Post on 16-Jan-2016
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
EMDB Meeting on Debt IssuesEMDB Meeting on Debt IssuesJuly 8, 2009July 8, 2009
Alejandro IzquierdoAlejandro IzquierdoInter-American Development BankInter-American Development Bank
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
I.I. Latin America and the Global Crisis: Latin America and the Global Crisis:
Initial ResilienceInitial Resilience
II.II. Macro Dynamics in Latin America Under Macro Dynamics in Latin America Under
Two Hypotheses on the Global EconomyTwo Hypotheses on the Global Economy
III.III. Policy Trade-offs and Policy Proposals: Policy Trade-offs and Policy Proposals:
A Liquidity ApproachA Liquidity Approach
OUTLINE
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
LATIN AMERICA AND THE GLOBAL CRISIS: PREDOMINANT VIEWS
As a result of the global crisis As a result of the global crisis Latin America Latin America suffered a drastic deterioration in the external suffered a drastic deterioration in the external environmentenvironment::
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
* EU-15 includes Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovenia and Spain.
Source: JPMorgan
(GDP, real terms)
United States
EU-15*
Japan
Industrial Countries
External Factors: Industrial Countries Growth
Peak Trough
-3,4%
May-08 Forecast
Current Forecast
96
97
98
99
100
101
102
08.II 08.III 08.IV 09.I 09.II 09.III
TroughPeak
-8,4%
Current Forecast
May-08 Forecast
90
92
94
96
98
100
102
08.I 08.II 08.III 08.IV 09.I 09.II 09.III
94
95
96
97
98
99
100
101
102
08.II 08.III 08.IV 09.I 09.II 09.III 09.IV
-4,8%
Peak TroughMay-08 Forecast
Current Forecast
Peak Trough
-4,3%
Current Forecast
May-08 Forecast
95
96
97
98
99
100
101
102
103
08.II 08.III 08.IV 09.I 09.II 09.III
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
50
150
250
350
450
550
650
750
2001
2002
2003
2004
2005
2006
2007
2008
70
90
110
130
150
170
190
2001
2002
2003
2004
2005
2006
2007
2008
70
100
130
160
190
220
250
280
310
340
2001
2002
2003
2004
2005
2006
2007
2008
External Factors: Commodity Prices
Source: IMF
OilOil(1991-1997 Average = 100)(1991-1997 Average = 100)
FoodFood(1991-1997 Average = 100)(1991-1997 Average = 100)
MetalsMetals(1991-1997 Average = 100)(1991-1997 Average = 100)
US Financial Crisis 725
228
373
-68%
91-97 Average
177
123
-30%
US Financial Crisis
123
91-97 Average
US Financial Crisis
313
158
-46%
91-97 Average
Variation Dec.01 – Jul.08:
+616%Variation
Dec.01 – Jun.08: +133%
Variation Dec.01 – Mar.08:
+282%
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
0
100
200
300
400
500
600
700
800
900
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
Corporate Bond SpreadsCorporate Bond Spreads
The End of the Panglossian Period: International Financial Conditions
(Latin CEMBI; 01-Jan-07 = 100)
Total
Variation in bps
CEMBI 87
Jan.07-May.08
Jun.08-Mar.09
516 603
Jan-07
221
06-Mar-09
824
Corporate Bonds: IssuanceCorporate Bonds: Issuance(LAC-7, billions of USD)
0
5
10
15
20
25
Ma
r-0
7
Jun-
07
Sep
-07
Dec
-07
Ma
r-0
8
Jun-
08
Sep
-08
Dec
-08
Ma
r-0
9
21.2
2.5
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Sovereign Bond SpreadsSovereign Bond Spreads(EMBI+ and Latin EMBI; Spreads, Basis Points)
Latin EMBI
EMBI+
(EMBI+, Latin EMBI and US AA Corporates; Bond Price Equivalent*, 01-Jan-07 = 100)
Latin EMBIEMBI+
US AA
Sovereign Bond PricesSovereign Bond Prices
Total
Latin EMBI
EMBI+
AA
% Variation
-1.0
.-0.6
0.5
Jan.07-May.08
Jun.08-Mar.09
-18.4
-18.0
-6.4
-19.2
-18.4
-5.9
Total
Variation in bps
Latin EMBI
EMBI+
67
71
Phase 1 Phase 2
401
448
468
519
Jan-07
186
170
06-Mar-09
654
689
65
70
75
80
85
90
95
100
105
Jan-
07
Ma
r-0
7
Ma
y-0
7
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Ma
r-0
8
Ma
y-0
8
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Ma
r-0
9
0
100
200
300
400
500
600
700
800
900
1000
Jan-
07
Ma
r-0
7
Ma
y-0
7
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Ma
r-0
8
Ma
y-0
8
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Ma
r-0
9
*Assumes a coupon of 11% and a 10Y maturity.
