Recovering from the Global Crisis: Can LAC Shift to a High Growth Path?

Transcription

1 Recovering from the Global Crisis: Can LAC Shift to a High Growth Path? Panama: It s Happening Now Panama City, 24 March 21 Chief Economist Office Latin America and the Caribbean Region The World Bank 1

2 Structure of presentation The worse is behind LAC after the global crisis Bruised but without systemic damage Well positioned for recovery What next? Global reconfiguration towards multi-polarity a rocky road Whither LAC? Short-run tensions Long-run 2

3 The Worse is Behind

4 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 S&P Indexes VIX The catastrophic scenario that was feared at the beginning of Standard & Poor's (Financial and Total Indexes) and VIX Index number Aug = 1 (S&P indexes) 9 1 Total S&P Financial S&P VIX (rhs) 15 Source: Bloomberg. 4

5 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 S&P Indexes VIX was averted, and things started turning around in the rich countries around March Standard & Poor's (Financial and Total Indexes) and VIX Index number Aug = 1 (S&P indexes) 9 1 Total S&P Financial S&P VIX (rhs) 15 Source: Bloomberg 5

6 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 For LAC, 29 started with very grim prospects: World demand had taken a nose dive 17 World Trade Volume Seasonally Adjusted, Index 2= Exports Imports Exports in Selected Regions Index Jan/26=1 16 Imports in Selected Regions Index Jan/26= ECA 14 EAP 14 LAC ECA EAP LAC 9 8 Source: CPB 6

7 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 before entering into a modest rebound 17 World Trade Volume Seasonally Adjusted, Index 2= Exports Imports Exports in Selected Regions Index Jan/26=1 16 Imports in Selected Regions Index Jan/26= ECA 14 EAP 14 LAC ECA EAP LAC 9 8 Source: CPB 7

8 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Wheat, Copper and Soybean, 1-Jan-5=1 Oil WTI, Current US$ commodity prices had collapsed Commodity Prices Oil WTI in Current US$, Wheat, Copper and Soybean: Index 1-Jan-5= Oil (rhs) Copper Wheat Soybean About 95% of LAC s GDP and 9% 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 Source: Bloomberg 8

9 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Wheat, Copper and Soybean, 1-Jan-5=1 Oil WTI, Current US$ before staging a strong rebound Commodity Prices Oil WTI in Current US$, Wheat, Copper and Soybean: Index 1-Jan-5= Oil (rhs) Copper Wheat Soybean About 95% of LAC s GDP and 9% 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 Source: Bloomberg 9

10 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 Access to international financial markets halted 2 Corporate EMBI & U.S. High Yield Bond Spread in basis points High Yield ECA 4 EAP LAC Source: Bloomberg 1

11 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Jan-8 Mar-8 May-8 Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 but then entered a normalization path 2 Corporate EMBI & U.S. High Yield Bond Spread in basis points High Yield ECA 4 EAP LAC Source: Bloomberg 11

12 Jan-7 Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Dec-9 Disaster was averted thanks to unprecedented risk absorption and stimulus policies, led by the U.S. Fed 2,5 2, 1,5 1, Other FED's Balance Sheet - Assets Side Factors Affecting Reserve Balances, US$ Billion Central Bank Liquidity Swaps New Program Portfolio Loans and Discounts Including Float Term Auction Facility (TAF) Treasury Securities US$ 9 Billions (6% of GDP) US$ 2,259 Billions (16.1% of GDP) 5 Source: Federal Reserve Bank St. Louis 12

13 Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 And aggressive investment-focused stimulus in China 4% China: Real Private Domestic Credit Annual Variation 35% 3% 25% 2% 15% 1% 5% % Source: IFS 13

14 How did LAC fare in 29? Bruised but without systemic damage

15 LAC s recession in 29 was less pronounced than in other areas of the world Recent Real GDP Growth for 29 Annual GDP Real Growth Rate Growth Collapses Across the World GDP Growth collapse, in p.p. (diff. between growth in 27 and 29) Western Europe Japan Eastern Europe US Latin America East Asian Tigers China ECA IND EA Tigers LAC China SSA MENA SA Source: Bloomberg. We used Consensus Forecast as of Dec. 29 for the countries that didn t published the 29 growth yet (the latest 29 forecast for Consensus). 15

