11

From Global Collapse to Recovery: Economic Adjustment and Growth Prospects in LAC

IMF-World Bank Spring Meetings

April 21, 2010Washington, DC

Chief Economist OfficeLatin America and the Caribbean RegionThe World Bank

Outline

After the fall, LAC stands tall LAC fared better in this crisis in comparative terms

Why?

LAC recovering in a multi-polar world A heterogeneous rebound

Challenges for LAC going forward An uncertain and complex global context

Short-run: currency appreciation pressures

Longer-run: it is mostly about growth

2

LAC fared better compared to other regions and its own past

After the fall, LAC stands tall

3

LAC’s 2009 economic downturn was less dramatic than that of other regions

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

ECA OECD LAC East Asian Tigers

SSA MENA South Asia

China

Real GDP Growth in 2009 Around the WorldAnnual Real GDP Growth Rate

4

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

ECA East Asian Tigers

OECD LAC China SSA MENA South Asia

GDP Growth Collapses Around the WorldDifferences Between Growth in 2007 and 2009

Note: Growth collapse is defined as the difference between the GDP growth rate in 2009 vis-à-vis growth in 2007. ECA refers to Eastern Europe and Central Asia countries. East Asian Tigers are Hong Kong,China; Indonesia; Korea,Republic of; Malaysia; Singapore; Taiwan,China; and Thailand. OECD refers to OECD-member countries. LAC refers to countries in Latin America and the Caribbean. SSA refers to Sub-Saharan Africa countries. MENA makes reference to Middle East and North African countries. Data comes from Consensus Forecast as of December 2009 for countries that have not published 2009 growth figures yet. Source: Bloomberg, IMF International Financial Statistics (IFS) and Consensus Forecasts.

Excluding Mexico, a regional outlier, LAC’s GDP would have hardly contracted in 2009

5Source: Bloomberg. We used Consensus Forecast as of Dec. 2009 for the countries that didn’t published the 2009 growth yet (the latest 2009 forecast for Consensus).

-8%

-6%

-4%

-2%

0%

2%

4%

Mex

icoAn

t. & B

arb.

Baha

mas

Jamaic

aPa

ragua

yHo

ndur

asBa

rbad

osVe

nezu

elaAr

gent

inaN

icarag

uaLA

CSt

. Kts.

& N

v.Ch

ileD

omini

caCo

sta R

icaSt

. Luc

iaEc

uado

rSt

. Vc.

& G

rs.Tr

i. & T

ob.

LAC

ex. M

exBr

azil

Beliz

eCo

lombia

Gua

temala

Haiti

Peru

Guy

ana

Surin

ame

Urug

uay

Dom

. Rep

.Pa

nam

aBo

livia

Real GDP Growth for 2009LAC Countries

Consistent with a comparatively milder recession in 2009, LAC also experiences a milder rise in unemployment

7

-30% -25% -20% -15% -10% -5% 0%

Argentina

Brazil

Chile

Colombia

Mexico

GDP Growth

Current Recession

Previuos recession

0% 2% 4% 6% 8% 10%

Argentina

Brazil

Chile

Colombia

Mexico

Change in Unemployment (p.p.)

Current Recession

Previous recession

Note: Previous recession periods are: Argentina (1998.Q4 – 2002.Q2); Brazil (1997.Q4 – 1998.Q2); Chile (1998.Q3 – 1999.Q4); Colombia (1998.Q3 – 1999.Q4); and Mexico (1995.Q1 – 1996.Q1). Current recession periods are: Argentina (2008.Q3 – 2009.Q2); Brazil (2008.Q4 – 2009.Q2); Chile (2008.Q3 – 2009.Q3); Colombia (2008.Q3 –2009.Q2); and Mexico (2008.Q2 – 2009.Q2). Source: LCRCE Staff calculations based on National Statistical Institutes data.

