Macroeconomic Challenges for Latin America: Where do we Stand? Prepared for Presentation at the XXX...
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Macroeconomic Challenges for Macroeconomic Challenges for Latin America: Latin America: Where do we Stand? Where do we Stand? Prepared for Presentation at the XXX Meeting of the Latin American Network of Prepared for Presentation at the XXX Meeting of the Latin American Network of Central Banks and Finance Ministries, IADB, Washington DC Central Banks and Finance Ministries, IADB, Washington DC Ernesto Talvi Ernesto Talvi Director of CERES and Non- Director of CERES and Non- Resident Senior Fellow, Resident Senior Fellow, Brookings Institution Brookings Institution October 22 October 22 nd nd , , 2009 2009
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Macroeconomic Challenges for Macroeconomic Challenges for Latin America: Latin America:
Where do we Stand?Where do we Stand?
Macroeconomic Challenges for Macroeconomic Challenges for Latin America: Latin America:
Where do we Stand?Where do we Stand?
Prepared for Presentation at the XXX Meeting of the Latin American Network of Prepared for Presentation at the XXX Meeting of the Latin American Network of Central Banks and Finance Ministries, IADB, Washington DCCentral Banks and Finance Ministries, IADB, Washington DC
Ernesto TalviErnesto TalviDirector of CERES and Non-Resident Director of CERES and Non-Resident Senior Fellow, Brookings InstitutionSenior Fellow, Brookings Institution
October 22October 22ndnd, 2009, 2009
OUTLINEOUTLINE
I.I. Introductory RemarksIntroductory Remarks
II. II. PhasePhase 1: “Indian Summer” (2007.I – 2008.II) 1: “Indian Summer” (2007.I – 2008.II)
III. Phase 2: “Winter” (2008.II – 2009.I)III. Phase 2: “Winter” (2008.II – 2009.I)
IV. Phase 3: “Spring” (2009.I)IV. Phase 3: “Spring” (2009.I)
V. Policy Challenges and a Final ThoughtV. Policy Challenges and a Final Thought
Phase 3:Spring
Phase 2:Winter
Phase 1:Indian Summer
Phases of the Global Financial CrisisPhases of the Global Financial Crisis
15
30
45
60
75
90
105
120
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
S&P Financial
S&P Industrial
-76.7
-61.3
Phase 2
130.4
61.0
Phase 3
Variation in %
-28.0
13.2
Phase 1
S&P Financial
S&P Industrial
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
LAC-7 CAC-7
Openness(Exports + Imports, in % of GDP, 2007)
Remittances(Remittances Inflows, in % of GDP, 2007)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
LAC-7 CAC-7
Latin America and Central America: Latin America and Central America: Structural DifferencesStructural Differences
Commodity Prices(Correlation Coefficient between Commodity Prices
and Terms of Trade, in logs, Mar.90 – Jun.09)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 93% of Latin America’s GDP. Peru and Venezuela. These countries represent 93% of Latin America’s GDP. CAC-7 is the simple average of the seven major Central American countries, namely Costa Rica, Dominican Republic, El CAC-7 is the simple average of the seven major Central American countries, namely Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama . Salvador, Guatemala, Honduras, Nicaragua and Panama .
1.1%
11.1%
52%
91%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
LAC -7 CAC-7
92.4%
-70.8%
92.1%
-29.5%
Levels
Differences
OUTLINEOUTLINE
I.I. Introductory RemarksIntroductory Remarks
II. II. PhasePhase 1: “Indian Summer” (2007.I – 2008.II) 1: “Indian Summer” (2007.I – 2008.II)
III. Phase 2: “Winter” (2008.II – 2009.I)III. Phase 2: “Winter” (2008.II – 2009.I)
IV. Phase 3: “Spring” (2009.I)IV. Phase 3: “Spring” (2009.I)
V. Policy Challenges and a Final ThoughtV. Policy Challenges and a Final Thought
Phase 1:Indian Summer
Phases of the Global Financial Crisis: Phases of the Global Financial Crisis: Indian SummerIndian Summer
15
30
45
60
75
90
105
120
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
S&P Financial
S&P Industrial
Variation in %
-28.0
13.2
Phase 1
S&P Financial
S&P Industrial
In fact, one year and a half into the US financial crisis, Latin In fact, one year and a half into the US financial crisis, Latin America was experiencing America was experiencing all the symptoms of overheatingall the symptoms of overheating::
Macroeconomic Impact on Latin America of Macroeconomic Impact on Latin America of the Global Financial Crisis: the Global Financial Crisis: Indian SummerIndian Summer
• Strong Capital InflowsStrong Capital Inflows
• Booming Asset PricesBooming Asset Prices
• Currency AppreciationCurrency Appreciation
• High Growth RatesHigh Growth Rates
• Inflationary PressuresInflationary Pressures
In the first phase of the crisis, the net impact of external factors In the first phase of the crisis, the net impact of external factors turned out to be expansionary for Latin Americaturned out to be expansionary for Latin America
Latin AmericaLatin America(LAC-7)(LAC-7)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil,
Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Central AmericaCentral America(CAC-6)(CAC-6)
US Financial Crisis
Russian Crisis Beginning of the Boom
238
103
17
164
0
25
50
75
100
125
150
175
200
225
250
1991
1993
1994
1995
1996
1998
1999
2000
2001
2003
2004
2005
2006
2008
0
2
4
6
8
10
12
14
16
18
20
1991
1993
1994
1995
1996
1998
1999
2000
2001
2003
2004
2005
2006
2008
US Financial Crisis
Russian Crisis Beginning of the Boom
5.5
2.9
12
18.3
CAC-6 is the simple average of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. CAC-6 is the simple average of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama.
Phase 1Phase 1 - Indian Summer: - Indian Summer: Capital InflowsCapital Inflows(Last 4 quarters, billions of USD, Mar-08 prices)(Last 4 quarters, billions of USD, Mar-08 prices)
Phase 1 (Δ)
Capital Inflows
Financial Inflows
FDI Inflows
Dec-06
3.6%
0.9%
2.7%
4.0%
2.8%
1.2%
In % of GDP
Capital Inflows
Financial Inflows
FDI Inflows
Dec-06
13.7%
5.7%
6.8%
3.1%
2.8%
0.2%
In % of GDP
Phase 1 (Δ)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 93% of Latin America’s GDP. countries represent 93% of Latin America’s GDP. CAC-7 is the simple average of the seven major Central American countries, namely Costa Rica, CAC-7 is the simple average of the seven major Central American countries, namely Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama . Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama .
