Update on LAC and the Global Crisis: The Worst is Behind, But What Lies Ahead?

Transcription

1 Update on LAC and the Global Crisis: The Worst is Behind, But What Lies Ahead? 17 December 29 Asunción, Paraguay Chief Economist Office Latin America and the Caribbean Region The World Bank 1

2 Structure of Presentation The worst is over for the global economy, but fragilities remain 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: haziness in the horizon and challenges for LAC The good news: LAC is well positioned to recover The bad news: LAC recovery depends on the global environment, which is clouded by risk & uncertainty LAC-specific opportunities and challenges 2

3 The Worst is Over A Fragile Recovery Part 1

4 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Mar-8 May-8 Sep-8 Nov-8 Mar-9 May-9 Sep-9 Nov-9 S&P Indexes VIX The catastrophic scenario was averted 12 1 Standard & Poor's (Financial and Total Indexes) and VIX Index number Aug = 1 (S&P indexes) Total S&P Pandit's Memo Subprime eruption Financial S&P Bear Stearns VIX (rhs) 15 Lehman Source: Bloomberg 4

5 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Mar-8 May-8 Sep-8 Nov-8 Mar-9 May-9 Sep-9 Nov-9 thanks to unprecedented interventions by governments central banks, led by the U.S. Fed 2,5 2, 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) 1,5 1, Subprime Eruption US$ 9 Billions (6% of GDP) Bear Sterns 5 Pandit's Memo Source: Federal Reserve Bank St. Louis 5

6 Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 May-8 Sep-8 May-9 and to substantial injections of fiscal and credit stimuli, including in large EMs, especially China 4% China: Real Private Domestic Credit Annual Variation 35% 3% 25% 2% 15% 1% 5% % Source: IFS 6

7 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 The large emerging economies, including Brazil, are leading the world s recovery World Industrial Production Index Jan/26=1 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 29 Source: CPB (Netherlands Bureau for Economic Policy Analysis), Sep. 29 7

8 Mar-8 May-8 Sep-8 Nov-8 Mar-9 May-9 Sep-9 Nov-9 Feb-9 Mar-9 Apr-9 May-9 Jun-9 Aug-9 Sep-9 Oct-9 Nov-9 Dec-9 Aug-8 Sep-8 Oct-8 Nov-8 Dec-8 Feb-9 Mar-9 Apr-9 May-9 Jun-9 Aug-9 Sep-9 Oct-9 Nov-9 Dec-9 Feb-9 Mar-9 Apr-9 May-9 Jun-9 Aug-9 Sep-9 Oct-9 Nov-9 Dec-9 With surprises on the upside, ST growth forecasts for the center and periphery are being revised upwards 2% Developed Countries: 29 Real GDP Growth Forecasts Annual Growth Rate 3.% Developed Countries: 21 Real GDP Growth Forecasts Annual Growth Rate % 2.5% USA -2% -4% USA Euro Zone UK 2.% 1.5% 1.% Japan UK Euro Zone -6% Japan.5% -8%.% LAC Countries: 29 Real GDP Growth Forecasts Annual Growth Rate LAC Countries: 21 Real GDP Growth Forecasts Annual Growth Rate 6% 4% 2% % -2% High Average Exc. Mexico Average 6% 5% 4% 3% 2% 1% High Average Exc. Mexico Average Low -4% -6% Low % -1% Source: Consensus Forecasts, from Jan. 28 to Dec. 29. LAC forecasts are based on the LAC6 (Argentina, Brazil, Chile, Colombia, Mexico, and Peru). 8

9 Feb-6 May-6 Aug-6 Nov-6 Feb-7 May-7 Aug-7 Nov-7 Feb-8 May-8 Aug-8 Nov-8 Feb-9 May-9 Aug-9 Nov-9 However, the process of economic repair in rich countries is still incomplete 65 Developed Economies: Manufacturing PMI Seasonally Adjusted 6 55 Global Eurozone Pandit's Memo Expansion 5 UK 45 4 US Subprime eruption 35 Contraction Bear Stearns 3 Lehman Japan 25 Manufacturing Purchasing Managers Index: assess business conditions in the manufacturing sector. A number above 5 indicates an expected increase of business conditions (expansion). A number below 5 indicates deterioration. Source: Bloomberg 9

