Update on the Global Crisis: The Worst is Over, Is LAC Poised to Recover? 5 November 2009 Chief Economist Office Latin America and the Caribbean Region The World Bank 1
Structure of Presentation The worst is over for the global economy, but fragilities remain The nature of the incipient recovery 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 On average, LAC is well positioned to recover but medium-term global environment is clouded by risk & uncertainty LAC-specific opportunities and challenges 2
The Worst is Over for the World But Fragilities Remain Part 1
Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 S&P Indexes VIX The catastrophic scenario was averted 120 100 Standard & Poor's (Financial and Total Indexes) and VIX Index number Aug-15-2007 = 100 (S&P indexes) Total S&P Pandit's Memo 90 75 80 60 Subprime eruption Financial S&P Bear Stearns 60 45 40 30 20 VIX (rhs) 15 0 Lehman 0 Source: Bloomberg 4
Jan-07 Jan-07 Mar-07 Mar-07 May-07 May-07 Jul-07 Jul-07 Sep-07 Sep-07 Nov-07 Nov-07 Jan-08 Jan-08 Mar-08 Mar-08 May-08 May-08 Jul-08 Jul-08 Sep-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 thanks to bold risk absorption and countercyclical actions by central banks, led by the U.S. Fed 2,500 2,500 2,000 2,000 Other Other Central Central Bank Bank Liquidity Swaps Swaps New New Program Portfolio Loans Loans and and Discounts Including Float Float Term Term Auction Facility Facility (TAF) (TAF) Treasury Securities FED's Balance Sheet --Assets Side Factors Affecting Reserve Balances, US$ Billion US$ 2,259 Billions (16.1% of of GDP) Lehman 1,500 1,500 1,000 1,000 Subprime Eruption US$ US$ 900 900 Billions Billions (6% (6% of GDP) of GDP) Bear Bear Sterns 500 500 Pandit's Memo Memo 0 0 Source: Federal Reserve Bank St. Louis 5
Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 and to substantial injections of fiscal and credit stimuli, including in large EMs, especially China 40% China: Real Private Domestic Credit Annual Variation 35% 30% 25% 20% 15% 10% 5% 0% Source: IFS 6
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 The large emerging economies, including Brazil, are leading the world s recovery 130 World Industrial Production Index Jan/2006=100 125 120 115 110 105 100 95 90 85 80 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 2009 Source: CPB (Netherlands Bureau for Economic Policy Analysis), Sep. 2009 7
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 With surprises on the upside, ST growth forecasts for the center and periphery are being revised upwards 2% Developed Countries: 2009 Real GDP Growth Forecasts Annual Growth Rate 3.0% Developed Countries: 2010 Real GDP Growth Forecasts Annual Growth Rate 0% 2.5% USA -2% -4% USA Euro Zone UK 2.0% 1.5% 1.0% Japan UK Euro Zone -6% Japan 0.5% -8% 0.0% LAC Countries: 2009 Real GDP Growth Forecasts Annual Growth Rate LAC Countries: 2010 Real GDP Growth Forecasts Annual Growth Rate 6% 4% 2% 0% -2% -4% Average Exc. Mexico High Average Low 6% 5% 4% 3% 2% 1% 0% High Average Exc. Mexico Average Low -6% -1% Source: Consensus Forecasts, Jan. 2008 to Oct. 2009 8
Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 However, the process of economic repair in rich countries is still incomplete Developed Economies: Manufacturing PMI Seasonally Adjusted 65 60 55 Global Eurozone Pandit's Memo Expansion 50 UK 45 40 35 30 Contraction US Subprime eruption Bear Stearns Lehman Japan 25 Manufacturing Purchasing Managers Index: assess business conditions in the manufacturing sector. A number above 50 indicates an expected increase of business conditions (expansion). A number below 50 indicates deterioration. Source: Bloomberg 9