Variation Dec.06-
Jul.08: -17%
US Financial Crisis
70
80
90
100
110
120
130
140
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
Variation Oct.02-Dec.06:
-27%
Variation Dec.90-Jun.98:
-25%
Variation Jun.98-Oct-02:
68%
Beginning of the Boom
Russian Crisis
(LAC-7)(LAC-7)Latin AmericaLatin America Central AmericaCentral America
(CAC-7)(CAC-7)
85
87
89
91
93
95
97
99
101
103
105
1990
1992
1994
1996
1998
2000
2002
2004
2006
Russian Crisis
Variation Dec.90-Jun.98:
-6%
Beginning of the Boom
US Financial Crisis
Variation Sep.03-Dec.06:
-5%
Variation Jun.98-Sep.03:
7%
Variation Dec.06-
Aug.08: -7%
(Bilateral RXR vis a vis the USD, Dec-90=100)(Bilateral RXR vis a vis the USD, Dec-90=100)
Phase 1Phase 1 – Indian Summer: – Indian Summer: Real Exchange RateReal Exchange Rate
* Year ended in Jun-08* Year ended in Jun-08
(Real GDP, annual variation)(Real GDP, annual variation)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico,
Peru and Venezuela. These countries represent 91% of Latin America’s GDP.Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
Average Growth Average Growth 91-97: 4.6%91-97: 4.6%
Average Growth Average Growth 98-02: 0.7%98-02: 0.7%
Average Growth Average Growth 03-06 : 5.6%03-06 : 5.6%
US Financial Crisis
Beginning of the Boom
Russian Crisis
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
6.7%6.6%
2008
*
6.4%
CAC-7 is the simple average of Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama. CAC-7 is the simple average of Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama.
Latin AmericaLatin America(LAC-7)(LAC-7)
Central AmericaCentral America(CAC-7)(CAC-7)
US Financial Crisis
Beginning of the Boom
Russian Crisis
7.0%6.9%
6%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1991
1993
1995
1997
1999
2001
2003
2005
2007
6.0%
Average 91-98: 4.6%Average 91-98: 4.6%
Average 99-02: Average 99-02: 3.3%3.3%
Average 03-06: Average 03-06: 5% 5%
Phase 1Phase 1 – Indian Summer: – Indian Summer: Economic ActivityEconomic Activity
3%
4%
5%
6%
7%
8%
Jan-
06
Apr
-06
Jul-0
6
Oct
-06
Jan-
07
Apr
-07
Jul-0
7
Oct
-07
Jan-
08
Apr
-08
Jul-0
8
7.9%
4.0%
US Financial Crisis
14.0%
5.6%
3%
5%
7%
9%
11%
13%
15%
Jan-
06
Mar
-06
May
-06
Jul-0
6
Sep
-06
Nov
-06
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
US Financial Crisis
LAC-7 is the median of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries LAC-7 is the median of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 93% of Latin America’s GDP. represent 93% of Latin America’s GDP. CAC-7 is the simple average of the seven major Central American countries, namely Costa Rica, Dominican CAC-7 is the simple average of the seven major Central American countries, namely Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama . Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama .
(CPI, inflation last 12 months)(CPI, inflation last 12 months)
(LAC-7)(LAC-7)Latin AmericaLatin America Central AmericaCentral America
((CCAC-7)AC-7)
Phase 1Phase 1 – Indian Summer: – Indian Summer: InflationInflation
+3.9%+8.4%
In fact, one year and a half into the US financial crisis, Latin In fact, one year and a half into the US financial crisis, Latin America was experiencing America was experiencing all the symptoms of overheatingall the symptoms of overheating::
The policy response in the ‘Indian Summer Phase’ of the global The policy response in the ‘Indian Summer Phase’ of the global crisis was a combination of crisis was a combination of tight monetary policytight monetary policy cum cum expansionary fiscal policyexpansionary fiscal policy (which maintained the expansionary (which maintained the expansionary bias of the previous years)bias of the previous years)
Macroeconomic Impact on Latin America of Macroeconomic Impact on Latin America of the Global Financial Crisis: the Global Financial Crisis: Indian SummerIndian Summer
• Strong Capital InflowsStrong Capital Inflows
• Booming Asset PricesBooming Asset Prices
• Currency AppreciationCurrency Appreciation
• High Growth RatesHigh Growth Rates
• Inflationary PressuresInflationary Pressures
In the first phase of the crisis, the net impact of external factors In the first phase of the crisis, the net impact of external factors turned out to be expansionary for Latin Americaturned out to be expansionary for Latin America
Phase 1Phase 1 – Indian Summer: – Indian Summer: Monetary Policy ResponseMonetary Policy Response
*Excludes Argentina and Venezuela
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries
represent 91% of Latin America’s GDP. CAC-4 is the simple average of Costa Rica, Dominican Republic, Guatemala and Honduras.
ene-
07
mar
-07
may
-07
ago-
07
sep-
07
nov-
07
ene-
08
mar
-08
may
-08
Central AmericaCentral America(CAC-4, CB Reference Rate and Nominal Exchange (CAC-4, CB Reference Rate and Nominal Exchange
Rate, in % and Jan-07=100)Rate, in % and Jan-07=100)
Latin AmericaLatin America(LAC-7*, CB Reference Rate and Nominal Exchange (LAC-7*, CB Reference Rate and Nominal Exchange
Rate, in % and 02-Jan-07=100)Rate, in % and 02-Jan-07=100)
Inte
rest
Ra
te
Exc
ha
ng
e R
ate
Inte
rest
Ra
te
Exc
ha
ng
e R
ate
80
85
90
95
100
105
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
ene-
07
feb-
07
mar
-07
abr-
07
may
-07
jun-
07
jul-0
7
ago-
07
sep-
07
oct-
07
nov-
07
dic-
07
ene-
08
feb-
08
mar
-08
abr-
08
may
-08
jun-
08
jul-0
8
80
85
90
95
100
105
feb-
07
abr-
07
jun-
07
jul-0
7
oct-
07
dic-
07
feb-
08
abr-
08
jun-
08
jul-0
8
7.5%
8.0%
8.5%
9.0%
9.5%
Interest Rate
Exchange Rate
Exchange Rate
Interest Rate
Phase 1Phase 1 – Indian Summer: – Indian Summer: Fiscal Policy ResponseFiscal Policy Response
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia,
Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Financial Crisis
-3.1%
-2.2%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
Latin AmericaLatin America(LAC-7**, Structural Fiscal Balance, % of GDP)(LAC-7**, Structural Fiscal Balance, % of GDP)
**Excludes Venezuela
-1.8%
-1.6%
-1.4%
-1.2%
-1.0%
-0.8%
-0.6%
Dec
-04
Mar
-05
Jun-
05
Sep
-05
Dec
-05
Mar
-06
Jun-
06
Sep
-06
Dec
-06
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Financial Crisis -1.7%
-1.1%
-0.9%
Central AmericaCentral America(CAC-7, Structural Fiscal Balance, % of GDP)(CAC-7, Structural Fiscal Balance, % of GDP)
CAC-7 is the simple average of Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama. CAC-7 is the simple average of Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama.
