THE WORLD ECONOMY AND LATIN AMERICA: Opportuni8es and Challenges

Transcription

1 THE WORLD ECONOMY AND LATIN AMERICA: Opportuni8es and Challenges Guillermo Perry Universidad de los Andes, Harvard University, Center for Global Development Ex Minister of Finance and Mines and Energy, Colombia Ex Chief Economist for La8n America, World Bank FICEM, Quito, October 211

2 THE WORLD ECONOMY: A TALE OF TWO CITIES DEVELOPED COUNTRIES: UNEVEN RECOVERY, SIGNIFICANT RISKS DEVELOPING COUNTRIES: BETWEEN THE CHALLENGES OF ABUNDANCE AND THE RISKS OF A GLOBAL CRISIS

3 Slow recovery in the US and Europe, fast growth in Emerging Markets GDP Growth China United States Euro area Emerging economies 9 7 % Source: FMI, WEO update, Sept 211

4 A large fiscal problem in the US and Europe Fiscal Balance (% GDP) United States United Kingdom Greece Spain France Portugal Italy Germany 2 18 Public Debt (% GDP) Source: IMF 212

5 Rising Risks of Default in some European countries Bonos a 2 años (%) oct-1 dic-1 feb-11 abr-11 jun-11 ago-11 oct-11 Portugal Irlanda España Italia Grecia Fuente: Banco de Bogotá

6 Increasing Risks of a new Financial Crisis in the Euro Area and the US Fuente: FMI E U ago- 4 ago- 5 ago- 6 ago- 7 ago- 8 ago- 9 ago- 1 ago Liquidity Risk Spreads (bp) EE.UU. Eurozona oct- 6 oct- 7 oct- 8 oct- 9 oct- 1 oct- 11

7 Increasing Financial Risks in European Countries: a closer look Bank Bond Yields (in percent) Fuente: FMI

8 8,5 Dollar deprecia8on trends, recent Euro instability 1,2 8 1,1 7,5 1 7 Dollar/Yuan Dollar/Euro,9,8 6,5,7 6,6 Source: Bloomberg

9 Super low US interest rates, ini8al hikes in Europe Libor 1- Month 3- Month 6- Month 12- Month 4,5 4 3,5 3 European Central Bank Interest Rate 5 2, ,5 1 3,5 2 ene- 7 may- 7 sep- 7 ene- 8 may- 8 sep- 8 ene- 9 may- 9 sep- 9 ene- 1 may- 1 sep- 1 ene- 11 may /99 8/99 3/ 1/ 5/1 12/1 7/2 2/3 9/3 4/4 11/4 6/5 1/6 8/6 3/7 1/7 5/8 12/8 7/9 2/1 9/1 4/11 Source: Bloomberg Fuente: Banco Central Europeo

10 Effects of the Greek Crisis and the S&P US downgrade on risk aversion and emerging markets spreads Índices de volaulidad del mercado (puntos) 9 VIX VIX 9 EMBI (puntos) oct- 3 oct- 4 oct- 5 oct- 6 oct- 7 oct- 8 oct- 9 oct- 1 oct EMBI EMBI LATAM 1 Fuente: Bloomberg. Cálculos Inves8gaciones Económicas Banco de Bogotá

11 Large Capital Flows to Emerging Markets

12 Especially to Asia, but also to La8n America Fuente: FMI

13 Infla8onary pressures in emerging markets InflaUon 9 China Germany 8 United States Emerging economies Fuente: FMI, WEO update, September 211

14 Exchange rate apprecia8on pressures during periods of high commodity prices and capital inflows 2,2 2 1,8 1,6 Brazil Chile Colombia Mexico Peru 1,4 1,2 1,8,

15 LATIN AMERICA GOOD TIMES ARE HERE AGAIN, BUT, WILL THEY LAST?

16 Source: Sources: Consensus Forecasts (March 211) La8n America is growing faster than the advanced economies (though less than Asia)