3.5 million Latin Americans joined the ranks of the unemployed in 2009 LAC’s economically active population in 2009 was about 272 million

The sensitivity of unemployment to economic activity was generally lower than in previous downturns…

8

0.0

0.5

1.0

1.5

2.0

2.5

Argentina Brazil Chile Colombia Mexico

Semi-Elasticity of Unemployment With Respect to GDP Growth

Previous recession

Current Recession

Note: Previous recession periods are: Argentina (1998.Q4 – 2002.Q2); Brazil (1997.Q4 – 1998.Q2); Chile (1998.Q3 – 1999.Q4); Colombia (1998.Q3 – 1999.Q4); and Mexico (1995.Q1 – 1996.Q1). Current recession periods are: Argentina (2008.Q3 – 2009.Q2); Brazil (2008.Q4 – 2009.Q2); Chile (2008.Q3 – 2009.Q3); Colombia (2008.Q3 –2009.Q2); and Mexico (2008.Q2 – 2009.Q2). Source: LCRCE Staff calculations based on National Statistical Institutes data.

…even though real wages did not decline this time around, reflecting downward nominal rigidity and low inflation

9Note: The graph depicts the evolution of quarterly average male real wages for the whole economy (all sectors) and the CPI index around recession periods for Argentina and Brazil. For Mexico, wage data refers to average compensation per employee in the manufacturing sector. Source: LCRCE calculations for Argentina based on Encuesta Permanente de Hogares (EPH) and Encuesta Permanente Continua de Hogares (EPHC) and for Brazil based on Pesquisa Mensal de Emprego (PME). For Mexico, Banco de México and INEGI.

Mexico

Brazil

70

80

90

100

110

120

130

140

150

160

170

180

Mar

-94

Jun-

94

Sep-

94

Dec

-94

Mar

-95

Jun-

95

Sep-

95

Dec

-95

Mar

-96

Jun-

96

Previous CrisisIndex Dec-94 = 100

Real Compensation per Employee - Industry

CPI

70

80

90

100

110

120

130

140

150

160

170

180

Jun-

07

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Current Crisis Index Dec-07 = 100

Real Compensation per Employee - Industry

CPI

80

85

90

95

100

105

110

115

Mar

-96

Jun-

96

Sep-

96

Dec

-96

Mar

-97

Jun-

97

Sep-

97

Dec

-97

Mar

-98

Jun-

98

Sep-

98

Dec

-98

Mar

-99

Jun-

99

Sep-

99

Dec

-99

Mar

-00

Previous CrisisIndex Sep-97 = 100

Real Mean Wage

CPI

80

85

90

95

100

105

110

115

Mar

-07

Jun-

07

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Current CrisisIndex Sep-08 = 100

Real Mean Wage

CPI

…even though real wages did not decline this time around (cont.)

10Note: The graph depicts the evolution of quarterly average male real wages for the whole economy (all sectors) and the CPI index around recession periods for Argentina. For Uruguay, median wages are graphed. Source: LCRCE calculations for Argentina based on Encuesta Permanente de Hogares (EPH) and Encuesta Permanente Continua de Hogares (EPHC), and for Uruguay, INE, and IFS

60

70

80

90

100

110

120

130

140

150

Jun-

97Se

p-97

Dec

-97

Mar

-98

Jun-

98Se

p-98

Dec

-98

Mar

-99

Jun-

99Se

p-99

Dec

-99

Mar

-00

Jun-

00Se

p -00

Dec

-00

Mar

-01

Jun-

01Se

p-01

Dec

-01

Mar

-02

Jun-

02Se

p-02

Dec

-02

Mar

-03

Jun-

03Se

p-03

Dec

-03

Mar

-04

Previous CrisisIndex Jun-98 = 100

CPICPI

Real Mean Wage

CPI

60

70

80

90

100

110

120

130

140

150

Mar

-07

Jun-

07

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Current CrisisIndex Jun-08 = 100

Real Mean Wage

CPI

Argentina

70

80

90

100

110

120

130

140

Jan-

99

May

-99

Sep-

99

Jan-

00

May

-00

Sep-

00

Jan-

01

May

-01

Sep-

01

Jan-

02

May

-02

Sep-

02

Jan-

03

May

-03

Sep-

03

Uruguay - Past CrisisIndex Dec. 2001 = 100

price index

real wage index

90

92

94

96

98

100

102

104

106

108

110

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Uruguay - Present CrisisIndex Sep. 2008 = 100

price index

real wage index

Uruguay

Surprisingly, informality did not rise in most of LAC during the 2009 downturn

11

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Argentina Brazil Colombia Ecuador Mexico Peru

Share of Workers Relative to the Total Number of EmployeesChange from 2008 to 2009, in Percentage Points

With Contract With Health Insurance

Note: For Argentina and Brazil, LCRCE Staff calculations based on Households Surveys. When the bars are not shown in the graph is because the information for that specific country is not available. Source: International Labor Organization.