-0.5%
Dec
-04
Mar
-05
Jun-
05
Sep
-05
Dec
-05
Mar
-06
Jun-
06
Sep
-06
Dec
-06
Mar
-07
Jun-
07
Sep
-07
Dec
-07
OUTLINEOUTLINE
I.I. Introductory RemarksIntroductory Remarks
II. II. PhasePhase 1: “Indian Summer” (2007.I – 2008.II) 1: “Indian Summer” (2007.I – 2008.II)
III. Phase 2: “Winter” (2008.II – 2009.I)III. Phase 2: “Winter” (2008.II – 2009.I)
IV. Phase 3: “Spring” (2009.I)IV. Phase 3: “Spring” (2009.I)
V. Policy Challenges and a Final ThoughtV. Policy Challenges and a Final Thought
Phase 2:Winter
Phase 1:Indian Summer
Phases of the Global Financial Crisis: Phases of the Global Financial Crisis: WinterWinter
15
30
45
60
75
90
105
120
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
S&P Financial
S&P Industrial
-76.7
-61.3
Phase 2
Variation in %
-28.0
13.2
Phase 1
S&P Financial
S&P Industrial
… … which put which put an abrupt end to the expansionary cyclean abrupt end to the expansionary cycle::
Macroeconomic Impact on Latin America of Macroeconomic Impact on Latin America of the Global Financial Crisis: the Global Financial Crisis: WinterWinter
• Severe International Credit CrunchSevere International Credit Crunch
• Currency DepreciationCurrency Depreciation
• RecessionRecession
• DisinflationDisinflation
• Collapse in Capital Flows and Asset PricesCollapse in Capital Flows and Asset Prices
During the ‘Winter Phase’, the global economic and financial conditions During the ‘Winter Phase’, the global economic and financial conditions suffered a severe deterioration… suffered a severe deterioration…
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru
and Venezuela. These countries represent 91% of Latin America’s GDP. CAC-5 is the simple average of Costa Rica, Dominican and Venezuela. These countries represent 91% of Latin America’s GDP. CAC-5 is the simple average of Costa Rica, Dominican
Republic, El Salvador, Guatemala and Panama. Republic, El Salvador, Guatemala and Panama.
100
200
300
400
500
600
700
800
900
1,000
Jan-
07
Apr
-07
Jul-0
7
Oct
-07
Jan-
08
Apr
-08
Jul-0
8
Oct
-08
Jan-
09
CAC-5
EMBI+
LAC-7
133
97
85
Phase 1
LAC-7
CAC-5
EMBI+
Variation in bps
519
431
434
Phase 2
Sovereign Bond SpreadsSovereign Bond Spreads(EMBI+ and Latin EMBI, in bps)(EMBI+ and Latin EMBI, in bps)
Phase 2Phase 2 – Winter: – Winter: International Financial ConditionsInternational Financial Conditions
Sovereign Bond PricesSovereign Bond Prices(EMBI+, Bond Price Equvalent*; 01-Jan-07 = 100)(EMBI+, Bond Price Equvalent*; 01-Jan-07 = 100)
*Assumes an 11% cupon and 10 year maturity*Assumes an 11% cupon and 10 year maturity
65
70
75
80
85
90
95
100
105
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
-3.6%
-0.8%
0.1%
Phase 1
LAC-7
EMBI+
CAC-5
Variation in %
-16.5%
-18%
-16.5%
Phase 2
LAC-7
CAC-5
EMBI+
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil,
Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.CAC-6 is the CAC-6 is the simple average simple average of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama.
Latin AmericaLatin America((LAC-7)LAC-7)
Central AmericaCentral America((CAC-6CAC-6))
Phase 2Phase 2 – Winter: – Winter: Capital InflowsCapital Inflows(L(Lastast 4 quarters, billion 4 quarters, billionss of of Mar-08Mar-08 USD and % of GDP*) USD and % of GDP*)
0
25
50
75
100
125
150
175
200
225
250
Dec
-03
Sep
-04
Jun-
05
Mar
-06
Dec
-06
Sep
-07
Jun-
08
Mar
-09
238 (7.6%)
0
2
4
6
8
10
12
14
16
18
20
Dec
-03
Sep
-04
Jun-
05
Mar
-06
Dec
-06
Sep
-07
Jun-
08
Mar
-09
18.3 (15.4%)
11.9 (11.0%)
-67%
-35%
US Financial Crisis
US Financial Crisis
Phase 2Phase 1 Phase 2Phase 1
103 (3.6%)
12 (12.3%)
Phase 2
Capital Inflows
Financial Inflows
FDI Inflows
Phase 1
Δ in % of GDP
4.0%
2.8%
1.2%
-4.0%
-3.5%
-0.5%
Phase 2
Capital Inflows
Financial Inflows
FDI Inflows
Phase 1
-4.4%
-4.1%
-0.2%
Δ in % of GDP
3.1%
2.8%
0.2%
79 (3.6%)
* % of GDP between brackets* % of GDP between brackets
99
100
101
102
103
104
105
106
107
108
Dec
-06
Feb
-07
Apr
-07
Jun-
07
Aug
-07
Oct
-07
Dec
-07
Feb
-08
Apr
-08
Jun-
08
Aug
-08
Oct
-08
Dec
-08
Feb
-09
Latin AmericaLatin America(LAC-7)(LAC-7)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 93% of Latin America’s GDP. countries represent 93% of Latin America’s GDP. CAC-5 is the simple average of Costa Rica, Dominican Republic, Guatemala, Honduras and Nicaragua . CAC-5 is the simple average of Costa Rica, Dominican Republic, Guatemala, Honduras and Nicaragua .
