International Monetary Fund May 217 International Dimensions of Monetary Policy Eighth BIS CCA Research Conference Alejandro Werner Director Western Hemisphere Department
Spillovers to Domestic Interest Rates Spillovers to Capital Flows and Exchange Rates Financial Stability Issues
MEX ARG PER BOL CRI CHL COL URY BRA LA5 HKG ISR CAN SWE KOR AUS ZAF ADV EME MEX ARG PER BOL CRI CHL COL URY BRA LA5 HKG ISR CAN SWE KOR AUS ZAF ADV EME While the US policy rate changes affect mainly the Mexican and Canadian short-term rates there are significant spillovers from long-term rates across the board. 9 8 7 6 From the Federal Funds Rate to Domestic Short-Term Interest Rates (basis points) 14 12 From 1-Year U.S. Treasury Bond Yields to Domestic Long- Term Interest Rates (basis points) 5 4 1 3 2 8 1-1 6-2 -3 4-4 -5 2-6 -7 Source: Carrière-Swallow, Y. and B. Gruss, Implications of Global Financial Integration for Monetary Policy in Latin America, chapter 4 in Challenges for Central Banking: Perspectives from Latin America. Note: Responses in basis points following a 1 basis point increase in the corresponding U.S. rate. Red bars mean statistically significant. ADV = advanced economies; EME = emerging market economies; LA5 = Brazil, Chile, Colombia, Mexico, Peru. 3
Spillovers to Domestic Interest Rates Spillovers to Capital Flows and Exchange Rates Financial Stability Issues
US$ billion 35 LA7: Gross Capital Inflows 8 3 Average 211 14 7 25 6 2 15 Response to U.S. monetary shock 5 4 3 Percent of GDP 1 5 After shock Initial (latest) 2 1 Sources: Haver Analytics; IMF, Balance of Payment Statistics Yearbook database; and IMF staff calculations. Note: The response to US monetary shock corresponds to the implied change in capital inflows to LA7 countries if US monetary policy tightens unexpectedly by 5 bps. Ratios in percent of GDP refer to trend GDP in U.S. dollars. 5
US$ billion Global policy uncertainty have risen noticeably over the past year, seemingly at odds with declining measures of volatility in major equity markets presenting risks to capital flows if market volatility (VIX) catches up with policy uncertainty. 7 3 22 LA7: Gross Capital Inflows 5 6 5 4 3 2 1 VIX U.S. economic policy uncertainty index (right scale) Global economic policy uncertainty index (right scale) 25 2 15 1 5 2 18 16 14 12 1 8 6 4 Response to VIX shock After shock Initial (latest) 4 3 2 1 Percent of GDP Jan. 5 Jan. 7 Jan. 9 Jan. 11 Jan. 13 Jan. 15 Jan. 17 2 Sources: Bloomberg L.P.; and Haver Analytics; Note: The economic policy uncertainty index for the United States and Global were developed by Scott Baker and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago (212). Sources: Haver Analytics; IMF, Balance of Payment Statistics Yearbook database; and IMF staff calculations. Note: The response to VIX shock corresponds to the implied change in capital inflows to LA7 countries if VIX increases to close the gap with the U.S. economic policy uncertainty index (this corresponds to a 1- point shock to the VIX, from its current level ([15] to 25 points). Ratios in percent of GDP refer to trend GDP in U.S. dollars. 6
14 12 1 Exchange Rate Regimes in Latin America (Number of countries by regime) Hard peg Soft peg Flexible 7 6 5 Total Reserves Assets (US$ billions) Brazil (right scale) Peru Colombia 4 35 3 8 4 Chile 25 2 6 3 15 4 2 Mexico (right scale) 1 2 1 5 199 1995 2 25 21 215 2 22 24 26 28 21 212 214 216 Sources: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions; and IMF staff calculations. Sources: IMF, World Economic Outlook database; and IMF staff calculations. 7