10 Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 May-8 Sep-8 May-9 Sep-9 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Durable Goods Nondefense US$ Billiion Feb-5 Jun-5 Oct-5 Feb-6 Jun-6 Oct-6 Feb-7 Jun-7 Oct-7 Feb-8 Jun-8 Oct-8 Feb-9 Jun-9 Mar-5 Jun-5 Sep-5 Dec-5 Mar-6 Jun-6 Sep-6 Dec-6 Mar-7 Jun-7 Sep-7 Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 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 27: 1.3% of GDP 24% 2% 16% Gross Nominal Public Debt Annual Variation 85% of GDP -7 12% -9 8% 67% of GDP -1,1-1,3-1,5 1.1% of GDP 4% % 24 Manufacturers' New Orders US$ Billion, Seasonally Adjusted 7 17 Exports of Goods and Services, BOP Basis Seasonally Adjusted Nondefense exc. Aircraft (rhs) Durable 45 1 Source: Federal Reserve Bank St. Louis and Economist Intelligence Unit (EIU) 1

11 Mar-5 Sep-5 Mar-6 Sep-6 Mar-7 Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Jan-5 May-5 Sep-5 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 May-8 Sep-8 May-9 Sep-9 Unemployment Rate, in % US$ Billion and fragilities remain in U.S. labor markets, private demand Nonfarm Payrolls and Unemployment Rate Seasonnally Adjusted Nonfarm Payrolls (rhs) Unemployment Rate Private Demand Components US$ Billion, Chained (25) Government consumption expenditures and gross investment Gross private domestic investment Personal Consumption Expenditures (rhs) Source: Bloomberg and Federal Reserve Bank St. Louis and IFS 11

12 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Mar-3 Dec-3 Sep-4 Jun-5 Mar-6 Dec-6 Sep-7 Jun-8 Mar-9 Consumer Credit Business Credit New Domestic Issues New Syndicated Loans and domestic credit, where deleveraging and balance sheet repair is far from complete Capital Markets in the US New Capital Raisings, US$ Billion New Domestic Issues (3 Months Moving Avg) New Syndicated Loans (rhs) Private Credit in the US by Banks US$ Billions Seasonally Adjusted Business Consumer Source: Federal Reserve Bank St. Louis 12

13 Jan-7 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Mar-8 May-8 Sep-8 Nov-8 Mar-9 May-9 Sep-9 Nov-9 External financing costs have fallen significantly for LAC and other emerging regions Corporate EMBI & U.S. High Yield Bond Spread in basis points Subprime eruption Bear Sterns Lehman ECA 8 4 High Yield LAC Pandit's Memo EAP Source: Bloomberg US Credit Suisse High Yield Spread, JP Morgan CEMBI Global: Corporate Emerging Markets Bond Index. 13

14 Mar-7 May-7 Jul-7 Sep-7 Nov-7 Mar-8 May-8 Sep-8 Nov-8 Mar-9 May-9 Sep-9 which has enabled a gradual return of emerging markets to capital raising in international markets 16, 14, 12, 1, 8, Total Capital Raised US$ Millions Others ECA EAP LAC 6, 4, 2, Others means MENA, SA and SSA regions together. Source: DECPG 14

15 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Wheat, Copper and Soybean, 1-Jan-5=1 Oil WTI, Current US$ And the rebound in commodity prices makes life easier for the net exporting countries in the region Commodity Prices Oil WTI in Current US$, Wheat, Copper and Soybean: Index 1-Jan-5= Copper Subprime eruption Bear Stearns Pandit's Memo Wheat About 95% of LAC s GDP and 9% 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 5 Oil (rhs) Lehman 3 Source: Bloomberg 16

