Transcript (I) + (II)

LatinMacroWatch
Special Analysis
LMW: the Big Picture on a Small Screen
A new RES feature
8-7-02
LAC-7 Outlook:
The Specter of Capital Flight
August 7, 2002
Prepared for Presentation at IADB Board of Directors,
Washington, DC
KEY QUESTIONS
What’s behind the current sharp growth
slowdown in the region? Is there evidence of
Contagion? What kind?
Are the G-7 shooting in the right direction?
Should Moral Hazard be their main concern?
 How likely is it for the region to enter a new
“lost decade”?
What is likely to happen in Brazil?
What should IDB do?
3
OUTLINE
I.
Capital Flight and Macroeconomic
Performance
II. The Specter of Capital Flight
III. Vulnerabilities to Capital Flight: Recent
Experiences of Argentina, Uruguay and Brazil
IV. Summary and the Role of the IADB
LAC-7 Business Cycle: 1997-2002
(s.a. GDP, mean annualized quarterly growth rate)
9%
Deceleration
7%
Recession
Recovery
Stalling
5%
3%
1%
-1%
-3%
Includes: Argentina Brazil, Chile, Colombia, Mexico, Peru and Venezuela
2002.I
2001.III
2001. I
2000.III
2000.I
1999.III
1999.I
1998.III
1998.I
1997.I
-7%
1997.III
-5%
LAC-7 Components of Demand
(1998.II = 100)
Recession
130
Stalling
Recovery
Exports
120
Consumption
110
100
Investment
90
80
Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru
2002.I
2001.IV
2001.III
2001.II
2001. I
2000.IV
2000.III
2000.II
2000.I
1999.IV
1999.III
1999.II
1999.I
1998.IV
1998.III
1998.II
70
LAC-7 Capital Flows
(4 quarters, millions of US dollars and % of GDP )
120000
6%
100000
5%
% of GDP
80000
4%
Millions of US dollars
60000
3%
Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
2002-I
2001-III
2001-I
2000-III
2000-I
1999-III
0%
1999-I
0
1998-III
1%
1998-I
20000
1997-III
2%
1997-I
40000
LAC-7 Non-FDI Capital Flows
(4 quarters, millions of US dollars and % of GDP )
60000
2%
% of GDP
40000
1%
20000
0%
Millions of US dollars
Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
2002-I
2001-III
2001-I
2000-III
-4%
2000-I
-60000
1999-III
-3%
1999-I
-40000
1998-III
-2%
1998-I
-20000
1997-III
-1%
1997-I
0
LAC-7 Business Cycle and Capital Flows
2%
1%
Non FDI Capital Flows
0%
-1%
GDP
-2%
-3%
Mar-02
Sep-01
Mar-01
Sep-00
Mar-00
Sep-99
Mar-99
Sep-98
Mar-98
Sep-97
Mar-97
Sep-96
-4%
Non FDI Capital Flows (% GDP)
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
Mar-96
GDP (yoy % change)
(GDP and Non FDI Capital Flows, last four quarters)
OUTLINE
I.