Jan-05 May-05 Sep-05 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-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Durable Goods Nondefense US$ Billiion Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 US$ Billiion as the stimuli is most of the story so far behind the incipient recovery, especially in the US 0-200 Budget Balance of Central Government Accumulated in 12 Months Avg. in 2007: 1.3% of GDP 24% 20% Gross Nominal Public Debt Annual Variation 82% of GDP -400 16% -600 12% -800-1000 8% 67% of GDP -1200 4% -1400 9.5% of GDP 0% 240 Manufacturers' New Orders US$ Billion, Seasonally Adjusted 70 170 Exports of Goods and Services, BOP Basis Seasonally Adjusted 225 210 195 180 165 Nondefense exc. Aircraft (rhs) 65 60 55 50 160 150 140 130 120 110 150 Durable 45 100 Source: Federal Reserve Bank St. Louis and Economist Intelligence Unit (EIU) 10
Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Unemployment Rate, in % US$ Billion and fragilities remain in labor markets and in private demand 11 10 9 8 Nonfarm Payrolls and Unemployment Rate Seasonnally Adjusted Nonfarm Payrolls (rhs) 140 139 138 137 136 7 6 5 4 3 Unemployment Rate 135 134 133 132 131 130 9500 9400 9300 9200 9100 Private Demand Components US$ Billion, Chained (2005) Government consumption expenditures and gross investment 2600 2400 2200 9000 Gross private domestic investment 2000 8900 8800 8700 Personal Consumption Expenditures (rhs) 1800 1600 8600 1400 Source: Bloomberg and Federal Reserve Bank St. Louis and IFS 11
Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Consumer Credit Business Credit Mar-03 Dec-03 Sep-04 Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09 New Domestic Issues New Syndicated Loans Also, domestic credit to households and firms remains depressed 2100 1900 1700 1500 1300 Capital Markets in the US New Capital Raisings, US$ Billion New Domestic Issues (3 Months Moving Avg) 800 700 600 500 1100 900 700 500 300 100 New Syndicated Loans (rhs) 400 300 200 100 0 900 850 Private Credit in the US by Banks US$ Billions Seasonally Adjusted Business 1600 800 1400 750 Consumer 1200 700 1000 650 800 Source: Federal Reserve Bank St. Louis 12
Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 External financial conditions have improved significantly for LAC and other emerging regions 2000 1600 1200 Corporate EMBI & U.S. High Yield Bond Spread in basis points Subprime eruption Bear Sterns Lehman ECA 800 400 High Yield LAC Pandit's Memo 0 EAP Source: Bloomberg US Credit Suisse High Yield Spread, JP Morgan CEMBI Global: Corporate Emerging Markets Bond Index. 13
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Wheat, Copper and Soybean, 01-Jan-05=100 Oil WTI, Current US$ And the rebound in commodity prices benefit net exporting countries in the region Commodity Prices Oil WTI in Current US$, Wheat, Copper and Soybean: Index 01-Jan-05=100 350 300 250 Copper Subprime eruption Bear Stearns Pandit's Memo Wheat 150 130 110 About 95% of LAC s GDP and 90% of LAC s population reside in countries that are net commodity exporters 200 150 100 Soybean 90 70 50 About half the number of countries in LAC are net commodity importers and are mainly located in Central America and the Caribbean 50 Oil (rhs) Lehman 30 Source: Bloomberg 14
Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Colombia, Venezuela, Ecuador and Mexico Uruguay Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 There is considerable heterogeneity in the pace of recovery across LAC countries 15% 10% 5% 0% Rebounding Industrial Production, YoY, 3 Months Moving Average Argentina Chile Brazil 20% 15% 10% 5% Still Falling Industrial Production, YoY, 3 Months Moving Average Peru -5% 0% -10% -5% -15% -10% -20% -15% 20% 15% Stabilized? Industrial Production, YoY, 3 Months Moving Average Colombia Uruguay 30% 25% 10% 5% 0% -5% Ecuador Mexico Venezuela 20% 15% 10% 5% 0% -10% -5% -15% -10% Source: Economist Intelligence Unit (EIU), GEM and IFS 15
