Crisis Prevention in Emerging Markets Self Insurance, Regional Arrangements, and Preemptive Financing: The experience Brazil High Level Seminar on Crisis Prevention July 1-11, 11, 26 Singapore Joaquim Vieira F. Levy Inter-American Development Bank (IDB) Brazil: Financial Turbulence and the IMF Brazil: Turnaround in the External Sector The Brazilian strategy 23-25 Further Issues in Self-Insurance, Regional Arrangements and Preemptive Financing 1
A bit history International turbulence, democracy and the IMF Exchange Rate (Jan 98 -June 6) 4.5 4. 3.5 Original Fund Program New Programs R$/US$ spot rate 3. 2.5 2. 1.5 Lula Adm. 1..5 Russian crisis BR Elections - Stock Markets Jan-98 May-98 Sep-98 Jan-99 May-99 Sep-99 Jan- May- Sep- Jan-1 May-1 Sep-1 Jan-2 May-2 Sep-2 9/11 Argentina Jan-3 May-3 Sep-3 Jan-4 May-4 Sep-4 Jan-5 May-5 Sep-5 Jan-6 May-6 25 High volatility s, with impact on firms EMBI+ Brazil (Jan 98-Jun 6) 2 15 1 5 22-25 1/2/98 5/2/98 9/2/98 1/2/99 5/2/99 9/2/99 1/2/ 5/2/ 9/2/ 1/2/1 5/2/1 9/2/1 1/2/2 5/2/2 9/2/2 1/2/3 5/2/3 9/2/3 1/2/4 5/2/4 9/2/4 1/2/5 5/2/5 9/2/5 1/2/6 5/2/6 2
New resilience, owing to strengthened policies 26 EMBI Spreads (May 1-Jun 22 % change) 7% 6% 5% 4% 3% 2% 1% % EMBI+ Turkey EMBI+ Colombia EMBI+ Venezuela EMBI+ Mexico EMBI+ EMBI+ Russia EMBI+ Argentina EMBI+ Brazil EMBI+ Peru Factors that helped avoid a crisis in 22 Identifying the pressure as being mainly due to liquidity rather than solvency issues (debt service was at moderate risk only, even considering the strong pressure associated with x-rate depreciation) Floating exchange rate, which facilitated resource allocation Fiscal performance in the three previous years Strong banking system, which weathered the sharp cut in credit lines Inflation Targeting system, which helped the government to remain credible, while some traditional (quantitative) indicators moved out line Ability IMF to trust presidential candidates and existing government, ensuring ownership to program and decreasing financial pressure due to political uncertainty Willingness candidates to signal intention ensuring public debt service 3
Brazil: Financial Turbulence and the IMF Brazil: Turnaround in the External Sector The Brazilian strategy 23-25 Further Issues in Self-Insurance, Regional Arrangements and Preemptive Financing Robust exports and strong external accounts Trade Trade Balance Balance (US$ (US$ billion billion - 12 12 months months accumulated) accumulated) 14. 12. Trade Balance Import Export 5. 4. Export Export Growth Growth 22-25 22-25 (% (% in in 12 12 months) months) Brazil Imp. e Exp. - US$ Bn 1. 8. 6. 4. 3. 2. 1. Trade Balance - US$ Bn 2.. Feb- Jun- Oct- Feb-1 Jun-1 Oct-1 Feb-2 Jun-2 Oct-2 Feb-3 Jun-3 Oct-3 Feb-4 Jun-4 Oct-4 Feb-5 Jun-5 Oct-5 Feb-6. -1. Average China, India, Korea, Turkey, Russia, Mexico, Argentina Exports Exports by by Destination Destination (US$ (US$ billion) billion) Exports Exports by by product product (US$ (US$ billion) billion) 12, 1, 8, 6, 4, 2, - 2 21 22 23 24 25 Others EU USA Canada Japan China Trad. Asia Mercosul LATAM Others include Eastern Europe + Russia, M. East, Africa, Oceania, etc. 14 12 1 8 6 4 2 2 21 22 23 24 25 Manuf Interm Primary 4
