Update on the Global Crisis: The Worst is Over, LAC Poised to Recover

Transcription

1 Update on the Global Crisis: The Worst is Over, LAC Poised to Recover 28 September 2009 Chief Economist Office Latin America and the Caribbean Region The World Bank 1

2 Structure of Presentation The worst seems over, but fragilities remain The nature of the incipient recovery How has LAC fared in comparative terms? Recession in LAC and elsewhere Growth collapse in LAC and elsewhere Explaining the differences in growth collapse Looking ahead: much haziness in the horizon Short-run recovery Medium-term growth and rebalancing uncertainty 2

3 The Worst Seems Over But Fragilities Remain Part 1

4 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 S&P Indexes VIX The catastrophic scenario was averted Standard & Poor's (Financial and Total Indexes) and VIX Index number Aug = 100 (S&P indexes) Total S&P Pandit's Memo Financial S&P Subprime eruption Bear Stearns VIX (rhs) 15 0 Lehman 0 Source: Bloomberg 4

5 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 thanks to bold risk absorption and countercyclical actions by central banks, led by the U.S. Fed 2,500 2,000 Other Central Bank Liquidity Swaps New Program Portfolio Loans and Discounts Including Float Term Auction Facility (TAF) Treasury Securities FED's Balance Sheet - Assets Side Factors Affecting Reserve Balances, US$ Billion Lehman US$ 2,259 Billions (16.1% of GDP) 1,500 1,000 US$ 900 Billions (6% of GDP) Subprime Eruption Bear Sterns 500 Pandit's Memo 0 Source: Federal Reserve Bank St. Louis 5

6 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 and to substantial injections of fiscal and credit stimuli, including in China 35% China: Real Private Domestic Credit Annual Variation 30% 25% 20% 15% 10% 5% 0% Source: IFS 6

7 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 The large emerging economies, including Brazil, are leading the world s recovery 130 World Industrial Production Index Jan/2006= Advanced World Emerging The emerging economies with strongest recoveries include Brazil, China, India, Korea, Malaysia, Philippines and Thailand They represent 52% of emerging economies GDP Industrial production for this group increased by 18% from January to June 2009 Source: CPB (Netherlands Bureau for Economic Policy Analysis) 7

8 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 With surprises on the upside, growth forecasts for the center and the periphery are being revised upwards 2% Developed Countries: 2009 Real GDP Growth Forecasts Annual Growth Rate 3.0% Developed Countries: 2010 Real GDP Growth Forecasts Annual Growth Rate 0% 2.5% USA -2% -4% -6% USA Euro Zone UK Japan 2.0% 1.5% 1.0% 0.5% Japan UK Euro Zone -8% 0.0% 6% LAC Countries: 2009 Real GDP Growth Forecasts Annual Growth Rate 6% LAC Countries: 2009 Real GDP Growth Forecasts Annual Growth Rate 4% 2% 0% -2% -4% -6% Average Exc. Mexico High Average Low 5% 4% 3% 2% 1% 0% -1% High Average Exc. Mexico Average Low Source: Consensus Forecasts, Jan to Sep

9 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 However, the process of economic repair in rich countries is still incomplete Developed Economies: Manufacturing PMI Seasonally Adjusted Global Eurozone Pandit's Memo Expansion 50 UK Contraction US Subprime eruption Bear Stearns Lehman Japan 25 Manufacturing Purchasing Managers Index: assess business conditions in the manufacturing sector. A number above 50 indicates an expected increase of business conditions (expansion). A number below 50 indicates deterioration. Source: Bloomberg 9

10 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 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Durable Goods Nondefense US$ Billiion Feb-05 Jun-05 Oct-05 Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 US$ Billiion as the stimuli is most of the story so far behind the incipient recovery, especially in the US Budget Balance of Central Government Accumulated in 12 Months Avg. in 2007: 1.3% of GDP 24% 20% Gross Nominal Public Debt Annual Variation 82% of GDP % % ,000-1,200-1, % of GDP 8% 4% 0% 67% of GDP 240 Manufacturers' New Orders US$ Billion, Seasonally Adjusted Exports of Goods and Services, BOP Basis Seasonally Adjusted Nondefense exc. Aircraft (rhs) Durable Source: Federal Reserve Bank St. Louis and Economist Intelligence Unit (EIU) 10