How Has LAC Fared in Comparative Terms? Part 2
Ant. & Barb. Bahamas St. Lucia Jamaica St. Kts. & Nv. Barbados Grenada Venezuela Ecuador Guatemala Honduras Nicaragua El Salvador Belize Dominica St. Vc. & Grs. Paraguay Costa Rica Argentina Dom. Rep. LAC - Mex Haiti Uruguay Colombia Mexico Bolivia LAC Panama Suriname Guyana Peru Chile Brazil Mexico Ant. & Barb. Grenada Bahamas Jamaica Honduras Paraguay Barbados Argentina Costa Rica St. Lucia Nicaragua LAC El Salvador Ecuador St. Kts. & Nv. Chile Venezuela St. Vc. & Grs. Guatemala LAC - Mex Dom. Rep. Colombia Uruguay Brazil Belize Peru Dominica Panama Suriname Haiti Guyana Bolivia % % 2009 will be a year of recession for LAC (Mexico the hardest hit) but a broad recovery is expected for 2010 4 Real GDP Growth Forecasts for 2009 LAC countries 2 0-2 -4 5 Real GDP Growth Forecasts for 2010 LAC countries -6 4-8 3 2 1 0-1 -2 Weighted average calculated based on 2008 nominal GDP. Source: Consensus Forecast and IMF Regional Economic Outlook October 2009 17
The 2009 recession in LAC is less pronounced than in other areas of the world 12% 10% Recent Real GDP Growth and Forecasts for 2009-2010 Annual GDP Real Growth Rate, 2009 2010 8% 6% 4% 2% 0% -2% -4% -6% -8% Japan Eastern Europe Western Europe United States Latin America East Asian Tigers China Source: Consensus Forecasts (Oct. 2009) 18
Number of Poor People (Millions) But the recession in LAC threatens social gains Actual and Projected Poverty Numbers 168 168 165 163 Projected 158 160 9.8 14.5 153 155 Counterfactual 148 2006 2007 2008 2009 150 Between 2002 and 2008, almost 60 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 (2009). 19
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 growth collapse in LAC is significant on average, but cross-country variation is nontrivial 0% Collapse in Growth Difference in Real GDP Growth between 2007 and 2009-2% -4% -6% -8% -10% -12% Weighted average calculated based on 2007 nominal GDP. Source: World Bank and IMF. 20
2009 Real GDP Growth Forecasts For many LAC countries, the collapse was from relatively high growth rates 12% Real GDP Growth in LAC 2007 and 2009 Forecasts 9% 6% 45 o 3% DOM HAI BOL GUY PAN BRZ ATB URY PER 0% T&T COL DMR GUA CHI VEN ECU NIC CRI -3% PRY ARG JAM HON -6% MEX -9% 0% 3% 6% 9% 12% 2007 Real GDP Growth Source: Consensus Forecast (Oct. 2009), World Bank and IMF 21
LAC s growth collapse is no greater than that in rich countries & the Tigers, and much smaller than ECA s 0 Growth Collapses Across the World GDP Growth collapse, in p.p. (diff. between growth in 2007 and 2009) -2-4 -6-8 -10-12 -14 ECA EA Tigers IND LAC China SSA MENA SA Source: World Bank, Consensus Forecasts (Oct. 2009) and IMF. 22
Index of Financial Turbulence All things considered, LAC was not hit as hard 2 Real and Financial Consequences of the Crisis 1 0 TUN CHL ECU BRA ISR MYS PER TWN SWE HKG PHL SVN DEU TUR JPN MEX CZE DNK PRT CAN FRA ZAF CHE NZL POL FIN SGP ESPGBRNLD THA USA NOR KOR LUX ITA BEL RUS SER AUT HRV GRC HUN COL MAR JOR IDN OMN AUS EGY IND VNM CHN MON -1 LVA LTU EST ROM BGR KAZ IRL ARG PAK -2 UKR -3-4 ICE -2-1.5-1 -0.5 0 0.5 1 1.5 2 Index of Real Turbulence Source: LCRCE Staff calculations. Computed as the "principal factor. Summarizes information of the following variables: (a) 2009.Q3 y-o-y GDP growth, (b) 2009.Q3 y-o-y industrial production, (c) 2009.Q3 y-o-y growth in exports, (d) March 2009 y-o-y % change in stock prices, (e) March 2009 y-o-y % change in the REER, and (f) March 2009 y- o-y % change in the Institutional Investor's country credit risk rating. (a), (b) and (c) for the real index and (d), (e) and (f) for the financial index. 23
Explaining cross-country differences in the collapse Regression analysis of the growth collapse from 2007 to 2009 Sample of 126 countries Collapses were larger in countries characterized by Greater trade and financial 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 24