A Structural Change in the External Sector Exports Exports Price Price by by Product Product Class Class 1996-25 1996-25 (1996=1) (1996=1) Basic Manufactured Semi-manufactured 12 Oil Oil and and Other Other Commodities Commodities - Price Price Evolution Evolution 4,% 1 8 6 35,% 3,% 25,% 2,% Livestock Fats Foodstuff Metals PETROLEUM:UK BRENT Oil 4 15,% 2 Jan-96 Sep-96 May-97 Jan-98 Source: Funcex (Ipeadata) Sep-98 May-99 Jan- Sep- May-1 Jan-2 Sep-2 May-3 Jan-4 Sep-4 May-5 Jan-6 1,% Food 5,% Metals,% jan-9 jan-95 jan- jan-5 Exports/Net Exports/Net Domestic Domestic 21-24 21-24 (% (% change) change) Net Net Reserves Reserves Excluding Excluding IMF IMF 6. 56.9 MACROECONOMIC OVERVIEW 15 14 13 12 11 1 9 8 Source:Funcex EXP/ 21 22 23 24 BRAZIL Indonésia Turkey Peru Philp. Colômbia Egypt US$ Billion 5. 4. 3. 2. 1.. Jan-3 May-3 Source: Central Bank Sep-3 Jan-4 May-4 Sep-4 Jan-5 May-5 Sep-5 Jan-6 9 For the first time in 25 years, the external debt is not a concern in Brazil For most the last 25 years, the government external debt was a multiple exports. Now the ratio is below one (close to.8) Total external debt/export ratio dropped by two thirds, from an average 4 to historical lows 1.4 Total External /Exports * Source: Central Bank. * International Reserves excludes IMF position (data available only after 2) 5% 2, Current Account balance 4% 15, 1, 5, 3% US$ billion, -5, -1, 1996 1997 1998 1999 2 21 22 23 24 25 2% -15, -2, 1% -25, -3, -35, -4, % 1985 1988 1993 1997 21 25 Source: Central Bank. 5
Brazil: Financial Turbulence and the IMF Brazil: Turnaround in the External Sector The Brazilian strategy 23-25 Further Issues in Self-Insurance, Regional Arrangements and Preemptive Financing Fiscal Responsibility Architecture robust growth the main pillar the economic policy MACROECONOMIC OVERVIEW Cautious Financial Policies price stability, strong banks and full transparency External Adjustment sustained export growth and strong external accounts Lead to... Converging, low inflationary expectations (4%-5%) Improved debt dynamics and continued resilience the banking system Strong External Accounts Room for micro-reforms More credit, more jobs More Growth 12 6
Public Sector Primary Balance Public Sector Primary Balance (% GDP) The 96-6 macro billboard EMBI+ (rhs) & Central Bank Interest Rate (lhs) 9 4 % GDP 6. 5. 4. 3. 2. 1.. -1..27 -.9 -.95.1 3.23 3.46 3.64 3.89 4.25 4.61 4.84 8 7 6 5 4 3 2 1 EMBI+ CB rate 35 3 25 2 15 16.54 1 5 224-2. Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec- Dec-1 Dec-2 Dec-3 Dec-4 Dec-5 Jan-95 Aug-95 Apr-96 Dec-96 Aug-97 Apr-98 Nov-98 Jul-99 Mar- Nov- Jul-1 Mar-2 Nov-2 Jul-3 Mar-4 Nov-4 Jun-5 Mar-6 US$ billion 2, 15, 1, 5,, -5, -1, -15, -2, -25, -3, -35, -4, Current Account balance 1996 1997 1998 1999 2 21 22 23 24 25 14 12 1 8 6 4 2 1996 1997 Inflation 1998 1999 2 21 GDP 22 23 24 25 Rating Rating Brazil 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5 2 6 M o o d y ' s B 1 B 2 B 2 B 1 B 1 B 2 B 2 B 1 B a 3 B a 3 S & P B B - B B - B + B + B B - B + B + B B - B B - B B F I T C H B + B + B B B - B B - B B + B B - B B - B B - 13 Decline /GDP and Change in Composition General General Government Government Primary Primary Surplus Surplus 24 24 (% (% GDP) GDP) 6.1 6.1 Net Public Sector / GDP 4. 3.1 1.4 1.5.9 1.4 1.3 B2 B1 Ba3 Ba3 Ba3 Ba2 Baa2 Baa1 Baa1 INA PHI TUR BRA PER COL RUS MEX RSA Source: Moody s, Central Bank Public Public Composition Composition 1% 8% 6% 4% 2% Exchange rate (b) External De bt (a) Floating rate Price Index Fixed rate Rate IFF IFF Transparency Transparency & Investment Investment Relations Relations Index Index Brazil 1 Brazil 2 Philippines 3 Mexico Mexico 4 Turkey Turkey 5 C h ile Chile 6 Korea Korea S 7 Africa S. A frica 8 Poland Poland 9 Pakistan 13 Bulgaria 14 Peru 1 5 C o lo m b ia 16 Romania 2 Egypt % 22 23 24 25 26* Floating rate Fixed rate Price Index Others Exchange rate (b) External (a) 21 Costa Rica 26 Russia 3 Morroco 1 2 3 4 Transparency helps reduce crises 7