17 But, will this change the previous pamern of long term divergence? ALC A.E. P.E Source: World Bank(26) LAC E.A. E.P

18 Fast GDP Growth recovery aner the crisis 12 GDP GROWTH (%) Argen8na Brazil Chile Colombia Ecuador Mexico Peru Venezuela (Right) Source: IMF WEO September 211

19 Upwards Investment Ra8os (GDP %) Argen8na Brazil Chile Colombia Mexico Peru Venezuela Source: WDI, Consensus Forecast

20 Uneven Fiscal Balances % GDP

21 Uneven Infla8onary Pressures InflaUon Argen8na Brazil Chile Colombia Ecuador Mexico Peru Venezuela (Right Axis) Source: IMF 5

22 WHAT IS BEHIND THE GOOD TIMES? I: Good Luck: Commodity Prices, Capital Inflows and the Demographic Bonus

23 A close rela8on between Commodity Prices, Capital Inflows and Growth Source: IMF. Magud and Sosa (21)

24 Commodity prices increasing trend since 23, interrupted by the 29 global crisis and 3 All index present turmoil. Commodity Price Index, 25=1 25 Non- Fuel index Food and beverage index Industrial Materials index 2 Agricultural Raw Material Index Metal index 15 Oil 1 5 Source: IMF 1991M1 1991M7 1992M1 1992M7 1993M1 1993M7 1994M1 1994M7 1995M1 1995M7 1996M1 1996M7 1997M1 1997M7 1998M1 1998M7 1999M1 1999M7 2M1 2M7 21M1 21M7 22M1 22M7 23M1 23M7 24M1 24M7 25M1 25M7 26M1 26M7 27M1 27M7 28M1 28M7 29M1 29M7 21M1 21M7 211M1 211M7

25 It is mostly about China (and Asia) Source: World Bank

26 China is also a growing des8na8on for La8n American exports

27 And a source of high interna8onal liquidity: (real interest rates vs China s Interna8onal Reserves) 3,5E E+12 2,5E+12 China's Reserves Libor E ,5E E E+11 1 Source: 1989 Bloomberg, WDI World 1993 Bank

28 Not surprisingly, there is growing co- movement between La8n America and China CorrelaUon of LA s and China s GDP, moving average for 2 years Source: World Bank

29 How long will these last? China (and Asia) could con8nue growing fast during more than a decade if there isn t a major global crisis fast increasing demand for commodi8es Points to watch: Banking and rebalancing problems in China Eventual democra8za8on pressures in China But capital inflows is anybody s guess Points to watch European risks!!!! Infla8onary pressures in the US (and poli8cal noise!

30 HOW STRONG IS LATIN AMERICA VIS A VIS A NEW GLOBAL FINANCIAL CRISIS?

31 RELATIVE STRENGTHS DOMESTIC FINANCIAL SECTOR ACCESS TO EXTERNAL FINANCIAL MARKETS EXTERNAL LIQUIDITY EXCHANGE RATE REGIME AND MONETARY POLICY ARG BRA CHI COL ECU MEX PER VEN + ++/ / FISCAL STRENGTH TRADE WITH ASIA EXPORT PRODUCT DIVERSIFICATION TOTAL +/ ++/ /

32 La8n America avoided a financial crisis and a credit crunch in 29 contrast to the US and Europe Source: IMF

33 ..thanks to generally solid banks Moderate Real Credit Growth Share of Non Performing Loans Provisions/NPL Source: Banco de la República de Colombia

34 La8n America suffered moderate increases in external credit costs (spread performance vis a vis other regions and US High Yield Bonds) Corporate EMBI y U.S. High Yield Bond Spread En puntos básicos Corporate High Yield Fuente: Banco Mundial, Cepal y Bloomberg

35 although not for all countries in the region Embi+ Spread Argen8na Brazil Colombia Peru Ecuador Venezuela Chile Mexico /6 3/6 5/6 7/6 9/6 11/6 1/7 3/7 5/7 7/7 9/7 11/7 1/8 3/8 5/8 7/8 9/8 11/8 1/9 3/9 5/9 7/9 9/9 11/9 1/1 3/1 5/1 7/1 9/1 11/1 1/11 3/11 5/11 7/11 9/11 Source: Global Financial Data

