
6
8
10
12
14
16
18
20
4/1/
1997
7/1/
1997
10/1
/199
71/
1/19
984/
1/19
987/
1/19
9810
/1/1
998
1/1/
1999
4/1/
1999
7/1/
1999
10/1
/199
91/
1/20
004/
1/20
007/
1/20
0010
/1/2
000
1/1/
2001
4/1/
2001
7/1/
2001
10/1
/200
11/
1/20
024/
1/20
027/
1/20
0210
/1/2
002
1/1/
2003
4/1/
2003
7/1/
2003
10/1
/200
31/
1/20
044/
1/20
047/
1/20
0410
/1/2
004
1/1/
2005
4/1/
2005
7/1/
2005
10/1
/200
51/
1/20
064/
1/20
067/
1/20
0610
/1/2
006
1/1/
2007
4/1/
2007
7/1/
2007
10/1
/200
71/
1/20
084/
1/20
087/
1/20
0810
/1/2
008
1/1/
2009
4/1/
2009
7/1/
2009
10/1
/200
91/
1/20
104/
1/20
107/
1/20
1010
/1/2
010
1/1/
2011
4/1/
2011
7/1/
2011
10/1
/201
11/
1/20
124/
1/20
127/
1/20
1210
/1/2
012
1/1/
2013
4/1/
2013
7/1/
2013
10/1
/201
31/
1/20
144/
1/20
147/
1/20
1410
/1/2
014
1/1/
2015
4/1/
2015
7/1/
2015
Latin America: Spreads and Yields of Soverign Bonds, 1997-2015
LATAM Spreads
LATAM Yields
LATIN AMERICA’S LESSONS FROM CAPITAL ACCOUNT LIBERALIZATIONJosé Antonio OcampoColumbia University