Trade openness across emerging regions 100 90 Structure of GDP as % of GDP Exports Imports Private Consumption 80 70 60 50 40 30 20 10 0 East Asia South Asia Latin America Eastern Europe Regional aggregates are calculated as simple averages. Source: LCRCE Staff calculations based on EIU 25
LAC-7: foreign debt flows fell sharply but FDI remained stable and a rebound in debt flows is now underway 1,200 World in US$ Billion 1,000 800 600 400 200 0 Debt Flows Equity Flows 160 140 120 LAC-7 Countries in US$ Billion -200 100-400 2003 2004 2005 2006 2007 2008 2009 2010 80 60 Equity Flows 40 20 0-20 Debt Flows Bank Flows -40 2003 2004 2005* 2006 2007 2008 2009* 2010 Net private flows for the world; Gross total flows for LAC-7 countries. Equity flows include FDI and portfolio equity flows. Source: Institute of International Finance (IIF). (*) last three quarters 2005 and first two 2009 26
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 Peru Mexico Morocco China India Brazil Turkey Indonesia Uruguay Argentina Egypt Philippines Healthy banking systems dampened the collapse 2 Deposit to Loan Ratios Emerging Countries, 2007 Data 1.75 1.5 1.25 1 0.75 0.5 0.25 0 Emerging countries were defined as lower middle income and upper middle income, World Bank Classification. Source: Beck, Demirguc-Kunt and Levine (2009): Financial Structure Database 27
Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Inflation-targeting countries in LAC undertook aggressive countercyclical monetary policies Monetary Policy Rates Inflation-Targeting LAC Countries, in % 14 Brazil 12 10 Colombia 8 6 Mexico Chile Peru 4 2 0 US Source: Bloomberg 28
The dog that did not bark: absence of domestic crises in a region traditionally plagued by them Banking Crises in LAC Countries 1980-1985 1995-2000 2008-2009 Argentina 1980 Argentina 1995 Brazil 1985 Brazil 1995 Chile 1980 Colombia 1998 Colombia 1982 Ecuador 1996, 1998 Ecuador 1980 Honduras 1999 Mexico 1981 Jamaica 1996 Peru 1983 Nicaragua 2000 Uruguay 1981 Paraguay 1995 Peru 1999 The table shows the start year of banking crises. Source: Laeven and Valencia (2008) and Reinhart and Rogoff (2008) 29
Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Colombia, Venezuela, Ecuador and Mexico Uruguay Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 There is considerable heterogeneity in the pace of recovery across LAC countries 15% 10% 5% 0% Rebounding Industrial Production, YoY, 3 Months Moving Average Argentina Chile Brazil 20% 15% 10% 5% Still Falling Industrial Production, YoY, 3 Months Moving Average Peru -5% 0% -10% -5% -15% -10% -20% -15% 20% 15% Stabilized? Industrial Production, YoY, 3 Months Moving Average Colombia Uruguay 30% 25% 10% 5% 0% -5% Ecuador Mexico Venezuela 20% 15% 10% 5% 0% -10% -5% -15% -10% Source: Economist Intelligence Unit (EIU), GEM and IFS 30
The Caribbean is LAC s softest spot, where delayed effects of the global crisis are most troublesome 0.60% Changes in Forecasts: LAC Countries Comparison Between the Projections in May-09 and Oct-09 0.40% 0.20% 0.00% -0.20% -0.40% -0.60% -0.80% Change in 2009 Forecast Change in 2010 Forecast Caribbean: Potentially explosive combination of financial sector fragility and high indebtedness, interacting with smallness -1.00% Caribbean Central America Mexico South America Source: May-09 forecasts are from World Bank s GDF and Consensus Forecasts (Aug. 2009). Oct-09 forecasts are from IMF s WEO and REO, and Consensus Forecasts (Oct. 2009) 31
