The Global Crisis: Impact on Latin America · March 16, 2009. 1 zGlobal crisis and deleveraging...

The Global Crisis: Impact on Latin America

Gilbert Terrier,March 16, 2009

1

Global crisis and deleveragingLatin America in better position this timeHowever, with differences across countriesAnd further risks down the roadHow best to prepare?

Outline of the presentation

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Unusually high commodity prices Strong capital inflows in some countries (though not as strong as in East. Europe)Optimistic expectations for potential output growth

Global bubble: important implications for LAC

3

Global outlook deteriorating fast

Collapse in growth in advanced economies with clear spillovers to EMContinued global deleveragingGlobal trade sharply contracting (esp. Asia), commodity prices down

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

2004Q1 2005Q1 2006Q1 2007Q1 2008Q1

USEuro AreaJapan

Real GDP Growth in Advanced Economies(q/q annualized)

Source: Haver Analytics.

4

What are the key channels of transmission?

Fall in commodity prices impact on current accounts

Trade linkages also relevant, though the region is still relatively closed

0

100

200

300

400

500

600

700

95 97 99 01 03 05 07 090

100

200

300

400

500

600

700

Food and beverage

Metals

Oil, Gas and Coal

Commodity Prices (2002=100)

Sources: WEO; and Fund staff estimates.

5

Main shocks from external financial conditions and the capital account

Strong impact of deleveraging on banks and corporatesCorporate access to foreign financing much tighter; and large corporate rollover needs in some casesRepatriation of capital to safe havens (US)

Private and Quasi-Sovereign Corporate Financing in LAC(Billions of U.S. dollars)

0

10

20

30

40

50

60

70

Q12007

Q2 Q3 Q4 Q12008

Q2 Q3 Q4

Syndicated foreign loansForeign placed bondsDomestically placed bonds

1998–02 03–06average

6

Severe and fast impact on real economy in LAC

-15

-10

-5

0

5

10

15

20

25

30

35

Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08

Merchandise ExportsMerchandise Imports

LA 7(Change from a year in the monthy value of exports and imports)

-10

-5

0

5

10

15

2004Q1 2005Q1 2006Q1 2007Q1 2008Q1

China IndiaBrazil Mexico

Industrial Production(y-o-y percentage change )

7



8

External and public debt levels have come down

0

10

20

30

40

50

60

70

80

2002 2004 2006 20080

0.5

1

1.5

2

2.5

3

3.5

4

Public debtCentral Government Deficit (right scale)

LAC Public Debt and Central Government Deficit(% of GDP)

0

10

20

30

40

50

60

LAC CEEE Emerg. Asia

1998 2001 2008

Total External Debt(% of GDP)

9

Lower external current account deficits

Current account deficits declined in LACMuch better position than Central and Eastern Europe, but worse than Asia

-6

-4

-2

0

2

4

6

8


199820012008

External Current Account Deficit(percent of GDP)

10

International reserves at more comfortable levels

0

2

4

6

8

10

12


1998 2001 2008

Reserves in Months of Imports(ratio)

0.0

0.5

1.0

1.5

2.0

2.5

BRA PER VEN CHL ARG COL MEX

Reserve Coverage of Aggegrate External Financing Requirements, 2009(ratio)

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Moderate credit and NPLs ratios

2008 Credit to the Private Sector(percent of GDP)

0

20

40

60

80

100

120

140

ARGBRACHLCOLMEXPERVENCHNKORTH

AHUNPOLUKR

average

2008 NPLs(percent of total credit)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

ARG BRA CHL COL MEX PER VEN

12

Flexible exchange rates: key shock absorber in some countries

Exchange rates(Jan. 2007=100)

80

90

100

110

120

130

140

150

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

80

90

100

110

120

130

140BRA

CHL COL

PER

MEX

13



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However, important asymmetries across the region

Terms of Trade 1/(Index 2000=100)

Source: IMF staff calculations.1/ PPP-GDP weighted average.

50

75

100

125

150

175

200

2000 01 02 03 04 05 06 07 08 09

Inflation targeting, commodity exporters

Other commodity exporters

Commodity importers Proj.

-8

-6

-4

-2

0

2

4

6

8

10

12

14

2000 01 02 03 04 05 06 07 08 09


Commodityimporters


Proj.

