How Nasty will the External Environment Get? Global Scenarios for LAC

Transcription

1 How Nasty will the External Environment Get? Global Scenarios for LAC RTM Retreat Washington, DC 2 November 2011 Chief Economist Office Latin America and the Caribbean The World Bank 1

2 Rising Global Uncertainty and Risks 2

3 The European Epicenter Reversal of fortune! Argentina Venezuela Ukrain Kazakhastan Tukey Phillipines Indonesia Colombia Panama Peru Vietnam Brazil Russia Romania South Africa Bulgaria Mexico Croatia Thailand Hungary Korea Malaysia Chile Poland Italy Greece Ireland Slovak Rep Portugal Spain Belgium France Germany Sweden Global Sovereign CDS 31-Dec-2007, in basis points Greece Venezuela Portugal Argentina Ireland Ukraine Hungary Italy Croatia Vietnam Spain Romania Bulgaria Turkey Belgium Poland Kazakhastan Russia Indonesia Phillipines South Africa France Peru Brazil Mexico Colombia Thailand Slovak Rep Panama Korea Malaysia Chile Germany Sweden Global Sovereign CDS 16-Sep-2011, in basis points Source: Bloomberg 3

4 The European epicenter One currency, 17 sovereign debt issuers 25% 20% 15% 10% 5% Spreads Over German Bonds In % Official Launch of the Euro Portugal Greece Ireland France Italy Spain 0% -5% Mar-93 Apr-94 May-95 Jun-96 Jul-97 Aug-98 Sep-99 Oct-00 Nov-01 Jan-03 Feb-04 Mar-05 Apr-06 May-07 Jun-08 Jul-09 Aug-10 Sep-11 Source: Bloomberg 4

5 The European epicenter Structural heterogeneity and the CGD trap 200 Unit Labor Costs in Europe Index base 100 = q Germany 180 Italy Portugal 160 Greece France Spain 20.0% 15.0% Debt Sustainability in Europe Theoretical vs Actual Primary Balance Actual Theoretical % Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q % of GDP 5.0% 0.0% -5.0% -10.0% Greece France Ireland Portugal Italy Spain Source: EuroStats and Bloomberg. For panel B, the theoretical primary balances is calculated using the last observation of the nominal interests rates on 10ys bonds, and assuming a long term inflation and growth of 1.5% and 2%, respectively. 5

6 The European epicenter Is a Euro in an Italian bank the same as a one in a German bank? 130 European Banks Bloomberg Europe Banks Index base 100 = Jan-11, CDS in bps Index base 100 = Jan Jan-11 Jan-11 Jan-11 Bloomberg Europe Banks Index Markit itraxx Europe Financial CDS Index (rhs) % 350.0% 300.0% 250.0% Libor - OIS Spreads in the US and Europe In percent Libor - OIS Spread (USD) Libor - OIS Spread (EUR) 200.0% 150.0% 100.0% 50.0% 0.0% Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Feb-11 Feb-11 Mar-11 Mar-11 Apr-11 Apr-11 May-11 May-11 Jun-11 Jun-11 Jul-11 Jul-11 Aug-11 Aug-11 Aug-11 Sep-11 Sep-11 Oct-11 Oct-11 bps Notes: In panel B the LIBOR OIS is the difference between LIBOR and the overnight indexed swap (OIS) rates. Source: Bloomberg 6

7 The US epicenter Feeble growth prospects: Keynes vs. Fischer 135 US Economic Activity GDP Index base 100 = Iq trend Index base 100 = Iq Mar-03 Nov-03 Jul-04 Mar-05 Nov-05 Jul-06 Mar-07 Nov-07 Jul-08 Mar-09 Nov-09 Jul-10 Mar-11 Nov-11 Jul-12 Mar-13 ISM Index Industrial Production and ISM Index Industrial Production (YoY %) 10.0% 5.0% 0.0% -5.0% -10.0% Industrial Production (YoY) 10 ISM Index -15.0% % 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 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Series2 Sources: Consensus Forecasts (October 2011) and Bloomberg. 7