External Factors: International Financial Conditions
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
SovereignSovereign Bonds: Maturity Bonds: Maturity(LAC-7, issuances with maturity less than 1 year, % of
total issuance)
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
Mar
-07
Jun-
07
Sep
-07
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
63.3%
28.6%
LAC-7 is the simple sum 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.
SovereignSovereign Bonds: IssuanceBonds: Issuance(LAC-7, billions of USD)
56.6
97.8
40
50
60
70
80
90
100
Ma
r-0
7
Jun-
07
Sep
-07
Dec
-07
Ma
r-0
8
Jun-
08
Sep
-08
Dec
-08
Ma
r-0
9
External Factors: International Financial Conditions
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
However, Latin America’s fundamentals were strong However, Latin America’s fundamentals were strong enough to withstand (at least initially) the worsening enough to withstand (at least initially) the worsening of global conditions…of global conditions…
LATIN AMERICA AND THE GLOBAL CRISIS: PREDOMINANT VIEWS
As a result of the global crisis As a result of the global crisis Latin America Latin America suffered a drastic deterioration in the external suffered a drastic deterioration in the external environmentenvironment
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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.
Fiscal Balance in Latin America(LAC-7; Overall Balance, % of GDP)
Public Debt in Latin America(LAC-7; Public Debt, % of GDP)
30%
32%
34%
36%
38%
40%
42%
44%
46%
48%
50%
52%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Russian Crisis Beginning of
2000s Boom US
Financial Crisis
50%
33%
52%
35%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
1.5%
Russian CrisisBeginning of 2000s Boom
Latin America:
Fiscal Balance and Public Debt
US Financial Crisis
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
International Reserves in Latin AmericaInternational Reserves in Latin America(LAC-7, (LAC-7, in billions of USDin billions of USD))
0
50
100
150
200
250
300
350
400
450
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Russian Crisis
Beginning of the Boom
US Financial Crisis
174
275
447
Latin America: International Liquidity Indicators
LAC-7 is the simple sum (*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.
147
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
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
Latin America: Financial Dollarization
Credit Dollarization in Latin America(LAC-7; Bank Credit in Foreign Currency , % of Total Credit)
Beginning of
2000s Boom
23%
50%
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru 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. These countries represent 91% of Latin America’s GDP. For bank credit figures, LAC-7 excludes Brazil, Colombia and Venezuela.For bank credit figures, LAC-7 excludes Brazil, Colombia and Venezuela.