Mexico 1995Argentina 1980 Argentina 1995Brazil 1985 Brazil 1995Chile 1980 Colombia 1998Colombia 1982 Ecuador 1996, 1998Ecuador 1980 Honduras 1999Mexico 1981 Jamaica 1996Peru 1983 Nicaragua 2000Uruguay 1981 Paraguay 1995

Peru 1999

Banking Crises in LAC Countries1980-1985 1995-2000 2008-2009

Crucially, LAC counties did not experience domestic financial crises – the dog that did not bark

13The table shows the start year of banking crises . Source: Laeven and Valencia (2008) and Reinhart and Rogoff (2008)

The global crisis bruised LAC’s “income statement” but it did not impair it’s “balance sheet”

Reason 1: improved macro-financial “immune system”The domestic factors that used to magnify external shocks (currencies, fiscal, banking) in the past, this time cushioned the shock

Reason 2: safer international financial integrationReason 3: timely multilateral and bilateral responseReason 4: the China connection

After the fall, LAC stands tall – Why?

14

The region has moved to more robust monetary policy frameworks managed by credible central banks…

15Source: Bloomberg

0

2

4

6

8

10

12

14

Jun-

07

Aug

-07

Oct

-07

Dec

-07

Feb-

08

Apr

-08

Jun-

08

Aug

-08

Oct

-08

Dec

-08

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

Monetary Policy RatesInflation-Targeting Latin American Countries, in %

US

Peru

Colombia

Chile

Brazil

Mexico

…virtuously interacting with reduced currency mismatches

16Sources: Gozzi et al (2009), Reinhart, Rogoff and Savastano (2003), IFS.

0%

10%

20%

30%

40%

50%

60%

70%

80%

Corporate Banks

Corporate and Banks' Dedollarization in LAC

Source: Gozzi et al. (2009), IFS

Issues in Foreign Currency / Total Issues Foreign Liabilities / Broad Money

1990-1993

2006-2009

2001-20032006-2008

Note: GDP-weighted averages of the periods noted.

0

1

2

3

4

5

6

7

8

9

10

Latin America Emerging Europe

Composite Dollarization IndexLAC, Emerging Europe

Source: Schmukler (2009) based on Reinhart, Rogoff, Savastano (2003)

1990-1993

2006-2009

2001-2003

2006-2008

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1998 2008 1998 2008 2002 2008

Mexico Colombia Brazil

Share of the Domestic and Foreign Public Debt in Total DebtSelected LAC Countries

Domestic Foreign

While far from perfect, fiscal processes have become more viable, even if they remain pro-cyclical (excepting Chile)

17

Fiscal Policy Reaction Function: Model with 2003 break in output gap and government debtMethod: Instrumental Variables

Actual Cyclically-adjustedPrimary Government Primary Primary Government PrimaryBalance Revenues Expenditure Balance Revenues Expenditure

I. All LAC Countries (17)Output gap, 1990-2003 -0.109486 -0.066482 0.209820** 0.001678 0.081457 0.249023**Output gap, 2003-2008 -0.10535 -0.060685 0.211770* 0.004452 0.088687 0.251989**Govt Debt, 1990-2003 0.006994 -0.005468 -0.009512* 0.007275 -0.005738 -0.008646Govt Debt, 2003-2008 0.020370*** 0.002222 -0.012584 0.024904*** 0.006603 -0.012623

No. Countries 17 17 17 17 17 17No. Observations 272 272 272 272 272 272

Standard errors in brackets *** p<0.01, ** p<0.05, * p<0.1

Dependent variable: Fiscal indicator as % of GDP (FI)

Note: We define the fiscal primary surplus as the general government receipts (including grants received and loan repayments) less non-interest expenditures, as a percentage of GDP. For Mexico, we use the Budgetary Public Sector. Source: EIU

Following frequent crisis, banking systems in LAC have become sounder

18Emerging countries were defined as lower middle income and upper middle income, World Bank Classification. Source: Beck, Demirguc-Kunt and Levine (2009): Financial Structure Database

0

0.25

0.5

0.75

1

1.25

1.5

1.75

2La

tvia

Bos.