Real GDP Growth 1/(Annual percent change)


IT commodity exporters includes Brazil, Chile, Colombia, Mexico, and Peru. Other commodity exporters includes Argentina, Bolivia, Ecuador, Venezuela, and Trinidad and Tobago. Commodity importers includes the remaining LAC countries.

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Also varying exposure through trade

Trade linkages less relevant than in other regions (Asia)

But strong ties to the US in Mexico, Central America, and the Caribbean

Impact also through remittances and tourism

LAC Total Exports(In percent of GDP)

-2

2

6

10

14

18

22

Total USA INTRA LAC EU CHINA RoW

2001 2008

Source: Direction of Trade.

16

Corporate balance sheets generally improved

Lower on-balance sheetexposure to FX debt

Stronger balance sheets in LA7 non-financial listed firms

020406080

100120140160180200

1994 1996 1998 2000 2002 2004 20060510152025303540

FX liabilities (% of FX assets and exports)Share of FX liabilities (right scale)

00.5

11.5

22.5

33.5

4

Quick ratio 1/ Leverage Return onassets (%)

1998-2002 2003-2007

1/ Current assets (net of inventories) / current liabilities.

17

Spreads have moved up

Corporate Spreads (all asset class, basis points)

Source: Credit Suisse.

0

200

400

600

800

1000

1200

1400

Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09

Latin America

Emerging Asia

U.S.

EMBI+ sovereign spreads(basis points)

Source: Datastream

200

400

600

800

1000

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Latin America

Europe

Asia

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Corporate vulnerabilities persisted, not always identified ex ante

In general, lower corporate exposure to FX debt

Off-balance sheet exposure through derivative positions

Substantial losses in some corporates in BRA and MEX following sharp FX depreciations

Large corporate rollover needs in 09-10

020406080

100120140160180200

1994 1996 1998 2000 2002 2004 20060510152025303540

FX liabilities (% of FX assets and exports)Share of FX liabilities (right scale)

Lower on-balance sheetexposure to FX debt

19



20

Risks going forward: reversal of credit boom

Credit risks important

Liquidity hoarding by banks (credit squeeze)

NPLs may rise sharply

-10

0

10

20

30

40

50

60

70

80

-10

0

10

20

30

40

50

60

70

80

In flation targeting, commodity exporters


Commodity importers

08Dec

072000 01 02 03 04 05 06

Credit to the Private Sector 1/(12-month percent change)

21

Risks going forward: domestic liquidity conditions

Lower foreign financing leading to tighter domestic liquidity Active policy response has helped

Provision of domestic liquidityCut in monetary policy ratesSpecial FX lines for corporates

2

5

8

11

14

17

20

23

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

0

20

40

60

80

100

120

Argentina(right scale)

Chile

MexicoBrazil

Local Currency Interest Rates(percent; one-year swap)

22

Risks going forward: commodity prices moving south?

Commodity prices remain well above 2002 levelSome speculation that they could rise—partly linked to fate of US dollarBut also potential to go down

Max in 2008 Ave. 2002

Food and Beverage -29 48

Oil, Gas and Coal -58 101

Metals -54 61

1/ Commodity indices measured in dollar terms.

Percentage difference of current level of commodity prices 1/

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Risks going forward: further considerations

Risks of protectionismSome movements toward trade restrictionsSubtle “buy domestic” campaigns as well

Protracted global deleveragingContinued tight foreign financing conditionsRollover risks for credit linesLower FDI

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25

Preparing for continued financial stress

Critical role for central banksBalance sheet expansion: how far?Quality of assets: which ones?

Bank resolutionStrengthen bank resolution mechanisms Recapitalize deposit insurance funds

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Scope for countercyclical fiscal policy?Strengthen social safety netsFinancing constraints?Importance of credible and sustainable medium-term fiscal frameworks 20

21

22

23

24

25

26

27

28

29

30

31

32

2000 01 02 03 04 05 06 07 0820

21

22

23

24

25

26

27

28

29

30

31

32

Commodity importers



Proj.

Primary Expenditure 1/(Percent of GDP)



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Issue: Recycle liquidity back to emerging marketsIMF can help, but resources are limited

US$ 150 bn + US$ 100 bn from JapanSeeking to double/triple resources

New facilities to ring fence economies with good track records


Thank you very much!

The Global Crisis: Impact on Latin America · March 16, 2009. 1 zGlobal crisis and deleveraging...

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Transcript of The Global Crisis: Impact on Latin America · March 16, 2009. 1 zGlobal crisis and deleveraging...