16 Mar-6 Jun-6 Sep-6 Dec-6 Mar-7 Jun-7 Sep-7 Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Mar-6 Jun-6 Sep-6 Dec-6 Mar-7 Jun-7 Sep-7 Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 However, there is considerable heterogeneity in the pace of recovery across LAC countries 2% 15% 1% 5% % -5% -1% -15% -2% Rebounding Industrial Production, YoY, 3 Months Moving Average Colombia Mexico Chile Venezuela Argentina Brazil Paraguay 15% 1% Stabilized? Industrial Production, YoY, 3 Months Moving Average Ecuador Uruguay (rhs) 35% 3% 25% 2% 15% 5% 1% Peru 5% % % -5% -1% -5% -15% Source: Economist Intelligence Unit (EIU), GEM and IFS 17

17 How Has LAC Fared in Comparative Terms? Part 2

18 Ant. & Barb. Bahamas St. Lucia Jamaica St. Kts. & Nv. Grenada Barbados Venezuela El Salvador Guatemala Honduras Ecuador Nicaragua Belize Dominica St. Vc. & Grs. Dom. Rep. Paraguay Haiti Costa Rica Colombia Uruguay Mexico Argentina Bolivia Suriname LAC Panama Guyana Peru Chile Brazil % Mexico Ant. & Barb. Grenada Bahamas Jamaica Venezuela Nicaragua Barbados Paraguay El Salvador Argentina Dom. Rep. Venezuela LAC St. Kts. & Nv. Costa Rica Chile Ecuador St. Vc. & Grs. Guatemala Brazil Colombia Dom. Rep. Peru Belize Uruguay Dominica Suriname Panama Haiti Guyana Bolivia % 29 was a year of recession for LAC (Mexico the hardest hit) but a broad recovery is expected for 21 4 Real GDP Growth Forecasts for 29 LAC countries Real GDP Growth Forecasts for 21 LAC countries Weighted average calculated based on 27 nominal GDP for all LAC countries. Source: Consensus Forecasts as of Dec 29 and IMF Regional Economic Outlook from Oct

19 The 29 recession in LAC was less pronounced than in other areas of the world Recent Real GDP Growth and Forecasts for Annual GDP Real Growth Rate, 12% 1% % 6% 4% 2% % -2% -4% -6% -8% Japan Eastern Europe Western Europe United States Latin America East Asian Tigers China Source: Consensus Forecasts (Dec 29). 2

20 Number of Poor People (Millions) But the recession in LAC threatens social gains 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). 21

21 Argentina Venezuela Mexico Costa Rica Panama Paraguay Honduras Dominican Republic Peru LAC Colombia Guatemala Uruguay Chile Trinidad and Tobago Nicaragua Brazil Antigua and Barbuda Jamaica Ecuador Guyana Bolivia Haiti Dominica Belize The 29 growth collapse in LAC was significant on average, but cross-country variation was nontrivial % Collapse in Growth Difference in Real GDP Growth between 27 and 29-2% -4% -6% -8% -1% -12% Weighted average calculated based on 27 nominal GDP. Source: Consensus Forecasts as of Dec. 29 and IMF Regional Economic Outlook for Oct

22 29 Real GDP Growth Forecasts For many LAC countries, the collapse was from relatively high growth rates 12% Real GDP Growth in LAC 27 and 29 Forecasts 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) and IMF Regional Economic Outlook for Oct

23 LAC s growth collapse was no greater than that in rich countries & the Tigers, much smaller than ECA s Growth Collapses Across the World GDP Growth collapse, in p.p. (diff. between growth in 27 and 29) -14 ECA IND EA Tigers LAC China SSA MENA SA Source: World Bank, Consensus Forecasts (Dec. 29) and IMF. 24