When coping with inflows and reserve accumulation: Rules-based approach (Colombia and Mexico) Ad-hoc approach When coping with outflows/depreciation pressures, largest economies in the region tend to rely on pre-announced rules-based approach for foreign exchange sales Announcing the intervention is in principle preferable from a signaling perspective Transparent rules can alleviate fears FXI send mixed signals about commitment to inflation target/primacy of inflation objective 8
15 LAC: Average Real GDP (index: t-1 = 1) 19 18 Asia: Average Real GDP (index: t-1 = 1) 14 17 13 Depreciation 16 Depreciation 15 12 14 Appreciation Appreciation 11 13 12 1 11 9 t= t=1 t=2 t=3 t=4 1 t= t=1 t=2 t=3 t=4 Source: Druck, Magud, and Mariscal (215). Note: The horizontal axes denote time intervals of dollar appreciation and depreciation cycles of various lengths, sub-divided into four equal parts. These dollar cycles are identified using a regime-switching Markov model. Each cycle is between 3 and 9 years in length. In the source paper, similar charts are shown for other regions. 9
Spillovers to Domestic Interest Rates Spillovers to Capital Flows and Exchange Rates Financial Stability Issues
9 75 LA5: Nonfinancial Corporates Foreign Bond Issuance (US$ billions; 12-month rolling sum) 27 26 LA: Corporate Leverage (debt to assets; %) 216:Q2 6 Brazil Colombia Peru Chile Mexico 25 Mean 24 45 23 3 22 15 21 Median 24 26 28 21 212 214 216 Sources: Dealogic; and IMF staff calculations. Note: Data for Brazil include issuance by foreign subsidiaries of Brazilian firms. 2 26 28 21 212 214 216 Sources: Bloomberg L.P., and IMF staff calculations. Note: The results are the median and mean of the nonfinancial corporates of Argentina, Brazil, Chile, Colombia, Mexico, and Peru. 11
21 215 216 March 217 21 215 216 March 217 Nonfinancial Corporates Bond Debt 45 4 35 3 25 2 Currency Composition (US$ billions) Peru Mexico Colombia Chile Brazil 7 6 5 4 Sectoral Composition (US$ billions) Other nonfinancial Industrials Consumer 6 5 4 Selected Quasi Sovereigns (US$ billions) CODELCO (CHL) ECOPETROL (COL) Comision Fed Elec (MEX) Eletrobras (BRA) 15 1 3 Materials 3 5 2 Utilities 2 1 Energy 1 PEMEX (MEX) Local currency Foreign currency March 217 Petrobras (BRA) March 217 Sources: Bloomberg L.P.; Dealogic; and IMF staff calculations. 12
Sovereign Codelco Sovereign Ecopetrol Sovereign Pemex Sovereign Petrobras 1,5 1,25 1, 75 Latin America Brazil Colombia Peru Argentina Chile Mexico Corporate Spreads (basis points) 45 4 35 3 25 2 15 CDS Spreads (5-year; basis points) Markers: March 216 Bars: March 217 1, 9 8 7 6 5 4 3 5 1 2 5 1 25 Jan-7 Jan-9 Jan-11 Jan-13 Jan-15 Jan-17 Chile Colombia Mexico Brazil Source: Bloomberg L.P. Note: J.P. Morgan CEMBI Broad Diversified Index; U.S. dollar-denominated corporate bonds. Source: Bloomberg L.P. Note: Ecopetrol data is implied CDS spread calculated by Bloomberg L.P. 13
Scenario 1 Scenario 2 Scenario 1 Scenario 2 Scenario 1 Scenario 2 Scenario 1 Scenario 2 Scenario 1 Scenario 2 1,4 1,2 Corporate Spreads: Scenario Analysis (basis points) 1, After shock 217Q1 (Initial) 8 6 4 2 Brazil Chile Colombia Mexico Peru Source: Bloomberg L.P.; and IMF staff calculations. Note: Scenario 1 = increase global market volatility (doubling of the VIX from its current level). Scenario 2 = increase in sovereign CDS spreads and currency depreciation (based on a reversal of the trend observed in these two variables since 216Q1, except for Mexico where the currency depreciated further by 11 percent over that period.) 14
International Monetary Fund May 217 International Dimensions of Monetary Policy Eighth BIS CCA Research Conference Alejandro Werner Director Western Hemisphere Department