Phase 2Phase 1
86
89
92
95
98
101
104
107
110
113
116
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
Central AmericaCentral America(CAC-5)(CAC-5)
Phase 2Phase 1
(Bilateral NXR vis a vis the USD, Dec-06=100)(Bilateral NXR vis a vis the USD, Dec-06=100)
Phase 2Phase 2 – Winter: – Winter: Nominal Exchange RateNominal Exchange Rate
115
89
107
102
30.7%
5.2%
•Source: JPMorgan. **Source: WEO
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Russian Crisis Beginning of the Boom
US Financial Crisis
Forecast Sep-09*
Average 71-06: 3.4%
4.8%
-1.9%-1.9%
Average Growth 91-Average Growth 91-97: 4.6%97: 4.6%
Average Growth Average Growth 98-02: 0.7% 98-02: 0.7%
Average Growth Average Growth 03-06: 5.6% 03-06: 5.6%
4.7%
Russian Crisis Beginning of the Boom
4.4%4.5%
US Financial Crisis
-0.6%
Forecast Oct-09**
(LAC-7)(LAC-7)Latin AmericaLatin America Central AmericaCentral America
((CCAC-7)AC-7)
(Real GDP, annual variation)(Real GDP, annual variation)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico,
Peru and Venezuela. These countries represent 91% of Latin America’s GDP.Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
CAC-7 is the CAC-7 is the simple average simple average of Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama. of Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama.
Forecast Apr-08* Forecast
Apr-08**
Phase 2
Phase1
Phase 2
Phase1
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Average Growth 91-98 : 4.6%Average Growth 91-98 : 4.6%
Average Growth Average Growth 99-02: 3.3%99-02: 3.3%
Average Growth Average Growth 03-06: 5.0%03-06: 5.0%
Phase 2Phase 2 – Winter: – Winter: Economic ActivityEconomic Activity
14%
5.6%
5.0%
7%
9%
11%
13%
15%
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
LAC-7 is the median of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and LAC-7 is the median of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 93% of Latin America’s GDP. Venezuela. These countries represent 93% of Latin America’s GDP.
5%
(CPI, inflation last 12 months)(CPI, inflation last 12 months)
Latin AmericaLatin America(LAC-7)(LAC-7)
Central AmericaCentral America(CAC-7)(CAC-7)
3%
4%
5%
6%
7%
8%
Jan-
06
Apr
-06
Jul-0
6
Oct
-06
Jan-
07
Apr
-07
Jul-0
7
Oct
-07
Jan-
08
Apr
-08
Jul-0
8
Oct
-08
Jan-
09
Apr
-09
7.9%
4.1%
US Financial Crisis
5.7%
Phase 2Phase 1 Phase 2Phase 1
CAC-7 is the CAC-7 is the simple average simple average of Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama. of Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and Panama.
Phase 2Phase 2 – Winter: – Winter: InflationInflation
-2.1%
-9.0%
… … which put which put an abrupt end to the expansionary cyclean abrupt end to the expansionary cycle::
In contrast with the Russian Crisis, the macro policy response was In contrast with the Russian Crisis, the macro policy response was countercyclical: countercyclical: looser monetary policylooser monetary policy and and expansionary fiscal policyexpansionary fiscal policy
Macroeconomic Impact on Latin America of Macroeconomic Impact on Latin America of the Global Financial Crisis: the Global Financial Crisis: WinterWinter
• Severe International Credit CrunchSevere International Credit Crunch
• Currency DepreciationCurrency Depreciation
• RecessionRecession
• DisinflationDisinflation
• Collapse in Capital Flows and Asset PricesCollapse in Capital Flows and Asset Prices
During the ‘Winter Phase’, the global economic and financial conditions During the ‘Winter Phase’, the global economic and financial conditions suffered a severe deterioration… suffered a severe deterioration…
Phase 2 – Winter:Monetary Policy Response
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. CAC-4 is the simple average of Costa Rica, Domincan Republic, Guantemala and Honduras
*Excludes Argentina and Venezuela
8.0%
8.5%
9.0%
9.5%
10.0%
95
100
105
110
115
120
125
16-sep-08 16-oct-08 16-nov-08 16-dic-08 16-ene-09 16-feb-09
Exchange RateInterest Rate
Inte
rest
Ra
te
Exc
ha
ng
e R
ate
16-sep-08 16-oct-08 16-nov-08 16-dic-08 16-ene-09 16-feb-0995
100
105
110
115
120
125
Exchange Rate
Exc
ha
ng
e R
ate
7.5%
8.0%
8.5%
9.0%
9.5%
Interest Rate
Inte
rest
Ra
te
Central America Central America (CAC-4, CB Reference rate and Nominal Exchange Rate, (CAC-4, CB Reference rate and Nominal Exchange Rate,
in % and Sep-16-08=100)in % and Sep-16-08=100)(LAC-7*, CB Reference rate and Nominal Exchange Rate, (LAC-7*, CB Reference rate and Nominal Exchange Rate,
in % and Sep-15-08=100)in % and Sep-15-08=100)
Latin AmericaLatin America
Latin America
(Announced Fiscal Stimulus Plans, 2009, % of GDP)
0.9%
1.3%
1.4%
2.5%
2.8%
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
Brazil
Argentina
Mexico
Peru
Chile
Source: Banco de España
Average: 1.8%0.0%
2.7%
2.7%
2.8%
4.7%
0% 1% 2% 3% 4% 5%
DomincanRepublic
El Salvador
Guatemala
Costa Rica
Panama
Average: 2.6%
Own calculations based on national and international sources
Central America
Phase 2 – Winter:Fiscal Policy Response
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
*Excludes Argentina and Venezuela
Monetary Policy(LAC-7*, Interbank Interest Rate and Nominal
Exchange Rate, in % and Jul-98=100)
Interest Rate
Exchange Rate
Inte
rest
Ra
te
Exc
ha
ng
e R
ate
Russian Crisis:Macroeconomic Policy Response
Fiscal Policy(LAC-7, Structural Fiscal Balance, % of GDP)
-3.1%
-1.2%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
Dec
-96
Ma
r-9
7
Jun-
97
Sep
-97
Dec
-97
Ma
r-9
8
Jun-
98
Sep
-98
Dec
-98
Ma
r-9
9
Jun-
99
Sep
-99
Russian Crisis
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
Jul-98 Ago-98 Sep-98
98
100
102
104
106
108
110
112
114
116
118
… … which put which put an abrupt end to the expansionary cyclean abrupt end to the expansionary cycle::
In contrast with the Russian Crisis, the macro policy response was In contrast with the Russian Crisis, the macro policy response was countercyclical: countercyclical: looser monetary policylooser monetary policy and and expansionary fiscal policyexpansionary fiscal policy