11 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 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 Index Jan-05=100 US$ Billion and fragilities remain in labor markets and in private demand Nonfarm Payrolls and Personnal Expenditures Seasonnally Adjusted Real PCE: Nondurable Real PCE: Durable Investment US$ Billion Government consumption expenditures and gross investment 97 Nonfarm Payrolls (rhs) Gross private domestic investment Nonresidential 1100 Source: Bloomberg and Federal Reserve Bank St. Louis 11

12 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Mar-03 Dec-03 Sep-04 Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09 Consumer Credit Business Credit Domestic Issues Syndicated Loans Also, domestic credit to households and firms remains sluggish Capital Markets in the US New Capital Raisings, US$ Billion Domestic Issues (3 Months Moving Avg) Syndicated Loans (rhs) Private Credit in the US US$ Billions Seasonally Adjusted Business Consumer Source: Federal Reserve Bank St. Louis 12

13 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 External financial conditions have improved significantly for LAC and other emerging regions Corporate EMBI & U.S. High Yield Bond Spread in basis points Subprime eruption Bear Sterns Lehman ECA High Yield LAC Pandit's Memo 0 EAP Source: Bloomberg US Credit Suisse High Yield Spread, JP Morgan CEMBI Global: Corporate Emerging Markets Bond Index. 13

14 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Wheat, Copper and Soybean, 01-Jan-05=100 Oil WTI, Current US$ And the rebound in commodity prices benefit net exporting countries in the region Commodity Prices Oil WTI in Current US$, Wheat, Copper and Soybean: Index 01-Jan-05= Copper Subprime eruption Bear Stearns Pandit's Memo Wheat About 95% of LAC s GDP and 90% of LAC s population reside in countries that are net commodity exporters Soybean About half the number of countries in LAC are net commodity importers and are mainly located in Central America and the Caribbean 50 Oil (rhs) Lehman 30 Source: Bloomberg 14

15 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 There is considerable heterogeneity in the pace of recovery across LAC countries 15% 10% 5% 0% -5% -10% -15% Argentina Rebounding Chile Brazil 20% 15% 10% 5% 0% -5% -10% Peru Still Falling Venezuela (rhs) 4% 2% 0% -2% -4% -6% -8% -10% -12% -20% -15% -14% 20% Stabilized? 30% 15% 10% 5% 0% -5% Ecuador Colombia Mexico Uruguay (rhs) 25% 20% 15% 10% 5% 0% -10% -5% -15% -10% Source: Economist Intelligence Unit (EIU), GEM and IFS 15

16 How Has LAC Fared in Comparative Terms? Part 2

17 Jamaica Venezuela El Salvador Dominica Guatemala Haiti Honduras Ecuador St. Lucia Argentina Nicaragua St. Vct. & G. Uruguay Belize Paraguay Costa Rica Dom. Rep. Colombia Mexico Bolivia LAC Guyana LAC Excl. Panama Ant. & Barb. Trin. & Tob. Brazil Chile Peru Mexico Ecuador Argentina Costa Rica Honduras Jamaica Dominica LAC El Salvador Nicaragua Paraguay Chile Venezuela St. Lucia Guatemala St. Vct. & G. LAC Excl. Mexico Dom. Rep. Colombia Haiti Brazil Uruguay Panama Belize Ant. & Barb. Peru Guyana Bolivia Trin. & Tob will be a year of recession for LAC (Mexico the hardest hit) but a broad recovery is expected for % 2009 Real GDP Growth Forecast 2% 0% -2% -4% -6% -8% 6% 5% 2010 Real GDP Growth Forecast 4% 3% 2% 1% 0% Weighted average calculated based on 2007 nominal GDP. Source: Consensus Forecast (Sep. 2009), World Bank and IMF. 17