Gini index the labor incomes.61 Drop in 1993-1995 reflects the impact price stabilization in 1994.6.59.58.57.56.55.54.53.6 Less poverty, more jobs, more access.547 1993 1995 1996 1997 1998 1999 21 22 23 24 Source: IBGE Source: IBGE Income equality: gini index = # users Internet China 94.. 24 Japão 57.2. 22 Alemanha 39.. 23 Corea do Sul 29.22. 23 Reino Unido 25.. 22 França 21.9. 23 Itália 18.5. 23 Índia 18.481. 23 Canada 16.11. 22 Brasil 14.3. 22 México 1.33. 22 Turquia 5.5. 23 Rússia 6.. 22 3 / 1, 21 / 1, 79 / 1, A social safety net that avoids extreme poverty %% Populationliving living with < US$ 1/day <US$ < 2/day Survey date BRASIL 8,2 22,4 21 CHINA 16,6 46,7 21 ÍNDIA 35,3 8,6 1999- RÚSSIA <2 7,5 22 INDONÉSIA 7,5 52,4 22 MALASIA <2 9,3 1997 MÉXICO 9,9 26,3 2 FILIPINAS 15,5 47,5 2 TAILÂNDIA <2 32,5 2 Source: Source: IBGE IBGE and and The The World World Bank Bank Source: World Bank Job Creation 23-25 in thousand positions Mexico Turkey formal Turkey overall Italy Spain Euroland UK private sec. (b) U S A (a) B R A Z I L - formal B R A Z I L - overall 24 / 1, - 1. 2. 3. 4. 5. Sources: Barklays Bank, except for USA (BLS), UK (NSO) and Brazil (MF) In sum, Brazil took advantage the favorable environment in 23-25 to: Strengthen its economy, based on fiscal discipline and structural (micro) reforms Reduce the public debt/gdp ratio and change the composition public debt Increase trade and reduce external vulnerability Create more than 1 million jobs a year on average 8
Brazil: Financial Turbulence and the IMF Brazil: Turnaround in the External Sector The Brazilian strategy 23-25 Further Issues in Self-Insurance, Regional Arrangements and Preemptive Financing Significant Dispersion in Saving Behavior... 2-23 23 Sav/GDP Credit/GDP Malaysia 43,6 13,5 China 4,4 147,7 Thailand 32,4 79,2 Vietnam 28,3 49 Chile 24,1 63,6 Indonesia 23,3 24,2 India 23,1 33,9 Brazil 21,5 28 Mexico 19,4 18,5 Poland 18 29 Phlippines 17,5 3,6 Uruguay 13,1 44,6 Brazil 24 24,3 33 * * 26 Savings Savings and and Credit Credit as as % GDP GDP (23) (23) 16 14 12 1 8 6 4 2 1 2 3 4 5 Credit/GDP (%) Savings Savings 24 24 (as (as % GDP) GDP) 25.3 19.5 2.7 24.3 Savng/GDP (%) 21.1 15. 35.1 2.7 17.2 B2 B1 Ba3 Ba3 Ba3 Ba2 Baa2 Baa1 Baa1 INA PHI TUR BRA* PER COL RUS MEX RSA * Data 25, II Quarter Source: Moody s, IBGE 9
... As well as in external debt & debt service External GG /GDP in 24 (%) Turkey Russia Brazil Korea Mexico South Africa Net Gross 6 5 4 3 2 1 Service Ratios (%) China Asia EM Europe Latam 1998 22 26 Brazil 25 Source: ING Turkey 25-4 -2 2 4 6... And a few common trends International Reserves in US$ billion International Reserves 2=1 8 35 7 6 5 4 3 Brazil Total Brazil Own Turkey Total Turkey Own 3 25 2 15 Mexic o South Africa Brazil 2 1 Mexico Own 1 5 2 21 22 23 24 25/9 21 22 23 24 25 4% 35% 3% 25% 2% 15% BRAZIL: BRAZIL: External External CG CG as as a % Total Total NFPS NFPS and and Net Net Reserves Reserves 5% 45% 4% 35% 3% 25% External Public / Total Public 2% External Public / Net Reserves 15% South Africa, Mexico and Brazil, although increasing their holdings international reserves, still keep a broad approach balancing the amount resources locked by the government in foreign currencies. 1% 1% Aug-2 Nov-2 Feb-3 May-3 Aug-3 Nov-3 Feb-4 May-4 Aug-4 Nov-4 Feb-5 May-5 Aug-5 Nov-5 Feb-6 Source: National Treasury and Central Bank 1