& H

er.

Kaz

akhs

tan

Geo

rgia

Lith

uani

aU

krai

neA

zerb

aija

nSo

uth

Afr

ica

Rus

siaA

rmen

iaTu

nisia

Rom

ania

Bulg

aria

Para

guay

Cro

atia

Ecu

ador

Pola

ndSr

i Lan

kaTh

aila

ndM

alay

siaBo

livia

Col

ombi

aPe

ruM

exic

oM

oroc

coC

hina

Indi

aBr

azil

Turk

eyIn

done

siaU

rugu

ayA

rgen

tina

Egy

ptPh

ilipp

ines

Deposit to Loan RatiosEmerging Countries, 2007 Data

LAC has migrated towards a safer form of integration into international financial markets

19

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

A Safer Integration in LAC

Net Debt Position vis-a-vis Rest of the World

Net Equity Position vis-a-vis Rest of the World

Net

Cre

dito

rN

et D

ebto

r

Source: The net debt position (vis-à-vis ROW) is the sum of debt assets and reserves minus debt liabilities. In turn, the net equity position (vis-à-vis ROW) is the sum of net FDI assets and net portfolio equity assets. The sample ranges from 1990 to 2007. Source: Lane and Milesi-Ferretti (2007).

Flexible and timely provision of liquidity and budget support financing from multilaterals

20Note: 2010 numbers projected based on submissions to OPCS. Source: IBRD

$.0

$4.0

$8.0

$12.0

$16.0

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Com

mitm

ents

(US$

b)

IBRD lending 1995-2009 by regions

EAP

AFR + MNA

SAR

LAC

ECA

Oct-08 US Fed opens US$ 120 bn

swap lines with BRA, MEX, KOR, and SGP

IMF creates short-term liquidity facility

Apr-09 IMF launches FCL FCL agreement with

Mexico (US$ 47 bn)

May-09 FCL agreement with

Colombia (US$ 10.4 bn)

A part of LAC has deepened its trade links to Asia

21Source: IMF’s Direction of Trade Statistics (DOTS).

0%

10%

20%

30%

40%

50%

60%

70%

80%

Surin

ame

Barb

ados

Jam

aica

Nic

arag

ua

Trin

. & T

ob.

Hon

dura

s

Gua

tem

ala

Mex

ico

Baha

mas

Guy

ana

Ecua

dor

Colo

mbi

a

Beliz

e

Dom

. Rep

.

Boliv

ia

Para

guay

Ecua

dor

Hai

ti

Pana

ma

Vene

zuel

a

Uru

guay

Arge

ntin

a

Braz

il

Cost

a Ri

ca

Peru

Chile

LAC Exports to Selected Regions as % of total exports, 2008 data

EAP Euro Zone US

…the co-movement of growth between many LAC countries and China has been on the rise…

22Source: National Authorities. Note: Solid colors reflect correlation values significant at a 10% confidence interval.

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1980 1984 1988 1992 1996 2000 2004 2008

Output Co-Movement Between LAC and China20 years rolling correlation of the Real GDP Growth

ARG BRA CHL COL

MEX PAN PER

China’s commodity-intensive growth is a boon to Latin commodity exporters

23

-40% -20% 0% 20% 40% 60% 80% 100% 120% 140%

HondurasDom. Rep.Dominica

NicaraguaCosta Rica

GuatemalaPanama

BrazilUruguay

MexicoArgentina

PeruColombia

Trin. and Tob.Paraguay

ChileEcuador

Bolivia

Cumulative Change in Terms of Trade

2008q4 - 2009q42001q4 - 2008q2

Note: The cumulative variation in the terms of trade index is calculated using quarterly data. The blue bars represent the cumulative percentage change during the recent commodity price boom up to the peak in 2008q2. The red bars capture the cumulative percentage change in terms of trade from its trough in 2008q4 to the most recently available quarter (2009q4). Source: WDI, DECPG, and Haver Analytics.

About 97% of LAC’s GDP and 93% of LAC’s population reside in countries that are net commodity exporters

About half the number of countries in LAC are net commodity importers and are mainly located in Central America and the Caribbean

Growth engines are being reignited at different pace and intensity, with dynamic EMs in the lead

LAC recovering in a multi-polar world economy

24

The world economy is rebounding

25Note: EAP represents East Asia and the Pacific region. Source: Bloomberg, and CPB (Netherlands Bureau for Economic Policy Analysis).