Public Debt Dollarization in Latin America(LAC-7; Foreign Currency Debt, % of Total Debt)
30%
35%
40%
45%
50%
55%
60%
65%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
65%
35%
Beginning of 2000s Boom
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
……and, thus, the region was better equipped to and, thus, the region was better equipped to pursue countercyclical monetary and fiscal pursue countercyclical monetary and fiscal policiespolicies to mitigate the impact of adverse external to mitigate the impact of adverse external shocksshocks
LATIN AMERICA AND THE GLOBAL CRISIS: PREDOMINANT VIEWS
As a result of the global crisis As a result of the global crisis Latin America Latin America suffered a drastic deterioration in the external suffered a drastic deterioration in the external environmentenvironment
However, Latin America’s fundamentals were strong However, Latin America’s fundamentals were strong enough to withstand (at least initially) the worsening enough to withstand (at least initially) the worsening of global conditions…of global conditions…
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Latin America: Monetary and Fiscal Policy Response
Monetary Policy
Inte
rest
Ra
te
Interest Rate
Exchange Rate
Exc
ha
ng
e R
ate
8.5%
8.7%
8.9%
9.1%
9.3%
9.5%
9.7%
9.9%
Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09
98
102
106
110
114
118
122
126
(LAC-7*, Interbank interest rate and Nominal Exchange Rate, in % and Sep-15-08=100)
Fiscal Stimulus Announcements in Latin America
(% of GDP)
Source: Credit Suisse
Argentina
Brazil
Chile
Mexico
Peru
5.1
0.3
1.0
0.5
0.0
0.2
0.1
1.1
1.0
1.4
1.1
3.3
0.7
0.0
1.1
6.4
3.6
2.8
1.5
2.5
ON - BUDGET OFF – BUDGET
TOTALRevenue-side Expenditure-side
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
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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 and Fiscal Policy Response: Russian Crisis vs. Current Crisis
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
Jul-98 Aug-98 Sep-98
98
100
102
104
106
108
110
112
114
116
118
Interest Rate
Exchange Rate
Inte
rest
Ra
te
Exc
ha
ng
e R
ate
Monetary Policy(LAC-7*, Interbank Interest Rate and Nominal
Exchange Rate, in % and Jul-98=100)
Fiscal Policy(LAC-7, Structural Fiscal Balance, % of GDP)
-3.2%
-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
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Predominant views: The recession in 2009 will be Predominant views: The recession in 2009 will be relatively deep but short livedrelatively deep but short lived, the region will return , the region will return to positive growth in 2010…to positive growth in 2010…
LATIN AMERICA AND THE GLOBAL CRISIS: PREDOMINANT VIEWS
……and thus better equipped to pursue and thus better equipped to pursue countercyclical monetary and fiscal policiescountercyclical monetary and fiscal policies to to mitigate the impact of adverse external shocksmitigate the impact of adverse external shocks
However, However, Latin America has very strong Latin America has very strong fundamentalsfundamentals to withstand the worsening of global to withstand the worsening of global conditions…conditions…
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Market Forecasts: Economic Performance
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.*Source: JPMorgan
(LAC-7; real GDP, annual variation)
-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
2010
Russian Crisis Beginning of the Current Boom
US Financial Crisis
Current Forecast
Apr-08 Forecast
Average 71-06: 3.4%
4.9 %
-1.9 %
91-97 Growth Average : 4.6%
98-02 Growth Average : 0.7%
03-06 Growth Average: 5.6%
Forecasts*
2.7 %
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
……and and liquidity crises and economic collapses, so liquidity crises and economic collapses, so prevalent in the past, will be largely avoidedprevalent in the past, will be largely avoided
Predominant views: The recession in 2009 will be Predominant views: The recession in 2009 will be relatively deep but short lived, the region will return relatively deep but short lived, the region will return to positive growth in 2010…to positive growth in 2010…
LATIN AMERICA AND THE GLOBAL CRISIS: PREDOMINANT VIEWS
……and thus better equipped to pursue and thus better equipped to pursue countercyclical monetary and fiscal policiescountercyclical monetary and fiscal policies to to mitigate the impact of adverse external shocksmitigate the impact of adverse external shocks
However, However, Latin America has very strong Latin America has very strong fundamentalsfundamentals to withstand the worsening of global to withstand the worsening of global conditions…conditions…
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Phase 3
Latin EMBI
EMBI+
100
200
300
400
500
600
700
800
900
1000
Ene
-07
Abr
-07
Jul-0
7
Oct
-07
Ene
-08
Abr
-08
Jul-0
8
Oct
-08
Ene
-09
Abr
-09
Variaction in bps
Latin EMBI
EMBI+
67
71
Phase 1 Phase 2
469
448
-193
-205
Phase 3
SpreadsSpreads(EMBI+, Latin EMBI Spread in basis points)
Phase 1 Phase 2
External Factors
Commodity Prices International Financial Conditions
World Growth
Phase 3
40
60
80
100
120
140
160
180
200
Ene
-07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Ene
-08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Ene
-09
Mar
-09
May
-09
76
28
22
-71%
26%
Commodity PricesCommodity Prices(S&P GSCI Commodity Index, 03-Jan-07 = 100)
Phase 1 Phase 2Phase 3
25
30
35
40
45
50
55
60
65
Ene
-07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Ene
-08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Ene
-09
Mar
-09
Germany
Japan
USA
Manufacturing PMI*Manufacturing PMI*(difussion Index, Over 50= expansion)(difussion Index, Over 50= expansion)
Phase 1 Phase 2
* Purchasing Managers Index* Purchasing Managers Index
Impact of Distension of the Financial Crisis in the US on Key External Factors for LAC
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Catastrophic scenarios seem to have been Catastrophic scenarios seem to have been ruled out as distension continues, making ruled out as distension continues, making scenarios covered in our report more scenarios covered in our report more relevant.relevant.