Trade fs Self-insurance Non-investment grade EM Investment grade EM Non-rated developing countries Source: ING International Reserves are expensive returns on reserves are low, impacting fiscal accounts; and reserves may lock resources however, credit rating agencies appear to strongly believe that they are important liquidity & geography matter Alternatives to self insurance may point to traditional regional integration (e.g., Mexico, Chile, Peru, Colombia, with the USA; Mercosul) or international financial integration role multilateral organizations, such as IMF, OECD (through membership or active informal participation) and regional development banks What the IDB is doing Strengthening the Policy Dialogue unique relationship with borrowing members throughout the Region in part because its capital composition, the Bank has foreshadowed the reaching out strategy that, e.g., the IMF is increasingly adopting Making available a significant contingent facility the IDB is prepared to lend up to US$ 6 billion in emergency/ precautionary loans and accelerate the disbursement/approval other loans in stress scenarios (high returns from loans increased the Bank s equity in recent years ensuring the Bank ability to deliver on that) the increasing sophistication IDB s membership and transparency their accounts can help market communication and coordination with the IMF, favoring a high degree country ownership and focus on core issues Providing new products Development local currency/ local capital markets, as well as mechanisms to Build Opportunities to the Majorities contribute to diversify finance sources for member countries and foster good policies. 11
Roles for Local Currency debt Institutional investor EM trading volume 4Q97 2Q98 4Q98 2Q99 4Q99 2Q 4Q 2Q1 4Q1 2Q2 4Q2 2Q3 4Q3 2Q4 4Q4 2Q5 Local currency US$ locals Bradys Other sovereign Other Source: Emerging Markets Trade Association (EMTA) 4Q5 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Avoid original sin for more susceptible countries Inflation Indexed allows for additional risk sharing borrower: higher correlation with local cashflows lender: less downside risk in an environment in which inflation is a new concern Inflation Indexed bonds may help deliver long-term appreciation in developing countries with less volatility 8 6 4 2-2 -4-6 -8 Features Inflation Linked Local Currency Bonds EM debt and equity fund flows 1/8/23 4/8/23 7/8/23 1/8/23 1/8/24 4/8/24 7/8/24 1/8/24 1/8/25 4/8/25 7/8/25 1/8/25 Equity (lhs) (rhs) 4 3 2 1-1 -2-3 Can help diversify investment portfolios in developed countries as well as in Asia to include LATAM components Can bring together some the attractiveness the wellestablished EM equity market and features fixed income instruments (e.g., less downside risk) It is an instrument with more than 4 years trading experience in the region and increasing acceptance in developed markets 12
Thank You! Latin America Fiscal Responsibility High Quality Investment Strong Export Drive... Leading to Better Finances Opportunity for the Majority Effective Development 25 13