Macroeconomic Impact on Latin America of Macroeconomic Impact on Latin America of the Global Financial Crisis: the Global Financial Crisis: WinterWinter
• Severe International Credit CrunchSevere International Credit Crunch
• Currency DepreciationCurrency Depreciation
• RecessionRecession
• DisinflationDisinflation
At the peak of the crisis in March 2009, Latin America was haunted by At the peak of the crisis in March 2009, Latin America was haunted by the specter of:the specter of:
• a long and deep recessiona long and deep recession
• potentially severe liquidity problemspotentially severe liquidity problems• ballooning fiscal deficits with sharp increases in public debt ballooning fiscal deficits with sharp increases in public debt
• Collapse in Capital Flows and Asset PricesCollapse in Capital Flows and Asset Prices
During the ‘Winter Phase’, the global economic and financial conditions During the ‘Winter Phase’, the global economic and financial conditions suffered a severe deterioration… suffered a severe deterioration…
External Factors
Economic Fluctuations in Latin America: Economic Fluctuations in Latin America: The Role of External FactorsThe Role of External Factors**
(LAC-7; real GDP, annual growth rate)
World Growth
International Financial Conditions
Commodity Prices
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.**Izquierdo, Izquierdo, AA., Romero, R. and Talvi, E. (2008): “Booms and Busts in Latin America: The Role of External Factors”, IADB and CERES Working Paper., Romero, R. and Talvi, E. (2008): “Booms and Busts in Latin America: The Role of External Factors”, IADB and CERES Working Paper
Latin America
Tequila Crisis
Asian / Russian Crises
Dot-Com Crisis
Beginning of the Boom
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Actual
Fitted
External Factors
Economic Fluctuations in Latin America: Economic Fluctuations in Latin America: The Role of External FactorsThe Role of External Factors**
(CAC-5; real GDP, annual growth rate)
World Growth
International Financial Conditions
Commodity Prices
CAC-5 is the simple average of Costa Rica, Dominican Republic, El Salvador, Guatemala and Panama.
* * Based on the methodology of Izquierdo, Based on the methodology of Izquierdo, AA., Romero, R. and Talvi, E. (2008): “Booms and Busts in Latin America: The Role of ., Romero, R. and Talvi, E. (2008): “Booms and Busts in Latin America: The Role of External Factors”, IADB and CERES Working PaperExternal Factors”, IADB and CERES Working Paper
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
1998 2000 2002 2004 2006
Russian Crisis Dot-Com Crisis
Beginning of the Boom
Fitted
Actual
1999 2001 2003 20051997
Central America
EXTERNAL FACTORS
Commodity PricesInternational Financial
ConditionsIndustrial Countries Growth
*Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented *Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented Times: Confronting the Global Crisis in Latin America”Times: Confronting the Global Crisis in Latin America”
Medium Term Macroeconomic Outlook for Latin America: Winter Scenario*
**Recovery to Dec-06 levels
Global Commodity PricesGlobal Commodity Prices
Pre-Crisis LevelPre-Crisis Level
Source: IMF and Bloomberg
(2006 = 100)(2006 = 100)
Jun-08
Mar-09
-47.3%
Dec-13
Peak
TroughP. to T.
Recovery**
75
85
95
105
115
125
135
2006 2007 2008 2009 2010 2011 2012 2013
**Recovry to pre-asian crisis levels (400 bps)
Jun-07
Dec-08
512
Dec-13
Sovereign Bonds SpreadSovereign Bonds Spread
Source: JPMorgan
Pre- Pre- AsianAsian Crisis LevelCrisis Level
(EMBI +, bps)(EMBI +, bps)
Trough
Peak
T. to P.
Recovery**
100
150
200
250
300
350
400
450
500
550
600
2006 2007 2008 2009 2010 2011 2012 2013
Source: Own calculations based on WEO and JPMorgan, Oct-08.
US Economic ActivityUS Economic Activity(2006 = 100)(2006 = 100)
**Recovery to pre-crisis levels**Recovery to pre-crisis levels
99
100
101
102
103
104
105
106
2006 2007 2008 2009 2010 2011 2012 2013
Pre-Crisis LevelPre-Crisis Level
Mar-08
Jun-09
-3.5%
Jun-12
Peak
Trough
P. to T.
Recovery**
GDP GrowthGDP Growth(annual growth rate)(annual growth rate)
Economic ActivityEconomic Activity(GDP 2006 = 100)(GDP 2006 = 100)
**Recovery to pre-crisis levels**Recovery to pre-crisis levelsLAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. CAC-5 is the simple average of Costa Rica, Dominican Republic El Salvador, Guatemala and Panama.countries represent 91% of Latin America’s GDP. CAC-5 is the simple average of Costa Rica, Dominican Republic El Salvador, Guatemala and Panama.
Economic Activity: Winter Scenario*
*Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented *Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented Times: Confronting the Global Crisis in Latin America”Times: Confronting the Global Crisis in Latin America”
95
100
105
110
115
2006 2007 2008 2009 2010 2011 2012 2013
Pre-Crisis Level
Average1991-2007: 3.3%
Average 2003-2007: 5.8%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
2006 2007 2008 2009 2010 2011 2012 2013
Avg. 2009-13: 0.1%Avg. 2009-13: 0.1%Peak
Trough
P. to T.
Recovery**
Dec-08
Dec-10
-5.1%
Dec-13
Latin Latin AmericaAmerica(LAC-7)(LAC-7)
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2006 2007 2008 2009 2010 2011 2012 2013
Avg. 2009-13: 1.0%Avg. 2009-13: 1.0%
Average 1991-2007: 4.8%
Average 2003-2007: 5.8%
98
103
108
113
118
123
2006 2007 2008 2009 2010 2011 2012 2013
Central Central AmericaAmerica(CAC-5)(CAC-5) Pre-Crisis Level
Peak Sep-08
Trough Dec-10
P. to T. -1.9%
Recovery** Jun-12
Public DebtPublic Debt(% of GDP)(% of GDP)
Fiscal BalanceFiscal Balance(% of GDP)(% of GDP)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. CAC-5 is the simple average of Costa Rica, Dominican Republic El Salvador, Guatemala and Panama.countries represent 91% of Latin America’s GDP. CAC-5 is the simple average of Costa Rica, Dominican Republic El Salvador, Guatemala and Panama.