8 The US Epicenter Downgraded but still the safe haven ( exorbitant privilege ) Gold and US T Gold 4.0% US T10 (rhs) 3.5% USD % 2.5% 2.0% Percent Japan US-EUR UK Currencies: 2011 Index base 100 = 1-Jan-2011 Brazil % Jan Dec-10 Jan-11 Mar-11 Apr-11 May-11 Jan-11 Jun-11 Feb-11 Jul-11 Feb-11 Aug-11 Mar-11 Mar-11 Apr-11 Apr-11 Sep-11 May-11 May-11 May-11 Jun-11 Jun-11 Jul-11 Jul-11 Aug-11 Aug-11 Sep-11 Source: Bloomberg 8

9 Short-run scenarios 1. Continued real de-coupling 2. A great global re-coupling 9

10 Real cyclical de-coupling has been a salient feature of the post-crisis global economic landscape Crisis World Industrial Production Index Apr-08 = 100 Advanced Economies Emerging Economies % 80% Contribution to World Economic GDP as a % of World GDP increase (PPP) 8% 11% 8% 8% 7% 8% 80 Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 60% 34% 44% 57% 40% 20% 51% 38% 27% 0% Others Other Advanced Economies EM - 20 Euro (15)+US+Japan+Canada+UK Note: 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). 10

11 For LAC it has been a decade of trend decoupling also 7.0% 6.0% 5.0% Cyclical Adjusted Growth High-Income Latin America 4.0% 3.0% 2.0% 1.0% 0.0% Average TFP growth per year Avg Avg Avg Avg Avg Avg LAC 7 1.9% 0.4% -2.0% 0.2% 1.0% 0.3% Non - LAC 7 1.1% 0.5% -2.0% 0.1% 1.2% 0.2% Argentina 1.3% -0.2% -2.5% 2.0% 1.4% 0.4% Brazil 2.9% 3.2% -3.3% -1.7% 0.5% 0.3% Chile 1.5% 0.5% -0.5% 2.9% 0.5% 1.0% Colombia 1.4% 1.0% -1.3% 0.0% 1.3% 0.5% Mexico 2.0% 0.3% -0.9% -1.6% 0.3% 0.0% Peru 2.4% -0.2% -3.8% 0.5% 2.9% 0.4% Venezuela 2.1% -2.1% -1.6% -0.5% 0.2% -0.4% EAP 3.1% 2.1% 2.3% 1.3% 2.0% 2.2% China -0.5% 0.9% 1.6% 3.4% 6.2% 2.3% United States 0.9% -0.4% 1.1% 1.0% 0.6% 0.6% Japan 6.7% 1.1% 1.4% -0.7% 0.9% 1.9% Notes: In Panel B, High Performance EAP includes Korea Rep., Taiwan, Hong Kong, and Singapore; Low Performance EAP includes Indonesia, Philippines, Thailand, and Malaysia; LAC includes the following countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay, Venezuela, Bolivia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua, Panama, and Paraguay. The weightsare calculated using the2007 nominal GDP. Source: Penn World Tables. 11

12 much is due to the China connection Output Co-Movement Between LAC and China 20 years rolling correlation of the Real GDP Growth Brazil Chile Colombia Mexico Peru Argentina Panama Dom. Rep Industrial Production: Latin America w.r.t Asia, US and Europe Asia US Europe Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Notes: In both panels, the coefficients were estimated using the percentage variation of industrial production against the percentage variation in industrial production in Asia, US and Europe. In Panel A the coefficients are associated to the following regression IP Latam=a+b1*IP(US)+b2*IP(Europe)+b3*IP(Asia). In Panel B, the coefficients are associated to IPLAC 6=a+b1*IP(US)+b2*IP(Europe)+b3*IP(Asia). LAC 6 includes Argentina, Brazil, Chile, Colombia, Peru and Mexico. One st.dev. in dashed lines. Sources: World Bank. 12

13 Financial coupling, however, is intensifying along a trend! 120 Stocks Markets 2011 In USD, Index base 100 = Jan Japan S&P 500 Brazil Germany UK France Jan-11 Feb-11 Feb-11 Mar-11 Mar-11 Apr-11 Apr-11 May-11 May-11 Jun-11 Jun-11 Jul-11 Jul-11 Aug-11 Aug-11 Aug-11 Sep-11 Sep-11 Oct-11 Oct-11 Nov-11 Percent 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Emerging Market Asset Returns and Common Factors Average R-Squared from Country Regressions Early Period ( ) Late Period (Jan-05 to Jul-08) Crisis (Aug-08 to Apr-09) Equity Foreign Exchange CDS Spreads Source: Bloomberg 13