16 Mexico Ant. & Barb. Bahamas Jamaica Paraguay Honduras Barbados Venezuela Argentina Nicaragua LAC St. Kts. & Nv. Chile Dominica Costa Rica St. Lucia Ecuador St. Vc. & Grs. Tri. & Tob. LAC ex. Mex Brazil Belize Colombia Guatemala Haiti Peru Guyana Suriname Uruguay Dom. Rep. Panama Bolivia Argentina Mexico Costa Rica Panama Venezuela Paraguay Honduras Dom. Rep. Peru Colombia Guatemala Uruguay LAC Tri. & Tob. Chile Ant. & Barb. Nicaragua Brazil Jamaica Ecuador Guyana Bolivia Haiti Dominica Belize The size of the economic recession and the collapse in growth varied significantly across Latin American countries 4% Real GDP Growth for 29 LAC Countries % Collapse in Growth Difference in Real GDP Growth between 27 and 29 2% -2% % -4% -2% -6% -4% -6% -8% -8% -1% -12% Source: Bloomberg. We used Consensus Forecast as of Dec. 29 for the countries that didn t published the 29 growth yet (the latest 29 forecast for Consensus). 16

17 29 Real GDP Growth For many LAC countries, the collapse in growth was from relatively high rates 12% Real GDP Growth in LAC 27 and 29 9% 45 o 6% 3% T&T BOL GUY PAN BRZ ATB PER URY % HAI COL DMR DOM GUA CHI VEN NIC PRY -3% CRI ARG JAM ECU HON -6% MEX -9% % 3% 6% 9% 12% 27 Real GDP Growth Source: Consensus Forecasts (Dec. 29), Bloomberg, and IMF Regional Economic Outlook for Oct

18 Number of Poor People (Millions) LAC s 29 recession added about 1 million to the poor, partly reversing the achievements of pre-crisis years, Actual and Projected Poverty Numbers Based on Oct. 9 Projections Projected Counterfactual Between 22 and 28, almost 6 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 (29). 18

19 Millions of People and it added 3.5 million to the ranks of the unemployed Unemployment in LAC Countries Colombia, Chile, Mexico were hardest hit Unemployment increased more among men than women Unemployment tended to concentrate in workers with secondary education and in manufacturing and construction sectors Source: ILO 19

20 Yet, the impact of the crisis on LAC employment was modest overall, relative to past crises 1 Changes in unemployment rate during the crisis period (in p.p) 9 8 Sep98 : Jun2 Past recession Current recession Sep98:Sep99 Sep98:Sep Sep8:Sep9 Sep8:Mar9 Dec94:Dec95 2 Sep8 : Sep9 Sep1:Jun2 Dec8:Jun9 Dec8:Mar9 1 Argentina Brazil Chile Colombia Mexico Source: ILO

21 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Jan-96 May-96 Sep-96 Jan-97 May-97 Sep-97 Jan-98 May-98 Sep-98 Jan-99 May-99 Sep-99 Jan- May- Sep- Brazil: Real wage adjustment no longer via inflation Brazil - Past Crisis Index Sep.1997 = 1 price index real wage index Brazil - Present Crisis Index Sep. 28 = 1 price index real wage index Note: median wages in the industrial sector. Source: IPEA, IFS 21

22 LAC comes out of this crisis without significant systemic damage the dog that did not bark Banking Crises in LAC Countries Argentina 198 Argentina 1995 Brazil 1985 Brazil 1995 Chile 198 Colombia 1998 Colombia 1982 Ecuador 1996, 1998 Ecuador 198 Honduras 1999 Mexico 1981 Jamaica 1996 Peru 1983 Nicaragua 2 Uruguay 1981 Paraguay 1995 Peru 1999 The global crisis bruised LAC s income statement but it did not impair it s balance sheet The table shows the start year of banking crises. Source: Laeven and Valencia (28) and Reinhart and Rogoff (28) 22

23 Net Debtor Net Creditor LAC s international financial integration has grown safer 1% 5% % -5% -1% -15% -2% -25% -3% -35% -4% A Safer Integration in LAC Net Debt Position vis-a-vis ROW Net Equity Position vis-a-vis ROW LAC has become a net creditor to the ROW in the debt side The ROW has become a net claimant on LAC in the equity side, where systemic vulnerabilities are less likely to emerge Note: Net positions expressed as % of LAC s GDP. LAC: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, Venezuela. Source: Lane, Milesi-Ferretti (27) 23