Fiscal Position: Winter Scenario*
*Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented *Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented Times: Confronting the Global Crisis in Latin America”Times: Confronting the Global Crisis in Latin America”
Latin Latin AmericaAmerica(LAC-7)(LAC-7)
Central Central AmericaAmerica(CAC-5)(CAC-5)
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
2006 2007 2008 2009 2010 2011 2012 2013
-5.0%
1.6%
-3.7%
32%
55%
-2.7%
-4.1%
49%‘‘Winter’ Winter’ ScenarioScenario
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
2006 2007 2008 2009 2010 2011 2012 2013
30%
35%
40%
45%
50%
55%
2006 2007 2008 2009 2010 2011 2012 2013
Pre-crisis Level
-5.3%
Pre-crisis Level
+23%
Pre-crisis Level
Pre-crisis Level
+12%-2.1%
0.6%
37%
28%
33%
38%
43%
48%
53%
58%
2006 2007 2008 2009 2010 2011 2012 2013
(LAC-7, ILR)(LAC-7, ILR)
Latin America: International Liquidity RatioLatin America: International Liquidity Ratio
Normal International Financial Conditions
80%
90%
100%
110%
120%
130%
140%
2008 2009 2010 2011 2012
‘Winter’ Scenario
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.Venezuela. These countries represent 91% of Latin America’s GDP.
Liquidity Indicators: Winter Scenario*
*Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented *Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented Times: Confronting the Global Crisis in Latin America”Times: Confronting the Global Crisis in Latin America”
DefinitionDefinition
RRtt
B B t+1t+1STST
ILR ILR tt ==
International Liquidity Ratio in t
B ST
t+1
ILRt =
R t International Reserves in t=
Total Public Debt Amortizations + Short Term External Private Debt Amortizations (in the next 12 months)
=
where
Key Challenges At The Peak of The Crisis:IDB / RES Main Proposals*
* Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented * Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented Times: Confronting the Global Crisis in Latin America”Times: Confronting the Global Crisis in Latin America”
The challenge is thus to The challenge is thus to anticipate gathering problems anticipate gathering problems early on early on to act in a timely fashion, and to to act in a timely fashion, and to design a set of design a set of policies that prevent countries from entering into financially policies that prevent countries from entering into financially fragile territoryfragile territory that might expose them to a liquidity crisis that might expose them to a liquidity crisis and a major economic collapseand a major economic collapse
Precarious access to credit markets for many emerging Precarious access to credit markets for many emerging market governments market governments calls for multilaterals to step in and calls for multilaterals to step in and play a key role as a lenders-of-last resortplay a key role as a lenders-of-last resort, akin to the role , akin to the role that credible governments, such as the US government, that credible governments, such as the US government, play domesticallyplay domestically
OUTLINEOUTLINE
I.I. Introductory RemarksIntroductory Remarks
II. II. PhasePhase 1: “Indian Summer” (2007.I – 2008.II) 1: “Indian Summer” (2007.I – 2008.II)
III. Phase 2: “Winter” (2008.II – 2009.I)III. Phase 2: “Winter” (2008.II – 2009.I)
IV. Phase 3: “Spring” (2009.I)IV. Phase 3: “Spring” (2009.I)
V. Policy Challenges and a Final ThoughtV. Policy Challenges and a Final Thought
Phase 3:Spring
Phase 2:Winter
Phase 1:Indian Summer
Phases of the Global Financial Crisis: Phases of the Global Financial Crisis: SpringSpring
15
30
45
60
75
90
105
120
Jan-
07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
S&P Financial
S&P Industrial
-76.7
-61.3
Phase 2
130.4
61.0
Phase 3
Variation in %
-28.0
13.2
Phase 1
S&P Financial
S&P Industrial
Moreover, the G-20 initiatives deactivated potentially Moreover, the G-20 initiatives deactivated potentially severe liquidity problems for the region…severe liquidity problems for the region…
Macroeconomic Impact on Latin America of Macroeconomic Impact on Latin America of the Global Financial Crisis: the Global Financial Crisis: SpringSpring
During the ‘Spring Phase’ of the crisis, global economic During the ‘Spring Phase’ of the crisis, global economic and financial conditions improved significantlyand financial conditions improved significantly
G-20 Initiatives: Financial Assistance for Emerging Markets
• Recapitalization of the IMF (US$ 500 bn)Recapitalization of the IMF (US$ 500 bn)
Increase in multilaterals lending capacity with a special focus on Increase in multilaterals lending capacity with a special focus on liquidity provision and crisis preventionliquidity provision and crisis prevention
• New Special Drawing Rights (SDR) allocation (US$ 250 bn)New Special Drawing Rights (SDR) allocation (US$ 250 bn)
• New support for trade finance (US$ 250 bn)New support for trade finance (US$ 250 bn)
• IMF Flexible Credit Line (FCL) and High-Access Precautionary IMF Flexible Credit Line (FCL) and High-Access Precautionary Arrangements (HAPAs)Arrangements (HAPAs)
New (and more flexible) financial instrumentsNew (and more flexible) financial instruments
• Recapitalization of Development Banks (U$S 100 - 300 bn)Recapitalization of Development Banks (U$S 100 - 300 bn)
ILRt = Reservest / (Public Debt Amortizationst+1 + Short Term External Private Debt)
Liquidity Indicators post G-20 Initiatives
ILR with Multilateral Support(LAC-7, International Liquidity Ratio) (LAC-7, International Liquidity Ratio)
80%
90%
100%
110%
120%
130%
140%
150%
2008 2009 2010 2011 2012
Threshold
Without Multilateral Support
With Multilateral Support
FCL = U$S 111.9 billion
FED = U$S 60 billion
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
*These countries already requested the FCL. Mexico USD47bn (1000%) and Colombia USD10.4bn (900%)*These countries already requested the FCL. Mexico USD47bn (1000%) and Colombia USD10.4bn (900%)
FCL Assumptions(1000% of Quota)
Mexico*
Brazil
Colombia*
Peru
47.0 bn
45.0 bn
10.4 bn
9.5 bn
FCL 112 bnSource: Barclays
Moreover, the G-20 initiatives deactivated potentially Moreover, the G-20 initiatives deactivated potentially severe liquidity problems for the region…severe liquidity problems for the region…
… … which together with the improvement in the global which together with the improvement in the global economic and financial conditions, significantly changed economic and financial conditions, significantly changed the macroeconomic outlook for Latin Americathe macroeconomic outlook for Latin America
Macroeconomic Impact on Latin America of Macroeconomic Impact on Latin America of the Global Financial Crisis: the Global Financial Crisis: SpringSpring
The recession is now expected to be relatively short The recession is now expected to be relatively short and a rebound is expected in 2010, and the fiscal and and a rebound is expected in 2010, and the fiscal and debt outlook improved substantiallydebt outlook improved substantially
During the ‘Spring Phase’ of the crisis, global economic During the ‘Spring Phase’ of the crisis, global economic and financial conditions improved significantlyand financial conditions improved significantly
EXTERNAL FACTORS
Commodity PricesInternational Financial
ConditionsIndustrial Countries Growth
**Recovery to Dec-06 levels
Global Commodity PricesGlobal Commodity Prices
Pre-Crisis LevelPre-Crisis Level
Source: IMF and Bloomberg
(2006 = 100)(2006 = 100)
Jun-08
Mar-09
-47.3%
Dec-13
Peak
TroughP. to T.
