Benchmarking LAC through the cycle, so far: downturn and recovery

Transcription

1 The New Face of LAC: Financially Globalized and Resilient International Crisis Seminar: Macro Adjustment and Prospects for LAC Augusto de la Torre Chief Economist for Latin America The World Bank Santiago, Chile 24 September

2 Agenda Benchmarking LAC through the cycle, so far: downturn and recovery Growth collapse Duration Recovery strength Three driving factors From magnifiers to cushions: new and improved macro-financial immune system Post-2002 shift to a safer form of international financial integration The China connection LAC as the granary and mine? Macro-financial policy issues going forward Capital inflow surge and global imbalances Over-burdened monetary policy Toward a sounder macro-financial policy mix 2

3 Center-periphery: contrasting cyclical patterns Developed Countries World Industrial Production Index Apr-08 = 100 Emerging Economies Emerging economies with strongest recoveries include Brazil, China, India, Korea, Malaysia, Philippines and Thailand They represent 52% of emerging economies GDP 80 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 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), June

4 Benchmarking LAC through the cycle, so far Key comparators: middle-income, income, financially globalized economies Key stylized fact: LAC did better compared to its own past and to Eastern Europe, and as well as the East Asian Tigers 4

5 2009 growth collapse: LAC no worse than the East Asian Tigers GDP Growth Collapses Across Regions GDP Growth Collapses Across LAC Countries -2% -2% -4% -6% -8% -1-4% -6% -8% -1 Percentage Points Percentage Points -12% -12% -14% ECA South Africa East Asian Tigers LAC HIC China India -14% Ant & Barb Grenada Venezuela Paraguay Mexico Panama Costa Rica Honduras Trin & Tob Peru El Salvador Argentina Colombia LAC Brazil Chile Guatemala Dom Rep Nicaragua Uruguay Jamaica Guyana Dominica Suriname Belize Ecuador Bolivia Notes: Growth collapses are defined as growth in 2009 minus growth in Sources: IMF's WEO (April 2010). 5

6 Size & duration of downturn: LAC better than its past and ahead of the MIC average Cyclical Growth Dynamics in a Comparative Setting Growth Rat te (%) Middle Income Countries Historic cycle Current cycle T-8 T-6 T-4 T-2 T T+2 T+4 T+6 T+8 Growth Rate e (%) Latin America & the Caribbean 0.5 Historic cycle Current cycle T-8 T-6 T-4 T-2 T T+2 T+4 T+6 T+8 Growth Rate (%) High Income Countries Historic cycle Current cycle T-8 T-6 T-4 T-2 T T+2 T+4 T+6 T+8 Notes: In the figures, period T stands for the Peak year in GDP business cycles. The sample of LAC countries includes: Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Peru, and Venezuela. Sources: Calderón and Servén (2010), EIU, Haver Analytics, LAC Central Banks and Statistical Offices. 6

7 Strength of the recovery: LAC trailing the Tigers in growth rates 12% 1 8% 6% 4% 2% Western Europe Real GDP Growth Forecasts for Annual GDP Real Growth Rate, in % Japan Eastern Europe US 8% Latin America East Asian Tigers China 1 8% 6% 4% 2% -2% -4% -6% -8% -1 Recent Real GDP Growth and Forecasts for Annual GDP Real Growth Rate, Weighted Averages Real GDP Growth Forecasts for 2010 LAC countries Haiti Venezuela Ant. & Barb. St. Kts. & Nv. Bahamas Barbados Jamaica St. Vc. & Grs. Belize St. Lucia Dominica El Salvador Ecuador Tri. & Tob. Guatemala Nicaragua Honduras Costa Rica Bolivia Suriname Guyana Colombia Dom. Rep. Mexico Panama Chile LAC Paraguay Uruguay Peru Brazil Argentina 6% 4% 2% -2% -4% -6% % Caricom (ex. Dom. Rep.) C. Am. (inc. Dom. Rep.) Mexico South America LAC Note: Caricom includes Dominican Republic. Source: WEO (Apr-10) and Consensus Forecast (Apr-10) (Sep-10) 7

8 Strength of the recovery: LAC recovering potential output faster than the Tigers 35% 3 25% Expected GDP Levels in 2010 and 2011 Relative to GDP in % Expected GDP Levels Relative to Trend GDP Percent 2 15% 1 Percent -5% -1 5% -15% -5% ECA HIC South Africa LAC East Asian Tigers India China 2 1 Expected GDP Levels Relative to Trend GDP LAC Countries ECA HIC South Africa East Asian Tigers LAC China India Percent Trin. & Tob. Ant. & Barb. Venezuela Belize Grenada Honduras Mexico Jamaica Costa Rica El Salvador Colombia Nicaragua Chile Guatemala Ecuador Dom. Rep. Suriname Paraguay Panama Brazil Dominica Peru Bolivia Guyana Argentina Uruguay Notes: Trend GDP, used in Panels B and C, is defined as the GDP that each country would have attained if it had grown between2008 and 2010 at the same pace as in between 2000 and Sources: Didier, Hevia, and Schmukler (2010). 8

9 Three driving factors From magnifiers to cushions the macro-financial story Shift to a safer form of international financial integration The China connection 9