Capital Flight and Macroeconomic
Performance
II. The Specter of Capital Flight
III. Vulnerabilities to Capital Flight: Recent
Experiences of Argentina, Uruguay and Brazil
IV. Summary and the Role of the IADB
Net Private Capital Flows to LAC
(Billions of real US dollars of May 2002, deflated by US CPI)
100
80
60
40
20
0
Source: WEO, IMF
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
-20
Net Direct Investment to LAC
(Billions of real US dollars of May 2002, deflated by US CPI)
70
60
50
40
30
20
10
Source: WEO, IMF
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
0
Financial Flows to LAC
(Billions of real US dollars of May 2002, deflated by US CPI)
100
80
60
40
20
0
-20
-40
Financial Flows= Net Portfolio Investment + Othe Ner Investment
Source: WEO, IMF
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
-60
Cumulative Total Private Capital Flows to LAC
(Billions of real US dollars of May 2002, deflated by US CPI)
1974-1981
1982-1989
80
500
450
60
400
40
350
300
20
250
0
200
150
-20
100
-40
50
0
-60
Financial
Flows
Source: WEO, IMF
FDI
Total Private
Flows
Financial
Flows
FDI
Total Private
Flows
Cumulative Total Private Capital Flows to LAC
(Billions of real US dollars of May 2002, deflated by US CPI)
1990-1998
600
1999-2001
250
200
500
150
400
100
300
50
200
0
100
-50
0
-100
Financial
Flows
Source: WEO, IMF
FDI
Total Private
Flows
Financial
Flows
FDI
Total Private
Flows
Cumulative Total Private Capital Flows to LAC:
1990-2001
(Billions of real US dollars of May 2002, deflated by US CPI)
700
600
500
400
300
200
100
0
Financial Flows
Source: WEO, IMF
FDI
Total Private Flows
Cumulative Total Private Capital Flows to Asia
(Billions of real US dollars of May 2002, deflated by US CPI)
1989-1997
600
1998-1999
150
100
500
50
400
0
300
-50
200
-100
100
-150
0
-200
Financial
Flows
Source: WEO, IMF
FDI
Total Private
Flows
Financial
Flows
FDI
Total Private
Flows
OUTLINE
I.
Capital Flight and Macroeconomic
Performance
II. The Specter of Capital Flight
III. Vulnerabilities to Capital Flight: Recent
Experiences of Argentina, Uruguay and Brazil
IV. Summary and the Role of the IADB
Exposure of the Public Sector to Capital Flight
(Public Debt in % of GDP)
65%
In US$
55%
In domestic currency
45%
35%
25%
15%
5%
Uruguay
Argentina
Pre- Capital Flight levels
Brazil
Chile
Current levels
Exposure of the Private Sector to Capital Flight
(Share of foreign currency loans to the non financial private sector)
80%
70%
60%
50%
40%
30%
20%
10%
0%
Argentina
Uruguay
Pre- Capital Flight levels
Brazil
Chile
Current levels
Exposure of the Financial System to the
Public Sector
Credit to the public sector in % of total assets
30%
25%
20%
15%
10%
5%
0%
Brazil
Current level
Argentina
Uruguay
Pre- Capital Flight level
Chile
Current level
Vulnerability to Capital Flight: A Summary
Argentina
Brazil
Uruguay
Chile
Public Debt to GDP
Financial mismatches of
the Public Sector
Financial Mismatches of
the Private Sector
Banking System Exposure
to the Public Sector
= High
vulnerability
= Medium
vulnerability
= Low
vulnerability
BRAZIL
Exchange Rate and Country Risk
2400
3.1
2.9
2.7
2.5
1400
1200
2.3
1000
800
2.1
EMBI+ spread
7/2/02
5/2/02
3/2/02
1/2/02
11/2/01
9/2/01
7/2/01
5/2/01
1.9
3/2/01
600
R$ per dollar
nominal exchange rate
1800
1600
1/2/01
basis points
2200
2000
May-02
Mar-02
Ene-02
Nov-01
Sep-01
Jul-01
May-01
Mar-01
Ene-01
Nov-00
Sep-00
Jul-00
May-00
Mar-00
Ene-00
Public Debt
(% of GDP)
61
Level: US$ 263.8 billion (58.6% of GDP)
59
57
55
53
51
49
47
45
Public Debt Structure
June 2002
Fixed
Rate
7%
External or FX
indexed Public Debt
Others
9%
Indexed to the
Interest Rate
44%
40%
Banks’ Exposure to the Public Sector
Public Bond Holdings
350%
300%
250%
200%
150%
100%
50%
0%
In % of Banks’ Assets
In % of Banks’ Net Worth
Fiscal Sustainability
April 2002
Public Debt
(% of GDP)
54.5%
Primary Balance
Interest Rate
10.9%
Growth Rate
3.5%
Required
3.9%
Observed
3.4%
Adjustment = 0.5%
Public Debt Dynamics
Public Debt
(% of GDP)
April 2002
Interest
Rate
Growth
Rate
54.5%
10.9%
3.5%
3.9%
57.2%
10.9%
3.5%
+0.2%
Primary Balance that
stabilizes Debt
Fiscal Impact of:
10% real
depreciation
Public Debt Dynamics
Public Debt
(% of GDP)
Interest
Rate
Growth
Rate
54.5%
10.9%
3.5%
3.9%
10% real
depreciation
57.2%
10.9%
3.5%
+0.2%
1% increase in the
domestic interest
rate
54.5%
11.4%
3.5%
+0.3%
April 2002
Primary Balance that
stabilizes Debt
Fiscal Impact of:
Public Debt Dynamics
Public Debt
(% of GDP)
Interest
Rate
Growth
Rate
54.5%
10.9%
3.5%
3.9%
10% real
depreciation
57.2%
10.9%
3.5%
+0.2%
1% increase in the
domestic interest
rate
54.5%
11.4%
3.5%
+0.3%
1% reduction in the
growth rate
54.5%
10.9%
2.5%
+0.6%
April 2002
Primary Balance that
stabilizes Debt
Fiscal Impact of:
Liquidity Requirements of the Public Sector
(Millions of US dollars)