But: Will recovery be quick (as initially But: Will recovery be quick (as initially predicted by markets) or will it be more predicted by markets) or will it be more protracted (as experience on financial protracted (as experience on financial crisis would tellcrisis would tell)?)?
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
I.I. Latin America and the Global Crisis: Latin America and the Global Crisis:
Initial ResilienceInitial Resilience
II.II. Macro Dynamics in Latin America Under Macro Dynamics in Latin America Under
Two Hypotheses on the Global EconomyTwo Hypotheses on the Global Economy
III.III. Policy Trade-offs and Policy Proposals: Policy Trade-offs and Policy Proposals:
A Liquidity ApproachA Liquidity Approach
OUTLINE
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
ROADMAPROADMAP
To assess the predominant view on the region in the To assess the predominant view on the region in the face of the global crisis, we proceed as follows:face of the global crisis, we proceed as follows:
i.i. Go beyond a snapshot of the region and see the Go beyond a snapshot of the region and see the motion picture right to the endmotion picture right to the end, t, tracing the macro-racing the macro-dynamics under alternative hypotheses on how the dynamics under alternative hypotheses on how the global recovery unfoldsglobal recovery unfolds
ii.ii. Develop a simple framework emphasizing liquidity Develop a simple framework emphasizing liquidity issuesissues as a key element in evaluating the region’s as a key element in evaluating the region’s risks and policy trade-offsrisks and policy trade-offs
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Hypotheses on the Global EconomyHypotheses on the Global Economy
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
L-Shaped L-Shaped ScenarioScenario
100
200
300
400
500
600
700
2006 2007 2008 2009 2010 2011 2012 2013
Sovereign Bond SpreadSovereign Bond Spread
Source: JPMorgan for Bond Spreads
Pre- Asian Crisis LevelsPre- Asian Crisis Levels
(EMBI +, bps)(EMBI +, bps)
V-Shaped V-Shaped ScenarioScenario
Trough Jun-07
Peak Jun-09
T-to-P 512
Recovery* Sep-10
V-Shaped
*Recovery to Pre-Asian crisis levels
L-Shaped L-Shaped ScenarioScenario
75
85
95
105
115
125
135
2006 2007 2008 2009 2010 2011 2012 2013
Global Commodity Price IndexGlobal Commodity Price Index
Source: IMF and Bloomberg*
Pre-Crisis LevelsPre-Crisis Levels
(2006 = 100)(2006 = 100)
V-Shaped V-Shaped ScenarioScenario
*Recovery to Dec-06 levels
Peak Jun-08
Trough Jun-09
P-to-T -47.3%
Recovery* Sep-10
V-ShapedMar-08
Jun-09
-4.3%
Dec-13
L-Shaped
EXTERNAL FACTORS
Commodity Prices
International Financial Conditions
Industrial Countries Growth
Two Hypotheses on the Global Economy
G7 is the PPP-weighted average of the Canada, France, Germany, Italy, Japan, United States, UK
G7 Industrial ProductionG7 Industrial Production(2006 = 100)(2006 = 100)
V-Shaped V-Shaped ScenarioScenario
Pre-Crisis LevelsPre-Crisis Levels
97
99
101
103
105
107
109
2006 2007 2008 2009 2010 2011 2012 2013
V-Shaped
Peak Mar-08
Trough Jun-09
P-to-T -4.3%
Recovery* Sep-10
*Recovery to pre-crisis levels of output
Source: Own calculations based on WEO and JPMorgan*, Oct-08.