120

130

140

150

160

170

180

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

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

World Trade VolumesSeasonally Adjusted, Index Jan-06 = 100

Exports

Imports

30

50

70

90

110

130

150

50

100

150

200

250

300

350

Jan-

05

Apr-0

5

Jul-0

5

Oct-0

5

Jan-

06

Apr-0

6

Jul-0

6

Oct-0

6

Jan-

07

Apr-0

7

Jul-0

7

Oct-0

7

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

Apr-1

0

Oil W

TI, C

urre

nt U

S$

Whe

at, C

oppe

r and

Soyb

ean,

01-

Jan-

05=1

00

Commodity PricesOil WTI in Current US$, Wheat, Copper and Soybean: Index 01-Jan-05=100

Oil (rhs)

Copper

Wheat

Soybean

40

50

60

70

80

90

100

110

120

130

140

150

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

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

Stock Prices Around the WorldIndexes: 1-Apr-08 = 100

Developed Countries

Emerging Economies

-200

0

200

400

600

800

1,000

1,200

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

f

2010

f

Net Private Capital Flows to Emerging EconomiesUS$ Billion

Private Flows

Debt Investment Portfolio EquityInvestment

FDI

But recovery patterns contrast sharply between the rich countries and the dynamic EMs

80

85

90

95

100

105

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

Jul-0

9

Oct

-09

World Industrial ProductionIndex Apr-08 = 100

Emerging Economies

Developed Countries

26Note: The group of developed countries refers to OECD countries excluding Turkey, Mexico, Republic of Korea, and Central European countries. Source: CPB (Netherlands Bureau for Economic Policy Analysis).

Emerging economies with strongest recoveries include Brazil, China, India, Korea, Malaysia, Philippines and Thailand

They represent 52% of emerging economies’ GDP

Growth forecasts for LAC in 2010-2011 are robust, but less so than for the East Asian Tigers

27

0

2

4

6

8

10

12

Western Europe

Japan Eastern Europe

US LAC MENA East Asian Tigers

China

Real GDP Growth Forecasts for 2010-2011Annual Real GDP Growth Rate

2010 2011

Note: Western Europe comprises Euro Zone countries, Denmark, Sweden, UK, Norway, and Switzerland. Source: Consensus Forecasts(December 2009 and March 2010), and Bloomberg.

… with Brazil, Peru, Chile and Panama leading the pack; and Colombia behind the regional average

28

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Vene

zuel

aAn

t. &

Barb

.Ba

ham

asSt

. Kts

. & N

v.Ba

rbad

osJa

mai

caSt

. Vc.

& Gr

s.Do

min

icaSt

. Luc

iaNi

cara

gua

Beliz

eGu

atem

ala

Haiti

Tri. &

Tob.

Hond

uras

Ecua

dor

Guya

naCo

lom

bia

Cost

a Rica

Dom

. Rep

.Pa

ragu

aySu

rinam

eBo

livia

Arge

ntin

aUr

ugua

yLA

CM

exico

Pana

ma

Chile

Peru

Braz

il

Real GDP Growth Forecasts for 2010LAC countries

Source: Latin American Consensus Forecasts as of March 2010, IMF’s World Economic Outlook, IMF’s Regional Economic Outlook.

Dynamic EMs, including several LAC countries, are basically back to the pre-crisis peak in economic activity

29

0.90

0.95

1.00

1.05

1.10

1.15M

exic

o

El S

alva

dor

Vene

zuel

a

Chile

Ecua

dor

Para

guay

Cost

a Ri

ca

Arge

ntin

a

Braz

il

Colo

mbi

a

Peru

Boliv

ia

Pana

ma

Uru

guay

Dom

. Rep

.

Chin

a

Ratio of Real GDP in 2009q4 to Pre-Crisis Peak

If inflation pressures are surfacing, it is in the EMs

30Source: DECPG

-2%

0%

2%

4%

6%

8%

10%

12%

14%

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

Sep-

09

Nov

-09

Jan-

10

Mar

-10

Inflation in Selected RegionsSeasonally Adjusted, YoY Growth Median

OECD

LAC

Developing Asia

An uncertain and complex global context

Challenges for LAC going forward

31

LAC prospects will still depend on the global environment, where much haziness and risks exist

Will rich countries be able to overcome the growth-impairing effects of their weakened balance sheets? Will private demand pick up as stimulus policies unwind?