Recovery**
Jun-07
Dec-08
512
Dec-13
Sovereign Bonds SpreadSovereign Bonds Spread
Source: JPMorgan
Pre- Pre- AsianAsian Crisis Level Crisis Level
(EMBI +, bps)(EMBI +, bps)
Trough
Peak
T. to P.
Recovery**
US Economic ActivityUS Economic Activity(2006 = 100)(2006 = 100)
Pre-Crisis LevelPre-Crisis Level
**Recovery to pre-crisis levels**Recovery to pre-crisis levelsSource: Own calculations based on WEO and JPMorgan, Oct-08.
Mar-08
Jun-09
-3.5%
Jun-12
Peak
Trough
P. to T.
Recovery**
Medium Term Macroeconomic Outlook for Latin America: Spring Scenario*
‘‘Winter’ Winter’ ScenarioScenario
100
150
200
250
300
350
400
450
500
550
600
2006 2007 2008 2009 2010 2011 2012 2013
‘‘Winter’ Winter’ ScenarioScenario
‘‘Spring’ Spring’ ScenarioScenario
‘‘Winter’ Winter’ ScenarioScenario
‘‘Winter’Winter’ScenarioScenario‘‘Winter’Winter’ScenarioScenario
‘‘Winter’Winter’ScenarioScenario
‘‘Spring’ Spring’ ScenarioScenario
99
101
103
105
107
109
111
113
2006 2007 2008 2009 2010 2011 2012 2013
Mar-08
Jun-09
-3.9%
Sep-10
‘‘Spring’Spring’Jun-08
Mar-09
-50.6%
Sep-10
‘‘Spring’Spring’
‘‘Spring’ Spring’ ScenarioScenario
75
85
95
105
115
125
135
2006 2007 2008 2009 2010 2011 2012 2013
Jun-07
Dec-08
512
Sep-10
‘‘Spring’Spring’
*Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented *Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented Times: Confronting the Global Crisis in Latin America”Times: Confronting the Global Crisis in Latin America”
**Recovery to pre-asian crisis levels (350 bps). In the case of spring scenario the recovery is to 300 bps
GDP GrowthGDP Growth(annual growth rate)(annual growth rate)
Economic ActivityEconomic Activity(GDP 2006 = 100)(GDP 2006 = 100)
**Recovery to pre-crisis levels**Recovery to pre-crisis levelsLAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. CAC-5 is the simple average of Costa Rica, Dominican Republic El Salvador, Guatemala and Panama.countries represent 91% of Latin America’s GDP. CAC-5 is the simple average of Costa Rica, Dominican Republic El Salvador, Guatemala and Panama.
Economic Activity: Winter Scenario*
*Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented *Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented Times: Confronting the Global Crisis in Latin America”Times: Confronting the Global Crisis in Latin America”
Latin Latin AmericaAmerica(LAC-7)(LAC-7)
Central Central AmericaAmerica(CAC-5)(CAC-5)
‘Winter’
Peak
Trough
P. to T.
Recovery**
Pre-Crisis Level
Sep-08
Sep-09
-3.8%
Sep-10
‘Spring’Scenarios
‘Winter’ Scenario
Sep-08
Sep-10
-5.1%
Jun-13
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
2006 2007 2008 2009 2010 2011 2012 2013
Average 2003-2007: 5.8%
‘Winter’
Peak
Trough
P. to T.
Recovery**
Pre-Crisis Level
Scenarios
‘Winter’ Scenario
95
100
105
110
115
120
125
130
135
2006 2007 2008 2009 2010 2011 2012 2013
Sep-08
Dec-10
-1.9%
Jun-12
‘Spring’
Sep-08
Jun-09
-0.8%
Mar-10
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
2006 2007 2008 2009 2010 2011 2012 2013
Average 1991-2007: 4.8%
Average 2003-2007: 5.8%
‘Spring’ Scenario
95
100
105
110
115
120
125
130
2006 2007 2008 2009 2010 2011 2012 2013
Average1991-2007: 3.3%
‘Spring’ Scenario
Public DebtPublic Debt(% of GDP)(% of GDP)
Fiscal BalanceFiscal Balance(% of GDP)(% of GDP)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. CAC-5 is the simple average of Costa Rica, Dominican Republic El Salvador, Guatemala and Panama.countries represent 91% of Latin America’s GDP. CAC-5 is the simple average of Costa Rica, Dominican Republic El Salvador, Guatemala and Panama.