L-Shaped L-Shaped ScenarioScenario
Jun-08
Jun-09
-47.3%
Dec-13
L-Shaped
Jun-07
Jun-09
512 .
Dec-13
L-Shaped
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Tequila Crisis
Asian / Russian Crises
Dot-Com Crisis
Beginning of the Boom
External Factors
-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
**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
Growth in Industrial Countries
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.
Economic Fluctuations in Latin America: The Role of External Factors*
(LAC-7; real GDP, annual growth rate)
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Fiscal Position Under Two Hypotheses on the Global Economy
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.
1.8%
2.3%
2.8%
3.3%
3.8%
4.3%
2006 2007 2008 2009 2010 2011 2012 2013
Interest PaymentsInterest Payments(LAC-7, % of GDP)(LAC-7, % of GDP)
L-Shaped L-Shaped ScenarioScenario
V-Shaped V-Shaped ScenarioScenario
2.3%
4.1%
2.6%
V-Shaped L-Shaped
Trough 2008 2008
Peak 2012 2013
Δ T-to-P 0.4% 1.8%
Recovery* n.a. n.a.
Fiscal RevenuesFiscal Revenues(LAC-7, 2008 = 100)(LAC-7, 2008 = 100)
2006 2007 2008 2009 2010 2011 2012 2013
87
92
96
101
105
V-Shaped V-Shaped ScenarioScenario
L-Shaped L-Shaped ScenarioScenario
100
105
95
93
86
V-Shaped L-Shaped
Peak 2008 2008
Trough 2010 2011
P-to-T -7.2% -13.5%
Recovery* 2012 n.a.
*Recovery to pre-crisis levels of output
Primary ExpenditurePrimary Expenditure(LAC-7, 2008 = 100)(LAC-7, 2008 = 100)
80
85
90
95
100
105
2006 2007 2008 2009 2010 2011 2012 2013
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Fiscal Position Under Two Hypotheses on the Global Economy: Are Debt Dynamics Sustainable?
Fiscal BalanceFiscal Balance(LAC-7, % of GDP)(LAC-7, % of GDP)
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
2006 2007 2008 2009 2010 2011 2012 2013
V-Shaped V-Shaped ScenarioScenario
L-Shaped L-Shaped ScenarioScenario
1.6%
-2.6%
-5.0%
0.3%
-3.7%
Public DebtPublic Debt(LAC-7, % of GDP)(LAC-7, % of GDP)
23%
28%
33%
38%
43%
48%
53%
2006 2007 2008 2009 2010 2011 2012 2013
V-Shaped V-Shaped ScenarioScenario
L-Shaped L-Shaped ScenarioScenario
34%
27%
49%
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.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Liquidity IndicatorsLiquidity Indicators
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
t
0 1 2 3 4
Rt
B t+1ST
R’t
B t+1ST
Fiscal Fiscal EffectEffect
Effective Level of Effective Level of Reserves EffectReserves Effect
Precarization Precarization EffectEffect
ILR DynamicsILR Dynamics
Determinants of ILR DynamicsDeterminants of ILR Dynamics
Initial level of public debtInitial level of public debt
‘‘Effective’ level of international reservesEffective’ level of international reserves
Time profile of debt amortizationsTime profile of debt amortizations
Dynamics of fiscal deficit and public debt Dynamics of fiscal deficit and public debt (which will depend on the initial fiscal (which will depend on the initial fiscal deficit and the policy response)deficit and the policy response)
Liquidity Indicators: A Simple Analytical Framework
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
ConclusionsConclusions
The likelihood of a liquidity crisis as The likelihood of a liquidity crisis as determined by ILRs determined by ILRs will depend on will depend on external factors (i.e. duration of the global external factors (i.e. duration of the global crisis) and idiosyncratic factors (i.e. crisis) and idiosyncratic factors (i.e. determinants of ILRs dynamics)determinants of ILRs dynamics)
Not every country may hit a critical threshold Not every country may hit a critical threshold in the relevant period of the global crisis and in the relevant period of the global crisis and for those that do, they will not do so at the for those that do, they will not do so at the same time. Liquidity crises, if they occur, will same time. Liquidity crises, if they occur, will be sequential rather than simultaneousbe sequential rather than simultaneous
Liquidity problems may evolve gradually Liquidity problems may evolve gradually but materialize suddenly when a critical but materialize suddenly when a critical threshold is hit. Therefore, problems may threshold is hit. Therefore, problems may not be evident until it is too latenot be evident until it is too late