14 The financial stress we are living in Tranquil Sep2006-Jul2008 VIX Index Aug2008-May2009 Jun2009-Apr2010 May2010-Current Lehman Brothers QEI Flash Crash/PIGS US Downgrade Japan 0.3 VIX Kernel Densities Jackson Hole (QEII) Aug-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 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Density Tranquil Sep2006-Jul2008 Aug2008-May2009 Jul2009-Apr2010 May2010-Current VIX Source: Bloomberg 14

15 is hitting LAC assets, but much less virulently than in the Lehman aftermath, so far 30.0% 20.0% 10.0% Elasticity of MSCI Latam w.r.t. VIX Weekly Sep2006-Jul2008 Aug2008-May2009 Jun2009-Apr2010 May2010-Sep2011 MSCI Returns 0.0% -10.0% -20.0% y = x % y = x y = x y = x % -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% VIX Returns EMBI Latam Returns 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Elasticity of Latam Sovereign Bond Spreads w.r.t. VIX Weekly Sep2006-Jul2008 Aug2008-May2009 Jun2009-Apr2010 May2010-Sep % y = 0.237x y = x % y = x y = x % -40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% VIX Returns Notes: VIX returns are calculated as the percentage variation of the VIX index. Both the MSCI Latam returns and VIX returns are weekly returns. The Latam Sovereign Bond spreads returns are the EMBI Latam index (weekly) retunrs. 15

16 Benign scenario: real decoupling continues If China s growth rate and commodity prices remain high Wheat, Copper and Soybean, Index 01-Jan-05= Commodity Prices Oil WTI in Current US$, Wheat, Copper and Soybean: Index base Jan-05=100 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct Oil WTI, Current US$ Gross Capital Inflows to LAC-7+URY Countries US$ Millions, Annual Flows Gross Inflows Non-FDI Gross Inflows FDI Mar-02 Aug-02 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 16

17 TOT dominates over other external factors for LAC 0.5% 0.0% LAC6+URY: Impact of a 2008 Crisis-like Event Percentage points of GDP growth Countries with strong policies*= -0.47% 0.1% -0.5% -1.0% -1.5% -1.5% -1.3% -2.0% -2.5% -1.8% Countries with weak policies**= -6.1% -3.0% ToT VIX World GDP Growth US T10 *"Strong Policies" With floating exchange rate regime, 15 percent dollarization and balanced primary fiscal accounts **"Weak Policies" With de-facto crawling band (narrower than +/-5 percent), 30 percent dollarization and primary balance of -2 percent of GDP Notes: LAC6+URY :Argentina, Brazil, Chile, Colombia, Mexico, Peru and Uruguay. Assumes shocks of (i) 40 percent drop in all commodity prices, leading to a -2.8 percentage points of GDP terms of trade shock (based on LA7's average net commodity exposure); (ii) a slowdown in global growth of 3.3 percent; (iii) a fall of 137 basis points in the US 10-year T-bond yield; and (iv) an increase of 14 points in the VIX. These assumptions are broadly consistent with developments during the crisis. Source: IMF s WEO (Sep-2011) 17

18 Forecasts are being revised downward world-wide, but so far seem to be assuming a benign scenario 10% GDP Growth Forecasts Evolution Forecasts for % 8% 7% January 2011 October % 5% 4% 3% 2% 1% 0% EEUU EuroZone China Latin America South East Asia Eastern Europe Source: Consensus Forecasts (2011) 18

19 LAC was already expected to decelerate, and downward revisions have not been large, so far 9.0% 8.0% 7.0% Actual Growth and Growth Forecast: LAC Countries Weighted Averages for LAC % 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Trin. & Tob. Jamaica El Salvador Guatemala Venezuela Brazil Mexico Costa Rica Nicaragua LAC Bolivia Ecuador Dom. Rep. Paraguay Colombia Uruguay Chile Peru Argentina Panama 19

20 Bad scenario: a global downward re-coupling In this scenario, major tail risks materialize and another great recession ensues All transmission channels would be activated Terms of trade External demand for LAC exports of goods and services Remittances Financial channels LAC countries that have the greatest shock absorption capacity are not necessarily those with the greatest growth potential Mexico versus Argentina 20