Ant. and Barb. St. Lucia Tri. and Tob. Grenada Carib. Average Jamaica Barbados LAC Average Bahamas St. K. and Nevis St. Vct. and the G. Dom. Rep. Dominica Haiti Ant. and Barb. Grenada Tri. and Tob. St. Lucia Jamaica St. K. and Nevis Carib. Average LAC Average St. Vct. and the G. Barbados Bahamas Dom. Rep. Haiti Dominica Caribbean: general deterioration in economic growth forecasts for 2009 and 2010 6% Changes in Forecasts: 2009 Real GDP Comparison Between the Projections in May-09 and Oct-09 4% 2% 0% -2% -4% -6% -8% -10% 2% 1% Changes in Forecasts: 2010 Real GDP Comparison Between the Projections in May-09 and Oct-09 0% -1% -2% -3% -4% -5% -6% Source: May-09 forecasts are from World Bank s GDF and Consensus Forecasts (Aug. 2009). Oct-09 forecasts are from IMF s WEO and REO, and Consensus Forecasts (Oct. 2009) 32
Looking Ahead: Haziness in the Global Horizon and Challenges for LAC Part 3
By and large, 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 34
% of GDP % of GDP Unlike rich countries, LAC comes out of the crisis with comfortable fiscal & public debt positions 3 Fiscal Balance 2-1 -5-1 -1-3 -3-1 -2-9 -13-17 -7-9 -9-10 -14 2007 2010 US Euro Japan UK OECD LAC-7 200 160 120 80 40 63 98 Gross Nominal Liabilities 200 2007 2010 167 100 89 89 71 74 47 33 35 0 US Euro Japan UK OECD LAC-7 Source: Economist Intelligence Unit (EIU) and Consensus Forecast (Sep. 2009) 35
But LAC prospects depend on world growth, where much haziness exist beyond the short run 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 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 might 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
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 World trade volume unlikely to grow fast for a while in a context of global rebalancing 170 World Trade Volume Seasonally Adjusted, Index 2000=100 165 160 155 Exports 150 145 Imports 140 135 130 125 120 Source: CPB (Netherlands Bureau for Economic Policy Analysis) 37
LAC-specific challenges and opportunities LAC can grow robustly while contributing to global rebalancing In the short-run, larger LAC countries will: 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) While keeping the course of social and macrofinancial improvements 38
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, 2007 4.5 Total GDP: 3.5 Total GDP: 3.7 Exports 24% Exports 39% 3.0 22% Investment 42% Investment 1.5 Consumption 77% Consumption 49% 0.0-23% Imports -30% Imports -1.5 Latin America China Source: World Bank s WDI 39
% of GDP while raising savings and investment rates to underpin a higher growth path 60% 50% Saving Savings and Investment Average Between 2006-2008 Investment 40% 30% 20% 10% 0% 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. 40
Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 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-00 May-00 Sep-00 Brazil: Real wage adjustment no longer via inflation 120 115 Brazil - Past Crisis Index Sep.1997 = 100 price index 110 105 100 95 90 real wage index 110 108 106 104 Brazil - Present Crisis Index Sep. 2008 = 100 price index 85 102 100 98 real wage index 96 94 92 90 Note: median wages in the industrial sector. Source: IPEA, IFS 41
Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 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. 1994 = 100 190 price index 170 150 130 110 90 real wage index 110 108 Mexico - Present Crisis Index Sep. 2008 = 100 70 106 104 price index 102 100 98 96 real wage index 94 92 90 Note: median wages in the industrial sector. Source: BanXico, IFS 42
Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Jan-99 May-99 Sep-99 Jan-00 May-00 Sep-00 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Uruguay: Real wage adjustment no longer via inflation Uruguay - Past Crisis Index Dec. 2001 = 100 140 price index 130 120 110 100 90 80 real wage index 110 108 Uruguay - Present Crisis Index Sep. 2008 = 100 real wage index 70 106 104 102 100 price index 98 96 94 92 90 Note: median wages. Source: INE, IFS 43
Thank you 44