24 Currency mismatches in LAC have declined significantly... 8% Corporate and Banks' Dedollarization in LAC 1 Composite Dollarization Index LAC, Emerging Europe % % 5% 4% 3% 2% 1% % Corporate Issues in Foreign Currency / Total Issues Banks ForeignLiabilities / Broad Money Latin America Emerging Europe Note: GDP-weighted averages of the periodsnoted. Source: Gozzi et al. (29), IFS Source: Schmukler (29) based on Reinhart, Rogoff, Savastano (23) Share of the Domestic and Foreign Public Debt in Total Debt Selected LAC Countries 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Mexico Colombia Brazil Domestic Foreign Source: Gozzi et al (29), Reinhart, Rogoff and Savastano, and IFS 24

25 Jun-7 Aug-7 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 Improved monetary policy frameworks and reduced currency mismatches have enabled countercyclical policy Monetary Policy Rates Inflation-Targeting Latin American Countries, in % 14 Brazil Colombia Mexico Chile 4 Peru 2 US Source: Bloomberg 25

26 % of GDP % of GDP While far from perfect, fiscal and public debt processes in most of LAC have become more viable 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. 29) 26

27 What next? Short-term challenges

28 A generalized economic recovery is underway but with considerable regional variation 12 Recent Real GDP Growth and Forecasts for Annual GDP Real Growth Rate Western Europe Japan Eastern Europe US Latin America East Asian Tigers China Source: Consensus Forecasts (Mar. 21 and Dec. 29), and Bloomberg 28

29 Venezuela Ant. & Barb. Bahamas St. Kts. & Nv. Barbados Jamaica St. Vc. & Grs. Dominica St. Lucia Nicaragua Belize Guatemala Haiti Tri. & Tob. Honduras Ecuador Guyana Colombia Costa Rica Dom. Rep. Paraguay Suriname Bolivia Argentina Uruguay LAC Mexico Panama Chile Peru Brazil % The economic recovery expected for LAC in 21 is not uniform but it is fairly generalized and relatively strong 6 Real GDP Growth Forecasts for 21 LAC countries Source: Consensus Forecasts as of Mar. 21, World Bank s GEP Jan. 21 and IMF Regional Economic Outlook from Oct

30 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 But sharply contrasting growth dynamics in advanced versus emerging economies World Industrial Production Index Apr/28 = 1 Advanced Emerging Emerging economies with strongest recoveries include Brazil, China, India, Korea, Malaysia, Philippines and Thailand They represent 52% of emerging economies GDP 8 Source: CPB (Netherlands Bureau for Economic Policy Analysis) 3

31 Jan-97 Sep-97 May-98 Jan-99 Sep-99 May- Jan-1 Sep-1 May-2 Jan-3 Sep-3 May-4 Jan-5 Sep-5 May-6 Jan-7 Sep-7 May-8 Jan-9 Sep-9 % While capacity utilization and employment is at a very low point in rich countries (keeping interest rates low) 95 Capacity Utilization 9 Germany US 65 Source: Bloomberg 31

32 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 % it is getting back to normal levels in EMs (pointing towards monetary normalization/tightening) Capacity Utilization Brazil Mexico Source: Bloomberg 32

33 Output gap Some Latin countries may be hit capacity constraints soon and be compelled to tighten monetary policy.1 21 Output and Inflation Gaps URY.5 PER COL PAN BRA BOL PRY ARG -.5 CHL ECU GUA DOM -.1 SLV MEX HND NIC CRI Inflation Pressures (Inflation Forecast for 21 Minus 4%) in p.p. Source: Consensus Forecasts (Mar. 21) - LCRCE Staff Calculations 33

34 which will exacerbate the already strong currency appreciation pressures in some Latin countries Brazil Peru 4 Chile 8 Colombia Note: The exchange market pressure is the weighted average of year-on-year percentage changes in: (a) the nominal exchange rate of the LAC-6 country 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 (EMP) index signals appreciation pressures and/or accumulation of reserves. 34