24 Explaining cross-country differences in the collapse Regression analysis of the growth collapse from 27 to 29 Sample of 126 countries Collapses were larger in countries characterized by Greater trade openness Higher share of manufacturing exports Greater export reliance on US and other rich country markets Weaker banking systems This helps explain contrasts in the collapse Brazil-Mexico; LAC-Eastern Europe; LAC-East Asian Tigers Better macro-financial policies in LAC no systemic damage They helped dampen the growth collapse somewhat but they mainly raised financial sector resilience (the Caribbean is an exception) and enabled countercyclical (particularly monetary) policy 26

25 Trade openness across emerging regions 1 9 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 27

26 The dog that did not bark: absence of domestic crises in a region traditionally plagued by them 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 table shows the start year of banking crises. Source: Laeven and Valencia (28) and Reinhart and Rogoff (28) 28

27 Net Debtor Net Creditor LAC avoided systemic damage due to a safer form of international financial integration 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 29

28 Latvia Bos. & Her. Kazakhstan Georgia Lithuania Ukraine Chile Azerbaijan South Africa Russia Armenia Tunisia Romania Bulgaria Paraguay Croatia Ecuador Poland Sri Lanka Thailand Malaysia Bolivia Colombia Peru Mexico Morocco China India Brazil Turkey Indonesia Uruguay Argentina Egypt Philippines healthier banking systems 2 Deposit to Loan Ratios Emerging Countries, 27 Data Emerging countries were defined as lower middle income and upper middle income, World Bank Classification. Source: Beck, Demirguc-Kunt and Levine (29): Financial Structure Database 3

29 Jun-7 Aug-7 Oct-7 Dec-7 Feb-8 Apr-8 Jun-8 Aug-8 Oct-8 Dec-8 Feb-9 Apr-9 Jun-9 Aug-9 Oct-9 and much improved monetary frameworks, especially in inflation-targeting countries Monetary Policy Rates Inflation-Targeting LAC Countries, in % 14 Brazil 12 1 Colombia 8 6 Mexico Chile Peru 4 2 US Source: Bloomberg 31

30 Looking Ahead: Haziness in the Global Horizon and Challenges for LAC Part 4

31 The good news: 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 s economies with more diversified export destinations and complementary to China s are recovering ahead of the pack On average, LAC emerges out of this crisis as a relatively more attractive destination for investment 33

32 % 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. 29) 34

33 The good news: 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 s economies with more diversified export destinations and complementary to China s are recovering ahead of the pack On average, LAC emerges out of this crisis as a relatively more attractive destination for investment 35

34 The bad news: LAC prospects depend on world growth, where much haziness exist beyond the ST 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 and inventory cycle 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 likely to be subdued Fiscal viability of the rich economies is in question Financial systems in rich countries are still impaired A slow expansion of world trade is likely in the context of rebalancing Possible adverse impact on MT investment of regulatory uncertainty 36

35 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 World trade volume unlikely to grow fast for a while in a context of global rebalancing 17 World Trade Volume Seasonally Adjusted, Index 2= Exports Imports Source: CPB (Netherlands Bureau for Economic Policy Analysis) 37

36 LAC-specific challenges and opportunities Larger LAC countries will face: Monetary policy dilemmas due to e-rate appreciation pressures Challenges of orderly exiting from fiscal and credit stimulus policies while smaller LAC countries may: Endure a lagged and longer recessionary impact complicated by debt & financial fragility in many Caribbean countries Labor market adjustment patterns likely to change deeply In the medium-term, a premium will be on the long-delayed productivity-oriented agenda (to seize opportunities) LAC can grow robustly and contribute to global rebalancing... while keeping the course of social and macrofinancial improvements 38

37 ELS DOM Chile GUA NIC BOL PAN PRY PER COL HON ECU BRZ T&T MEX CRI ARG JAM URY VEN Exchange rate dilemmas in LAC are dampened by low or non-existent inflation pressures 4% 35% 3% 25% 2% 15% 1% 5% % -5% Sep-8 Mar-9 Sep-9 Inflation Rates in LAC Countries Annual Variation Source: IFS 39