Or, given limited space for additional fiscal stimulus, will low interest rates foster again financial excesses?

Will problems in Club Med Europe be contained?

Will fiscal/debt dynamics in rich countries be restored to viability without inflation down the line?

Will regulatory uncertainty in rich countries be adequately dispelled?

Will a new, robust source of consumption demand arise outside the U.S.? A revaluation of the Renminbi is arguably essential in this regard

32

In the short-run: currency appreciation pressures

Challenges for LAC going forward

33

Currency appreciation pressures are already felt and bound to intensify…

34

-4

-2

0

2

4

6

8

Jan-

03

May

-03

Sep-

03

Jan-

04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

Brazil

Reserve Accumulation

Appreciation Pressures

Exchange Market Pressure-3

-2

-1

0

1

2

3

4

Jan-

03

May

-03

Sep-

03

Jan-

04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10

Chile

Reserve Accumulation

Appreciation Pressures

Exchange Market Pressure

Note: The Exchange Market Pressure Index is the weighted average of year-on-year percentage changes in: (a) the nominal exchange rate of the local currency vis-à-vis the US dollar (such that an increase represents an appreciation of the LAC currency), and (b) the level of international reserves. The weights are given by the inverse of the annual standard deviation of the changes in the nominal exchange rate and the standard deviation of the changes in reserves. An increase in the Exchange Market Pressure index signals appreciation pressures and/or accumulation of reserves. Source: LCRCE Staff calculations based on IMF’s IFS.

-4

-2

0

2

4

6

8

Jan-

03

May

-03

Sep-

03

Jan-

04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep-

08

Jan-

09

May

-09

Sep-

09

Jan-

10Colombia

Reserve Accumulation

Appreciation Pressures

Exchange Market Pressure-3

-2

-1

0

1

2

3

4

5

Jan-

03

May

-03

Sep-

03

Jan-

04

May

-04

Sep-

04

Jan-

05

May

-05

Sep-

05

Jan-

06

May

-06

Sep-

06

Jan-

07

May

-07

Sep-

07

Jan-

08

May

-08

Sep -

08

Jan-

09

May

-09

Sep-

09

Jan-

10

Peru

Reserve Accumulation

Appreciation Pressures

Exchange Market Pressure

… as Latin countries are likely to be compelled to tighten monetary policy ahead of rich countries…

35

ARG

BOL

BRA

CHL

COL

CRI

DOMECU

GUA

HNDMEXNIC

PAN

PER

PRY

SLV

URY

-0.0015

-0.001

-0.0005

0

0.0005

0.001

-4 -2 0 2 4 6

Out

put G

ap

Inflation Pressurein percentage points

2010 Output and Inflation Gaps

Note: Inflation pressures are calculated as the difference between the 2010 inflation rate forecast and an estimated target of 4% (assumed to be the target for most countries in the region). The output gap calculated as the difference between the (log of) actual and potential GDP, with the latter being calculated using the Hodrick-Prescott filter. Source: LCRCE Staff calculations based on Consensus Forecasts as of March 2010.

It is mostly about growth and, for most of the LAC economy, growth linked to natural resource wealth

Challenges for LAC going forward

36

The virtuous development triad

37

Growth

StabilityFairness

Sustainabledevelopment

100 years of growth solitude for LAC!

38

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1900

1906

1912

1918

1924

1930

1936

1942

1948

1954

1960

1966

1972

1978

1984

1990

1996

2002

2008

GDP Per Capita of Selected Regions / US GDP per Capita

LAC/US

Asian Tigers/US

Gold Standard Period

Interwar Period

US Recovers

Alliance for

Progress

Imports Substitution

Lost Decade

Washington Consensus

Washington Dissensus

Note: The group of East Asian tigers includes Hong Kong (China), Indonesia, Malaysia, Republic of Korea, Singapore, Thailand, and Taiwan (China). Source: LCRCE Staff calculations based on Maddison (2007, 2009), WDI and DECPG

39

Thank you