35 Economic activity in LAC is increasingly linked to large emerging markets, particularly China 18% 16% Percentage of Exports to China % 8% Percentage of Exports to the US % 7% 12% 6% 1% 5% 8% 4% 6% 3% 4% 2% 2% 1% % Argentina Brazil Chile Colombia Mexico Peru Venezuela % Argentina Brazil Chile Colombia Mexico Peru Venezuela Source: DOTS 35

36 But LAC prospects will still depend on the global environment, where much haziness and risks exist Will exit from stimulus policies be well-timed and orderly? Premature retreat can kill the recovery; delayed retreat can rise inflation specter Will fiscal/debt dynamics in rich countries be restored to viability? Specter of future inflation or higher interest rates to the extent that growing out of debt and/or higher taxes/major spending cuts are not feasible Will problems in Club Med Europe be contained? Will regulatory uncertainty in rich countries be adequately dispelled? Will external current account positions be globally rebalanced? A revaluation of the Renminbi is arguably essential for rebalancing 36

37 Colombia Brazil Chile Mexico Peru Argentina Hungary Bulgaria Ukraine Turkey Philippines Indonesia Russia Romania South Africa Germany Italy France Portugal Spain UK US Japan Ireland Greece In sharp contrast with EMs, rich countries face daunting fiscal and debt challenges 2 Required Fiscal Adjustment Between 21 and 22 To Reach Debt Levels of 6% in % of GDP Source: IMF 37

38 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 So far, rebalancing seems incipient and there has been no adjustment in China s currency Global Imbalances: Exchange Rates (LCU/US$) Period average, market rate, index Jan/5= Japan Euro Area Canada China Global Imbalances (Trade balance in goods, US$ millions, SA, 3-month cumulative) China-Germany-Japan 5 China US -3 Source: Bloomberg, EIU 38

39 What Next? Long-term development challenges

40 The virtuous development triad High growth Sustainable development Strong sense of fairness Low vulnerability to shocks 4

41 For more than a century, in contrast with the Asian Tigers, LAC has been unable to grow faster than rich countries GDP Per Capita of Selected Regions / US GDP per Capita Gold Standard Period Interwar Period US Recovers Alliance for Progress Imports Substitution Lost Decade Washington Consensus Washington Dissensus.5.4 LAC/US Asian Tigers/US Source: Maddison 41

42 Jan-8 Jan-82 Jan-84 Jan-86 Jan-88 Jan-9 Jan-92 Jan-94 Jan-96 Jan-98 Jan- Jan-2 Jan-4 Jan-6 Jan-8 Did such dire record start changing this millennium? 6 5 Trend GDP growth in LAC and High Income Countries Stock Market Indexes, Jan 27 = 1 Latin America High Income Source: Maddison 42

43 Mathematics score in PISA 26 To generate trend growth above the world s average, LAC will need to close key gaps: the education gap Finland Hong Kong Korea Netherlands Macao, China New Zealand Switzerland Australia Belgium Japan Czech Republic Austria Denmark Estonia Germany Slovenia Iceland Ireland France UK Norway Poland Sweden Hungary Slovak Republic Lithuania Luxembourg Latvia Azerbaijan Spain United States Croatia Portugal Greece Italy Israel 4 35 Indonesia Uruguay Turkey Romania Chile Argentina Thailand Mexico Jordan Brazil Bulgaria Colombia Tunisia 3 Kyrgyz Republic Expenditure per student, primary (% of GDP per capita) Source: Mathematics score from Pisa (26). Expenditure per Student, primary (% GDP) is the most recent data available in WDI (24 for most of the countries). Public expenditure per student is the public current spending on education divided by the total number of students in the primary level. 43

44 the innovation gap Source: Lederman & Maloney (27) 44

45 the physical infrastructure gap 6 Aggregate Index of Infrastructure Capital 5 LAC EAP Note: LAC Argentina, Brazil, Bolivia, Chile, Colombia, Costa Rica, Dom. Rep., Ecuador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Peru, Paraguay, El Salvador, Uruguay, and Venezuela. EAP - Hong Kong, Indonesia, South Korea, Malaysia, Singapore, Taiwan and Thailand. Aggregate index: First principal component of: (a) main lines and mobile phones (per 1 inhabitants), (b) electricity installed capacity (in thousands of KW per 1 inhabitants), (c) total road length (in Km. per 1 inhabitants). All infrastructure variables are expressed in logs before performing principal components analysis. Source: Calderón and Servén (23) 45

46 Thank you 46