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 Apr-8 Oct-8 Apr-9 Oct-9 Q1 25 Q2 25 Q3 25 Q4 25 Q1 26 Q2 26 Q3 26 Q4 26 Q1 27 Q2 27 Q3 27 Q4 27 Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Q3 29 Mill USD Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-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 Apr-8 Oct-8 Apr-9 Oct-9 Exchange rate appreciation dilemma Exhibit 1: Brazil Brazil: Exchange Rate Market Rate, End of Period, LCU/US$ Brazil: Interest Rates Policy Rate (Selic), in % Brazil : International Reserves US$ Billions 6, 5, 4, 3, Capital Flows and Current Account Foreign 15 2, 1 1, Current Account 5-1, -2, Domestic -3, Source: Bloomberg and IFS 4

39 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Q1 25 Q2 25 Q3 25 Q4 25 Q1 26 Q2 26 Q3 26 Q4 26 Q1 27 Q2 27 Q3 27 Q4 27 Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Mill USD Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-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 Apr-8 Oct-8 Apr-9 Oct-9 Exchange rate appreciation dilemma Exhibit 2: Colombia Colombia: Exchange Rate Market Rate, End of Period, LCU/US$ 11 Colombia: Interest Rates Policy Rate (Repo Max), in % Colombia: International Reserves US$ Billions 1, 8, 6, 4, Capital Flows and Current Account Foreign 2 2, , -4, Domestic Current Account 5-6, -8, -1, Source: Bloomberg and IFS 41

40 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Q1 25 Q2 25 Q3 25 Q4 25 Q1 26 Q2 26 Q3 26 Q4 26 Q1 27 Q2 27 Q3 27 Q4 27 Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Q3 29 Mill USD Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-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 Apr-8 Oct-8 Apr-9 Oct-9 Exchange rate appreciation dilemma Exhibit 3: Chile 7 Chile: Exchange Rate Market Rate, End of Period, LCU/US$ 9 Chile: Interest Rates Policy Rate, in % Chile: International Reserves US$ Billions 15, Capital Flows and Current Account Foreign 25 1, 2 5, 15 1 Current Account 5-5, Domestic -1, Source: Bloomberg and IFS 42

41 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Q1 25 Q2 25 Q3 25 Q4 25 Q1 26 Q2 26 Q3 26 Q4 26 Q1 27 Q2 27 Q3 27 Q4 27 Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Q3 29 Mill USD Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-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 Apr-8 Oct-8 Apr-9 Oct-9 Exchange rate appreciation dilemma Exhibit 4: Peru Peru: Exchange Rate Market Rate, End of Period, LCU/US$ 7 6 Peru: Interest Rates Policy Rate, in % Peru: International Reserves US$ Billions 7, 6, Capital Flows and Current Account , 4, 3, Foreign 25 2, 2 1, , -2, -3, Domestic Current Account -4, Source: Bloomberg, IFS, Banco Central de Reserva de Peru. 43

42 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Q1 25 Q2 25 Q3 25 Q4 25 Q1 26 Q2 26 Q3 26 Q4 26 Q1 27 Q2 27 Q3 27 Q4 27 Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Mill USD Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-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 Apr-8 Oct-8 Apr-9 Oct-9 Exchange rate dilemma appears somewhat mitigated in Mexico 16 Mexico: Exchange Rate Market Rate, End of Period, LCU/US$ 1 Mexico: Interest Rates Policy Rate (Repo Rate), in % Mexico: International Reserves US$ Billions 15, 1, Capital Flows and Current Account Foreign , Current Account 4-5, 2-1, Domestic -15, Source: Bloomberg and IFS 44

43 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Q1 25 Q2 25 Q3 25 Q4 25 Q1 26 Q2 26 Q3 26 Q4 26 Q1 27 Q2 27 Q3 27 Q4 27 Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Mill USD Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Mar-5 Jun-5 Sep-5 Dec-5 Mar-6 Jun-6 Sep-6 Dec-6 Mar-7 Jun-7 Sep-7 Dec-7 Mar-8 Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 and also in Paraguay 65 Paraguay: Exchange Rate Market Rate, End of Period, LCU/US$ 1 9 Paraguay: Interest Rates Money Market Rate, in % Paraguay: International Reserves US$ Billions 4 3 Capital Flows and Current Account Domestic Foreign Current Account Source: Bloomberg, ECLAC and IFS 45