Threshold
0 1 2 3 4
t
Rt
B t+1ST
ILR DynamicsILR Dynamics
Country 1Country 1
Country 2Country 2
Liquidity CrisisLiquidity Crisis
Liquidity Indicators: A Simple Analytical Framework
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
2009 2010 2011 2012 2013
Normal InternationalFinancial Conditions
Sudden Stop
L -
V -
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
2009 2010 2011 2012 2013
Normal InternationalFinancial Conditions
Sudden Stop
Shaped Scenario
V - Shaped Scenario
Liquidity Indicators Under Two Hypotheses on the Global Economy
ILR Dynamics: Precarization and Fiscal EffectsILR Dynamics: Precarization and Fiscal Effects(LAC-7)(LAC-7)
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
80%
90%
100%
110%
120%
130%
140%
150%
160%
170%
180%
2009 2010 2011 2012 2013
ILR1
ILR2
80%
90%
100%
110%
120%
130%
140%
150%
160%
170%
180%
2009 2010 2011 2012 2013
ILR1
ILR2
ILR1
ILR2
90%
100%
110%
120%
130%
140%
150%
160%
170%
180%
190%
2009 2010 2011 2012 2013
ILR1
ILR2
90%
110%
120%
130%
140%
150%
160%
170%
180%
190%
2009 2010 2011 2012 2013
ILR Dynamics Under L-Shaped ScenarioILR Dynamics Under L-Shaped Scenario(LAC-7)(LAC-7)
ILR Dynamics Under V-Shaped ScenarioILR Dynamics Under V-Shaped Scenario(LAC-7)(LAC-7)
ILR 1t = Reservest / Public Debt Amortizationst+1
ILR 2t = Reservest / (Public Debt Amortizationst+1 + Short Term Private External Debt Amortizations)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, 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.Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Liquidity Indicators Under Two Hypotheses on the Global Economy
Key to consider:Key to consider:
ILR Dynamics are ILR Dynamics are beforebefore IMF flexible IMF flexible credit linecredit line
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Under a V-shaped global recoveryUnder a V-shaped global recovery, the dynamics of key macro , the dynamics of key macro fundamentals suggest that fundamentals suggest that the predominant views on the region the predominant views on the region are largely correctare largely correct
CONCLUSIONSCONCLUSIONS
MACRO DYNAMICS IN LATIN AMERICA UNDER TWO HYPOTHESES ON THE GLOBAL ECONOMY
Under the L-shaped scenario, Under the L-shaped scenario, the region could experiencethe region could experience negative growth in 2009 and 2010 and average growth will be negative growth in 2009 and 2010 and average growth will be close to zero in the next five yearsclose to zero in the next five years
A key feature of this scenario is that A key feature of this scenario is that the deterioration in the deterioration in fundamentalsfundamentals is gradual and therefore problems may not become is gradual and therefore problems may not become evident until it is too lateevident until it is too late
IIt is crucial to anticipate gathering problems early ont is crucial to anticipate gathering problems early on to act in a to act in a timely fashion,timely fashion, and to design a set of policies that prevent esign a set of policies that prevent countries from entering into financially fragile territorycountries from entering into financially fragile territory
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
I.I. Latin America and the Global Crisis: Latin America and the Global Crisis:
Initial ResilienceInitial Resilience
II.II. Macro Dynamics in Latin America Under Macro Dynamics in Latin America Under
Two Hypotheses on the Global EconomyTwo Hypotheses on the Global Economy
III.III. Policy Trade-offs and Policy Proposals: Policy Trade-offs and Policy Proposals:
A Liquidity ApproachA Liquidity Approach
OUTLINE
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Confronting the Global Crisis in Latin America: Policy Trade Offs
Mitigate Recessionary
PressuresTrade - Off Weaken Liquidity
Position
EXPANSIONARY FISCAL POLICY
ILR with expansionary
policy
GDP with expansionary policy and no liquidity crisis
Threshold
GDP with no policy
0 1 2 3 4
ILR
t
ILR with no policy
GDP
t-1 0 1 2 3
Threshold