21 Bad scenario: a global downward re-coupling Lines of defense in shock absorption Robust monetary policy frameworks in LAC, mostly Shock absorption via e-rate flexibility/monetary policy independence Rate increases over the past 15 month gives the region room to maneuver How good are LAC s fiscal buffers? Comfortable public debt situation but insufficient fiscal flexibility Much less space among Central American and Caribbean countries How good are LAC s financial system buffers? Strong capital and liquidity positions, except in the Caribbean Have systemic risks been brewing in the past year or so? How good are LAC s social safety nets? Ability to scale up social assistance programs vary widely in the region Social insurance frameworks are the weak link 21

22 Thank you 22

23 LAC s success A decade of high growth and progress in social equity 7% 6% 5% 4% 3% 2% 1% Cyclical-adjusted Growth in Latin America and High-Income Countries Trend growth computed using the band-pass filter High-Income Latin America Moderate Poverty Rate US$ 4 a Day Per Capita GDP Growth and Poverty LAC Countries Poverty Headcount GDP Per Capita 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 GDP Per Capita US Dollars 0% Costa Rica Dominican Republic Colombia Uruguay Honduras Bolivia Chile El Salvador Argentina Panama Latin America Mexico Brazil Peru Paraguay Gini Coefficient Cumulative Change From 2009 to LAC: Expanding Middle Class Source: LCSPP based on Socio-Economic Database for Latin America and the Caribbean (CEDLAS and The World Bank). 23

24 LAC s uneven success Mutating regional heterogeneity Slow-Growth Countries within LAC GDP Index 2002 = 100 Actual Potential Medium-Growth Countries within LAC GDP Index 2002 = 100 Actual Potential High-Growth Countries within LAC GDP Index 2002 = 100 Actual Potential Sources: Potential GPD is computed as the average rate of growth between 2007 and Simple averages are used to construct the composite. The categorization of each group is as follow: Slow-growth are those countries that showed a less than 3.5% in their GDP real growth rate; Medium-growth are those between 3.5% and 10%: High-growth are those with 10% or more. For 2011 we used the last available forecast (Consensus Forecast June-2011). Sources: Consensus Forecast (June 2011); WEO (April 2011). 24

25 LAC s uneven success Where you are matters less than to whom you are connected Cumulative Number of countries Mean growth * Mean Growth Mean Growth ** Max Min Low growth % 2.3% -0.3% 3.3% -12.3% Medium growth 7 4.4% 3.5% 2.4% 7.9% 4.1% High growth % 5.2% 4.9% 18.8% 10.0% Total % 3.7% 2.2% 18.8% -12.3% * This is the measure used to construct the "Potential GDP" ** This is the measure used to define the classification as "Low", "Medium" and "High". Low growth (<4%): St. Kitts and Nevis, Antigua and Barbuda, Grenada, Barbados, Jamaica, Bahamas, Venezuela, Trinidad and Tobago, St. Vincent and the Grenadines, El Salvador, St. Lucia, Dominica and Mexico Medium growth (4%-10%): Honduras, Belize, Haiti, Nicaragua, Guatemala, Costa Rica and Ecuador High growth (>10%): Chile, Colombia, Brazil, Guyana, Bolivia, Suriname, Paraguay, Dominican Republic, Peru, Argentina, Uruguay and Panama Sources: World Bank s World Development Indicators WDI (December 2010), IMF's World Economic Outlook WEO (April 2011), and Consensus Forecasts (June 2011) Latest available forecasts. Potential GDP is calculated computing the annual average real growth rate for the to 2007 GDP. Weighted averages (2007 Nominal GDP in USD Billions). 25

26 VIX dominates stock market co-movement in crisis times MSCI Latam w.r.t VIX and S&P500: VIX Coefficient Robust standar errors in parentheses (0.0263) (0.073) (0.019) Coefficient of VIX Sep2006-Jul2008 Aug2008-May2009 Jun2009-Apr2010 May2010-Sep (0.025) MSCI LatAm Returns = a+b1*vix+b2*s&p MSCI Latam w.r.t VIX and S&P500: S&P500 Coefficient Robust standar errors in parentheses (0.212) (0.195) (0.132) Coefficient SP500 Sep2006-Jul2008 Aug2008-May2009 Jun2009-Apr2010 May2010-Sep2011 (0.213) Notes: The coefficient showed in both panels are associated to the following regression MSCI Latam returns=a+b1*vix returns+b2*s&p500 returns. 26