18 The 2009 recession in LAC is less pronounced than in other areas of the world 12% 10% Recent Real GDP Growth and Forecasts for Annual GDP Real Growth Rate, % 6% 4% 2% 0% -2% -4% -6% -8% Japan Eastern Europe Western Europe United States Latin America East Asian Tigers China Source: Consensus Forecasts (Sep. 2009) 18

19 Number of Poor People (Millions) But the recession in LAC threatens social gains Actual and Projected Poverty Numbers Projected Counterfactual Between 2002 and 2008, almost 60 million people in LAC moved out of poverty. Poverty for LAC is measured at PPP-adjusted US$4 a day. Source: Based on Azevedo, Molina, Rubiano, and Saavedra (2009). 19

20 Argentina Costa Rica Panama Mexico Venezuela Paraguay Dom. Rep. Honduras Colombia Peru Guatemala Uruguay LAC Chile Brazil Ant. & Barb. Ecuador Nicaragua Dominica Jamaica Guyana Haiti Tri. & Tob. Bolivia The growth collapse in LAC is significant on average, although cross-country variation is non-trivial 0% Collapse in Growth Difference in Real GDP Growth between 2007 and % -4% -6% -8% -10% -12% Weighted average calculated based on 2007 nominal GDP. Source: World Bank and IMF. 20

21 2009 Real GDP Growth Forecasts For many LAC countries, the collapse was from relatively high growth rates 12% Real GDP Growth in LAC 2007 and 2009 Forecasts 9% 6% 45 o 3% T&T BOL GUY BRZ ATB PER PAN URY 0% HAI COL DMR GUA DOM CHI VEN NIC PRY -3% CRI ARG JAM ECU HON -6% MEX -9% 0% 3% 6% 9% 12% 2007 Real GDP Growth Source: Consensus Forecast (Sep. 2009), World Bank and IMF 21

22 LAC s growth collapse is similar to China s and smaller to that of the Tigers and Eastern Europe 0% Growth Collapses Across the World GDP Growth collapse, in p.p. (diff. between growth in 2007 and 2009) -2% -4% -6% -8% -10% -12% -14% ECA EA Tigers IND LAC China MENA SSA SA Source: World Bank, Consensus Forecasts (Sep. 2009) and IMF with LCRCE Staff calculations. 22

23 Explaining cross-country differences in the collapse Regression analysis of the growth collapse from 2007 to 2009 Sample of 126 countries Collapses were larger in countries characterized by Greater trade and financial openness Higher share of manufacturing exports Greater export reliance on rich country markets Weaker banking systems This helps explain contrasts in the collapse Brazil-Mexico; LAC-Eastern Europe; LAC-East Asian Tigers Soundness of macro policies played a positive role Dampening the collapse somewhat Enabling countercyclical policies, particularly in the monetary front Helping avoid systemic damage 23

24 Trade openness across emerging regions Structure of GDP as % of GDP Exports Imports Private Consumption East Asia South Asia Latin America Eastern Europe Regional aggregates are calculated as simple averages. Source: LCRCE Staff calculations based on EIU 24

25 The fall in foreign debt flows stands in sharp contrast with the stability of equity flows 1,200 World in US$ Billion 1, Debt Flows Equity Flows 160 LAC-7 Countries in US$ Billion Equity Flows Debt Flows Net private flows for the world; Gross total flows for LAC-7 countries. Equity flows include FDI and portfolio equity flows. Source: Institute of International Finance (IIF) 25

26 Latvia Bos. & Her. Kazakhstan Colombia Georgia Lithuania Ukraine Chile Azerbaijan South Africa Russia Armenia Tunisia Romania Bulgaria Paraguay Croatia Ecuador Poland Sri Lanka Thailand Malaysia Bolivia Venezuela Peru Mexico Morocco China India Brazil Turkey Indonesia Uruguay Argentina Egypt Philippines Healthy banking systems dampened the collapse 2 Deposit to Loan Ratios Emerging Countries, 2007 Data Emerging countries were defined as lower middle income and upper middle income, World Bank Classification. Source: Beck, Demirguc-Kunt and Levine (2009): Financial Structure Database 26