Fiscal Position: Winter Scenario*
*Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented *Based on Izquierdo, A. and Talvi, E. (coords.) (2009), “Policy Trade-Offs for Unprecedented Times: Confronting the Global Crisis in Latin America”Times: Confronting the Global Crisis in Latin America”
Latin Latin AmericaAmerica(LAC-7)(LAC-7)
Central Central AmericaAmerica(CAC-5)(CAC-5)
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
2006 2007 2008 2009 2010 2011 2012 2013
‘‘Winter’ Winter’ ScenarioScenario
-5.0%
1.6%
‘‘Spring’ Spring’ ScenarioScenario
-2.6%
0.3%
-3.7%
‘‘Winter’ Winter’ ScenarioScenario
32%
55%
-2.7%
-4.1%
49%
‘‘Winter’ Winter’ ScenarioScenario
‘‘Winter’ Winter’ ScenarioScenario
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
2006 2007 2008 2009 2010 2011 2012 2013
0.6%
-0.8%
-3.2%
‘‘Spring’ Spring’ ScenarioScenario
30%
35%
40%
45%
50%
55%
2006 2007 2008 2009 2010 2011 2012 2013
37%
39%‘‘Spring’ Spring’ ScenarioScenario
‘‘Spring’ Spring’ ScenarioScenario
39%
28%
33%
38%
43%
48%
53%
58%
2006 2007 2008 2009 2010 2011 2012 2013
OUTLINEOUTLINE
I.I. Introductory RemarksIntroductory Remarks
II. II. PhasePhase 1: “Indian Summer” (2007.I – 2008.II) 1: “Indian Summer” (2007.I – 2008.II)
III. Phase 2: “Winter” (2008.II – 2009.I)III. Phase 2: “Winter” (2008.II – 2009.I)
IV. Phase 3: “Spring” (2009.I)IV. Phase 3: “Spring” (2009.I)
V. Policy Challenges and a Final ThoughtV. Policy Challenges and a Final Thought
POLICY CHALLENGES FOR LATIN AMERICAPOLICY CHALLENGES FOR LATIN AMERICA
This improved outlook implies a shift in the monetary This improved outlook implies a shift in the monetary and fiscal policy focus towards: and fiscal policy focus towards:
• Gradually undoing expansionary fiscal policies set in Gradually undoing expansionary fiscal policies set in motion during the ‘Winter Phase’, in a manner motion during the ‘Winter Phase’, in a manner consistent with an intertemporal sound fiscal policy consistent with an intertemporal sound fiscal policy and safe levels of public debt and safe levels of public debt
• Exchange rate / inflationary impact of renewed Exchange rate / inflationary impact of renewed capital inflows and rising commodity pricescapital inflows and rising commodity prices
Looking ahead: Chilly Spring or Hot Summer?Looking ahead: Chilly Spring or Hot Summer?
LOOKING AHEAD: LOOKING AHEAD: CHILLY SPRING OR HOT SUMMER?CHILLY SPRING OR HOT SUMMER?
Chilly SpringChilly Spring
Countries should prepare themselves by concentrating on Countries should prepare themselves by concentrating on self-insuranceself-insurance (reserve accumulation and rescheduling of debt maturities) and (reserve accumulation and rescheduling of debt maturities) and strengthening fiscal positionsstrengthening fiscal positions while capital market conditions remain while capital market conditions remain favorable for the region favorable for the region
Possibly higher US interest rates might imply tighter credit conditions Possibly higher US interest rates might imply tighter credit conditions for EMs in the foreseeable futurefor EMs in the foreseeable future
Hot SummerHot Summer Excess world savings imply a very low real interest rate scenario cum Excess world savings imply a very low real interest rate scenario cum
high capital inflows to EMshigh capital inflows to EMs
Fiscal BalanceFiscal Balance(Last 4 quarters, % of GDP)(Last 4 quarters, % of GDP)
Current AccountCurrent Account(Last 4 quarters, % of GDP)(Last 4 quarters, % of GDP)
Twin Deficits in the US
-1.2%
-3.2%
-13.1%-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
US Financial Crisis
-5.2%-4.9%
-3.1%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
US Financial Crisis
-1.9%
-6.0%
LOOKING AHEAD: LOOKING AHEAD: CHILLY SPRING OR HOT SUMMER?CHILLY SPRING OR HOT SUMMER?
Chilly SpringChilly Spring
Countries should prepare themselves by concentrating on Countries should prepare themselves by concentrating on self-insuranceself-insurance (reserve accumulation and rescheduling of debt maturities) and (reserve accumulation and rescheduling of debt maturities) and strengthening fiscal positionsstrengthening fiscal positions while capital market conditions remain while capital market conditions remain favorable for the region favorable for the region
Possibly higher US interest rates might imply tighter credit conditions Possibly higher US interest rates might imply tighter credit conditions for EMs in the foreseeable futurefor EMs in the foreseeable future
Hot SummerHot Summer
Countries should manage the capital flow bonanza concentrating on:Countries should manage the capital flow bonanza concentrating on:
Excess world savings imply a very low real interest rate scenario cum Excess world savings imply a very low real interest rate scenario cum high capital inflows to EMshigh capital inflows to EMs
• More aggressive countercyclical monetary and fiscal policyMore aggressive countercyclical monetary and fiscal policy
• Achieving structural fiscal surpluses and public debt reduction to Achieving structural fiscal surpluses and public debt reduction to safe levelssafe levels
• Channeling world savings into socially productive investmentsChanneling world savings into socially productive investments
A Final ThoughtA Final Thought
(in basis points, t = 0)
Sovereign Bond Spreads
200
400
600
800
1000
1200
1400
1600
1800
2000
0 9 18 27 36 45 54 63 72 81 90 99 108 117
Venezuela Current Crisis
(01-Sep-08 = 100)
Argentina Current Crisis
(01-Sep-08 = 100)
Latin EMBI Current Crisis
(01-Sep-08 = 100)
Latin EMBI Russian Crisis
(20-Jul-98 = 100)
Current Crisis
Russian Crisis
2.8% 17.7%
8.7% 15.1%
Argentina 1.1%
Venezuela 3.0%
Countries with Strong Fundamentals (2007)
5.8% 16.4%Average 2.1%
Current Account Reserves
1.9% 14.3%
Latin America (LAC-7)
Pre-Current Crisis (2007) 1.9%
Fiscal Balance
Macroeconomic Fundamentals (% of GDP)
-3.0% 12.7%Pre-Russian Crisis (1997) -0.9%
Latin America’s Resilience during the Global Crisis: Latin America’s Resilience during the Global Crisis: Strong Fundamentals or International LOLR?Strong Fundamentals or International LOLR?
Macroeconomic Challenges for Macroeconomic Challenges for Latin America: Latin America:
Where do we Stand?Where do we Stand?
Macroeconomic Challenges for Macroeconomic Challenges for Latin America: Latin America:
Where do we Stand?Where do we Stand?
Prepared for Presentation at the XXX Meeting of the Latin American Network of Prepared for Presentation at the XXX Meeting of the Latin American Network of Central Banks and Finance Ministries, IADB, Washington DCCentral Banks and Finance Ministries, IADB, Washington DC
Ernesto TalviErnesto TalviDirector of CERES and Non-Resident Director of CERES and Non-Resident Senior Fellow, Brookings InstitutionSenior Fellow, Brookings Institution
October 22October 22ndnd, 2009, 2009