44 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Q1 25 Q2 25 Q3 25 Q4 25 Q1 26 Q2 26 Q3 26 Q4 26 Q1 27 Q2 27 Q3 27 Q4 27 Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Mill USD Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-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 Apr-8 Oct-8 Apr-9 Oct-9 But exchange rate policy issues are different in the case of Argentina 4 Argentina: Exchange Rate Market Rate, End of Period, LCU/US$ 14 Argentina: Interest Rates Policy Rate (Reverse Repo), in % Argentina: International Reserves US$ Billions 8, 6, 4, Capital Flows and Current Account Foreign Current Account 4 2, 3 2-2, -4, Domestic 1-6, -8, -1, Source: Bloomberg and IFS 46

45 LAC-specific challenges and opportunities Larger LAC countries will face: Monetary policy dilemmas due to e-rate appreciation pressures Challenges of orderly exiting from fiscal and credit stimulus policies while smaller LAC countries may: Endure a lagged and longer recessionary impact complicated by debt & financial fragility in many Caribbean countries Labor market adjustment patterns likely to change deeply In the medium-term, a premium will be on the long-delayed productivity-oriented agenda (to seize opportunities) LAC can grow robustly and contribute to global rebalancing... while keeping the course of social and macrofinancial improvements 47

46 Jan-7 Apr-7 Jul-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Formal unemployment has risen in LAC, but not dramatically Unemployment Rate in LAC Countries in % Colombia Brazil Peru Chile Argentina 6 Uruguay 4 2 Mexico Source: Bloomberg 48

47 Jan-7 May-7 Sep-7 May-8 Sep-8 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 49

48 Jan-7 May-7 Sep-7 May-8 Sep-8 May-9 Jan-93 May-93 Sep-93 Jan-94 May-94 Sep-94 Jan-95 May-95 Sep-95 Jan-96 May-96 Sep-96 Mexico: Real wage adjustment no longer via inflation Mexico - Past Crisis Index Dec = 1 19 price index real wage index Mexico - Present Crisis Index Sep. 28 = price index real wage index Note: median wages in the industrial sector. Source: BanXico, IFS 5

49 Jan-7 May-7 Sep-7 May-8 Sep-8 May-9 Jan-99 May-99 Sep-99 Jan- May- Sep- Jan-1 May-1 Sep-1 Jan-2 May-2 Sep-2 Jan-3 May-3 Sep-3 Uruguay: Real wage adjustment no longer via inflation Uruguay - Past Crisis Index Dec. 21 = 1 14 price index real wage index Uruguay - Present Crisis Index Sep. 28 = 1 real wage index price index Note: median wages. Source: INE, IFS 51

50 LAC-specific challenges and opportunities Larger LAC countries will face: Monetary policy dilemmas due to e-rate appreciation pressures Challenges of orderly exiting from fiscal and credit stimulus policies while smaller LAC countries may: Endure a lagged and longer recessionary impact complicated by debt & financial fragility in many Caribbean countries Labor market adjustment patterns likely to change deeply In the medium-term, a premium will be on the long-delayed productivity-oriented agenda (to seize opportunities) LAC can grow robustly and contribute to global rebalancing... while keeping the course of social and macrofinancial improvements 52

51 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% 3. 22% Investment 42% Investment 1.5 Consumption 77% Consumption 49%. -23% Imports -3% Imports -1.5 Latin America China Source: World Bank s WDI 53

52 % of GDP while raising savings and investment rates to underpin a higher growth path 6% 5% Saving Savings and Investment Average Between Investment 4% 3% 2% 1% % 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. 54

53 Thank you 55