27 The dog that did not bark: absence of domestic crises in a region traditionally plagued by them Banking Crises in LAC Countries Argentina 1980 Argentina 1995 Brazil 1985 Brazil 1995 Chile 1980 Colombia 1998 Colombia 1982 Ecuador 1996, 1998 Ecuador 1980 Honduras 1999 Mexico 1981 Jamaica 1996 Peru 1983 Nicaragua 2000 Uruguay 1981 Paraguay 1995 Peru 1999 The table shows the start year of banking crises. Source: Laeven and Valencia (2008) and Reinhart and Rogoff (2008) 27

28 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Inflation-targeting countries in LAC undertook aggressive countercyclical monetary policies Monetary Policy Rates Inflation-Targeting LAC Countries, in % 14 Brazil Mexico Chile Colombia 6 Peru US Source: Bloomberg 28

29 Looking Ahead: Much Haziness in the Horizon Part 3

30 By and large, LAC is well-positioned for recovery Despite being financially globalized, LAC is coming out of the crisis without systemic damage Improved macro-financial inmune system passed a tough test In contrast with rich countries, LAC s fiscal and debt positions remain comfortable Exchange rate flexibility acted as cushion (countercyclicality) and facilitated external adjustment at lower output cost than otherwise LAC economies that are complementary to China s lead the recovery Thus, LAC emerging as an attractive destination for investment But LAC will need to intensify its productivity-oriented agenda to seize opportunities going forward Keeping the course of improvement in social and macrofinancial policy 30

31 % of GDP % of GDP Unlike rich countries, LAC comes out of the crisis with comfortable fiscal & public debt positions 3 Fiscal Balance US Euro Japan UK OECD LAC Gross Nominal Liabilities US Euro Japan UK OECD LAC-7 Source: Economist Intelligence Unit (EIU) and Consensus Forecast (Sep. 2009) 31

32 Exports to China/Total Exports (2006) LAC economies that are complementary to China s are recovering first Trade ties with the US and China 16% JAM Trade ties with the US Trade ties with China 12% CRI 8% PER CHI ARG BRZ 4% 0% COL VEN ECU MEX -4% 0% 20% 40% 60% 80% 100% Exports to the US/Total Exports (2006) LAC countries, Source: DOTS 32

33 LAC prospects depend on world growth, where much haziness exist beyond the short run In the short run, the global recovery is looking a lot like a V......but economic repair is still incomplete and fragilities remain Will private sector demand be strong when stimulus fizzles away? Will exit from stimulus policies be well-timed and orderly? Premature retreat can kill the recovery; delayed retreat can rise inflation specter Medium-term growth for the world might be subdued Financial system still impaired Scenario of slow expansion of world trade in the context of rebalancing Possible adverse impact on MT investment of regulatory uncertainty LAC can grow robustly while contributing to global rebalancing LAC economy is the size of China s but consumption has greater weight and investment has significant room to expand 33

34 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 World trade volume unlikely to grow fast for a while in a context of global rebalancing 170 World Trade Volume Seasonally Adjusted, Index 2000= Exports Imports Source: CPB (Netherlands Bureau for Economic Policy Analysis) 34

35 US$ Trillion at Current Prices At the margin, LAC can contribute to global rebalancing more than China Output and Demand: China vs. LAC GDP and Demand Components, Total GDP: 3.5 Total GDP: 3.7 Exports 24% Exports 39% % Investment 42% Investment 1.5 Consumption 77% Consumption 49% % Imports -30% Imports -1.5 Latin America China Source: World Bank s WDI 35

36 % of GDP while raising savings and investment rates to underpin a higher growth path 60% 50% Saving Savings and Investment Average Between Investment 40% 30% 20% 10% 0% LAC East Asian Tigers China Source: World Bank s WDI and EIU. East Asian Tigers include the following countries: Hong Kong, Indonesia, Korea, Malaysia, Singapore, Taiwan, and Thailand. 36

37 Thank you 37