36 And no prolonged Sudden Stops in capital inflows

37 It also avoided currency crises thanks to high external liquidity and low external dependence (partly due to high Commodity Prices) Total External Debt (GDP %) East Asia and Pacific Central and Eas. Europe La8n America Reserves (Months of Imports) Current Account (Billion US$) Central and Eastern Europe La8n America Emerging Asia (right axis) Fuente: FMI, WDI

38 35% Reserves / GDP 14 Reserves in Months of Imports 3% 12 25% 1 Argen8na 2% % GDP 15% Months Of Imports 8 6 Brazil Chile Colombia Mexico Peru Venezuela, RB 1% 4 5% 2 % FUENTE: WDI_WB FUENT E: WDI_ WB

39 Current Account / GDP % GDP Argen8na Brazil Chile Colombia Mexico Peru Venezuela, RB Fuente: WDI_WB - 5

40 Exports to Asia / Total Exports 6% 5% % Total Exports 4% 3% 2% Argen8na Brazil Chile Colombia Mexico Peru Venezuela 1% %

41 SEIZING THE OPPORTUNITIES IN A GOOD GLOBAL SCENARIO

42 The problem: the produc8vity gap has widened Fuente: BID (21)

43 ..especially in the large services sector.. Labor produc8vity Growth Agricultural sector Industry Services La8n America East Asia High income countries Source: IADB (21)

44 Associated with low effec8ve trade openess.. 25 Exports Share of GDP 2 15 % GDP Brazil Colombia Venezuela Argen8na Peru Mexico Chile Korea Vietnam Thailand Malaysia Singapore Hong Kong Source: WDI, World Bank

45 high concentra8on of exports Source: World Bank

46 .. low innova8on by firms... 5.% Predicted & Observed R&D/GDP 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5% Israel Finland Korea South Africa China India Argentina.% Mexico Log GDP per Capita Costa Rica

47 ..and high informality Margins of Informality Es8mated Impact of Informality on Labor Produc8vity 35 3 Intersectoral Margin (labor) Argentina Bolivia Share of labor force Micro Firms Formal Informal Modern Firms Intersectoral Margin (firms) DeSoto Intrafirm Margin Mexico Panama Peru 5 Pooled Sample Firm Size - workers ( θ ) mean of Informal_Start

48 What is behind these related problems? Cri8cal policy areas for improvement: priori8es vary by country 1. Low quality and unequal access to educa8on 2. Weak and poorly coordinated Innova8on Systems 3. Low domes8c compe88on, especially in services 4. Low and unequal access to financial services 5. Low quality of public infrastructure 6. High costs and low benefits of formality 7. Overvalued and vola8le real exchange rates

49 Remaining Macro- financial dilemmas: Spend more and more efficiently in quality educa8on and infrastructure, while avoiding debt crisis and pro cyclicality of expenditures Strengthen tax and budgetary insutuuons; fiscal rules. Increase financial access, while avoiding financial crises Concentrate on access of SME s while conunuing to improve financial insutuuons, regulauon and supervision. Keep infla8on under control and exchange rate flexibility but avoid excessive apprecia8ons Managed floaung, reserve accumulauon and strong fiscal balance

50 Who s likely to take advantage of a good global scenario? Macro- financial policies Pro market policies EffecUve social policies Other micro policies Chile ++ Uruguay Costa Rica Brasil Colombia + Peru Mexico Most of CAC Broad consensus. Chile + Broad Consensus Col + Majority Consensus Broad in ES Broad consensus Chile + Broad consensus Col + Majority Consensus Broad in ES Broad consensus Consensus in the making. Bra + No consensus Consensus in Chile. Not in U & CR Weak consensus. Bemer in Col Weak consensus. Bemer in Peru and ES Argen8na Weak consensus Weak consensus Some consensus No consensus Venezuela Nicaragua Bolivia Ecuador No consensus. Stronger in Bolivia No consensus No consensus; Inefficient official social policies No consensus

51 The End