10 LAC breaking with history: countercyclical macro policy 16% 14% 12% 1 8% 6% 4% 2% Jul-07 Colombia Mexico Sep-07 Nov-07 Chile Jan-08 Mar-08 Monetary Policy Rates Inflation-Targeting LAC Countries, in % May-08 Jul-08 Sep-08 US Nov-08 Jan-09 Brazil Mar-09 May-09 Jul-09 Percentage Points of GDP Peru Sep-09 2% 2% 1% 1% -1% -1% -2% -2% -3% -3% Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Percentage Points -1% -2% -3% -4% -5% -6% -7% -8% -9% a Costa Rica Variation in the Cyclically Adjusted Primary Surplus across LAC Countries a Argentina Previous Crisis Argentina Brazil Chile Colombia Mexico Peru y Paraguay Monetary Policy Changes in Monetary Policy Rates a Guatemala o Mexico Trin. & Tob b. y Uruguay s Honduras s Barbados il Brazi u Peru Dom. Rep p. a Colombia a Jamaica e Chile Notes: Panel C reports the average quarterly variation (in percentage points of GDP) of the cyclically-adjusted primary balance of LAC-6 countries during the global downturn associated to the financial crisis and during previous crisis. Negative (positive) values indicate an expansion (contraction) in discretionary fiscal policy. Sources: IMF s Fiscal Monitor: Navigating the Fiscal Challenges Ahead (May 2010), ECLAC, and Bloomberg for Panels A and B; and LCRCE staff calculations based on Haver Analytics, Datastream in Panel C. 10

11 LAC and the Tigers: Flexible exchange rates cushioned the shock this time 130 Latin America & Caribbean Previous Crisis 130 Latin America & Caribbean Current Crisis Index Jul-97 = Index Jul-97 = Apr-97 May-97 Jun-97 Jul-97 Aug-97 Sep-97 Oct Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Argentina Brazil Chile Colombia Mexico Peru Venezuela Argentina Brazil Chile Colombia Mexico Peru Venezuela 130 East Asia & Pacific Previous Crisis 130 East Asia & Pacific Current Crisis Index Jul-97 = Index Jul-97 = Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 China Indonesia Korea, Rep. Malaysia Philippines Singapore Thailand China Indonesia Korea, Rep. Malaysia Philippines Singapore Thailand Notes: This figure depicts the behavior of the nominal exchange rate around crises episodes of external origin to the region in question. Sources: Didier, Hevia, and Schmukler (2010). 11

12 not least because reduced currency mismatches helped dispel the fear of floating in most of LAC Corporate and Banks' Dedollarization in LAC Corporate Banks Issues in Foreign Currency / Total Issues ForeignLiabilities / Broad Money Note: GDP-weighted averages of the periods noted. Source: Gozzi et al. (2009), IFS Share of the Domestic and Foreign Public Debt in Total Debt Selected LAC Countries Mexico Colombia Brazil Domestic Foreign Sources: Gozzi et al (2009), Reinhart, Rogoff and Savastano (2003), IFS. 12

13 LAC breaking with history: no systemic damage at home Financial Crises Around the World 13

14 LAC has migrated towards a safer form of integration into international financial markets Net Creditor Net Debtor 1 5% -5% -1-15% -2-25% -3-35% A Safer Integration in LAC Net Debt Position visa-vis Rest of the World Net Equity Position visa-vis Rest of the World Note: The net debt position (vis-à-vis ROW) is the sum of debt assets and reserves minus debt liabilities. In turn, the net equity position (vis-à-vis ROW) is the sum of net FDI assets and net portfolio equity assets. The sample ranges from 1990 to Source: Lane and Milesi-Ferretti(2007). 14

15 The China connection: LAC countries has been sharply intensifying trade and FDI links to Asia LAC Exports to Selected Regions as % of total exports, 2008 data 8 7 EAP Euro Zone US Source: IMF s Direction of Trade Statistics (DOTS). 15 Suriname Barbados Jamaica Nicaragua Trin. & Tob. Honduras Guatemala Mexico Bahamas Guyana Ecuador Colombia Belize Dom. Rep. Bolivia Paraguay Ecuador Haiti Panama Venezuela Uruguay Argentina Brazil Costa Rica Peru Chile

16 the co-movement of growth between LAC countries and China has been trending upward Output Co-Movement Between LAC and China 20 years rolling correlation of the Real GDP Growth Argentina Brazil Chile Colombia Mexico Panama Peru Source: National Authorities. Note: Solid colors reflect correlation values significant at a 1 confidence interval. 16

17 Macro-financial policy issues going forward -- No time for complacency -- Surge in capital inflows and global rebalancing --Over Over-burdened monetary policy -- Rebalancing the policy mix 17

18 Capital inflows surge and global rebalancing Interest rate differentials / risk appetite comeback Capital inflow surge to EMs HIC-EM asymmetry: output gap & inflation pressures EM resistance to appreciation (to dollar depreciation) Lower than otherwise interest rates in HICs Global coordination failure Could be broken if the Chinese currency appreciates significantly LAC: responding to a global distortion or adding to the global distortion? 18

19 Over-burdened monetary policy Monetary policy focused on pre-empting inflation is also shouldering the burden of dealing with capital inflows surge & natural resource windfalls Withdrawal of fiscal and credit stimulus is proving more difficult than expected Short-fall of countercyclical policy in good times fostered by: Easing of financial conditions mood swing Substantial margin to borrow Demonstration effect from rich-country fiscal and monetary largesse Growing downside risks Fiscal profligacy Currency over-valuation Financial excesses 19

20 Towards a sounder macro-financial policy mix Emphasis on cyclically-adjusted fiscal targets Public saving even more important in countries with commodity bonanza Constructive ambiguity to forestall currency overvaluation? At present, an apparent trend in LAC is to let inflation exceed the central target, coupled with pre-announced FX intervention amounts Instead, central banks could express a view on the exchange rate backed with constructive ambiguity on what instruments it will used out of a credible arsenal of options Premium on macro-prudential agenda to avert financial excesses Given that monetary policy is over-burdened, this agenda is more relevant to LAC But a significant degree of exchange rate flexibility is needed to ensure prudential policy independence 20

21 Thank you 21