GDP with expansionary policy and liquidity crisis
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
POLICY PRINCIPLES: MAIN GOALS
Anticipate gathering problems early onAnticipate gathering problems early on to act in a to act in a timely fashion timely fashion
Design a set of policies that prevent countries from Design a set of policies that prevent countries from entering into financially fragile territoryentering into financially fragile territory that might that might expose them to a liquidity crisis and a major expose them to a liquidity crisis and a major economic collapseeconomic collapse
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
(Latin EMBI and Latin CEMBI, Yield in %)
Sovereign and Corporate Bonds in USSovereign and Corporate Bonds in US(US 10y T-Bonds and US BBB Corporate, Yield in %)
Latin EMBI
Latin CEMBI
6
7
8
9
10
11
12
13
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
Source: Bloomberg
US 10Y
BBB
US
10
Y
BB
B
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
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
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
Sovereign and Corporate Bonds in LACSovereign and Corporate Bonds in LAC
POLICY PRINCIPLES: CONSTRAINTS
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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 (and borrowers)-of-last play a key role as a lenders (and borrowers)-of-last resortresort, akin to the role that credible governments, such , akin to the role that credible governments, such as the US government, play domesticallyas the US government, play domestically
The question then is The question then is not whether multilaterals should not whether multilaterals should play a key role in the current crisis, but which is the most play a key role in the current crisis, but which is the most effective way to channel their interventioneffective way to channel their intervention and at what and at what financial costfinancial cost
POLICY PROPOSALS
THE ROLE OF MULTILATERALSTHE ROLE OF MULTILATERALS
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
1.1. Strengthen the role of multilateral institutionsStrengthen the role of multilateral institutions. Multilateral support . Multilateral support will be vital under precarious access to credit markets.will be vital under precarious access to credit markets.
2.2. Move away from short-term financingMove away from short-term financing. Multilaterals should avoid . Multilaterals should avoid short-term emergency financing and only consider medium to short-term emergency financing and only consider medium to long-term financing in order to partially “complete” markets in long-term financing in order to partially “complete” markets in terms of maturities.terms of maturities.
3.3. Redefine the emphasis of multilateral supportRedefine the emphasis of multilateral support. Multilaterals . Multilaterals should not only provide medium to long-term financing for fiscal should not only provide medium to long-term financing for fiscal stimulus –when fiscal sustainability is not at stake– but more stimulus –when fiscal sustainability is not at stake– but more importantly, they should provide liquidity for refinancing of importantly, they should provide liquidity for refinancing of maturing debt obligations.maturing debt obligations.
4.4. Ensure that countries work towards sustainable fiscal policy Ensure that countries work towards sustainable fiscal policy while strengthening social protectionwhile strengthening social protection. Multilateral support should . Multilateral support should be complemented with incentive-compatible conditionality, to be complemented with incentive-compatible conditionality, to ensure fiscal sustainability and strengthen social protection. ensure fiscal sustainability and strengthen social protection.
POLICY PRINCIPLES
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
EMDB Meeting on Debt IssuesEMDB Meeting on Debt IssuesJuly 8, 2009July 8, 2009
Alejandro Izquierdo,Alejandro Izquierdo,Inter-American Development BankInter-American Development Bank
FULL REPORT AVAILABLE AT:
http://www.iadb.org/res/pub_desc.cfm?pub_id=B-635