July 02 - Dec 02
July 02 - June 03
I. FISCAL DEFICIT (est.)
11,535
20,787
II. PUBLIC DEBT AMORTIZATIONS
46,768
88,861
41,005
5,763
75,282
13,580
III. (I) + (II)
58,303
109,649
IV. MONETARY BASE
19,000
19,000
77,303
128,649
Domestic Debt
External Debt
V. POTENTIAL LIQUIDITY REQUIREMENTS: (III) + (IV)
Liquid International Resources of the Public Sector
(Millions of US dollars)
I. International Reserves (end June without IMF loan)
32,000
II. IMF Credit Line
10,000
III. Total Available Liquid Funds ( I+II)
42,000
In % of July02-Dec02 Liquidity Req.
54%
In % of July02-May03 Liquidity Req.
33%
Note: Under the IMF agreement there is an agreed floor for reserves of US$ 15
billion.
50000
2001-IV
2001-III
2001-II
2001-I
2000-IV
2000-III
2000-II
2000-I
1999-IV
1999-III
1999-II
1999-I
1998-IV
1998-III
1998-II
1998-I
1997-IV
Total Gross Private External Debt
In millions of US$
170000
150000
130000
110000
90000
70000
Liquidity Requirements of the Private Sector
(Millions of US dollars)
July 02 - Dec 02
July 02 - June 03
EXTERNAL DEBT AMORTIZATIONS
16,370
28,309
Medium and Long Term
9,694
14,957
Short Term
6,676
13,352
Capital flight and financial collapse can generate:

severe productive disruptions

political instability

social unrest
… and these conditions may validate the initial
flight. Furthermore the disruptive effects of the
flight of financial capital can frighten FDI and
thereby multiply its effects.
OUTLINE
I.
Capital Flight and Macroeconomic
Performance
II. The Specter of Capital Flight
III. Vulnerabilities to Capital Flight: Recent
Experiences of Argentina, Uruguay and Brazil
IV. Summary and the Role of the IADB
SUMMARY
There are clear signs of Capital Flight since the 1998
Russian Crisis.
Economic Contagion is not obvious, although the
whole region is suffering from higher spreads.
The depth and spread of crises in region may be
rooted in
G-7 Pontious Pilate approach to financial crisis
in EMs, caused by fear of a Moral Hazard
epidemic.
Political cycle and backward-looking politicians
who fail to see the enormous rebound potential of
the region.
Financial vulnerabilities
38
ROLE OF THE IADB
Help to convey the regional view about the
cause of, and remedies for, the current crises-partly to counteract the Moral Hazard obsession:
it is time for the IADB to move forward from
the end of the line, and make its voice heard
and heeded at the planning stage!
Design social programs that help prevent social
unrest, a serious deterrent for FDI (the main
source of international finance in the region).
Design social programs to ameliorate the impact
of crises on poverty.
Enhance competitiveness programs and
support of FTAA negotiations.
39
LAC-7 Outlook:
The Specter of Capital Flight
August 7, 2002
Prepared for Presentation at IADB Board of Directors,
Washington, DC
LatinMacroWatch
Special Analysis
LMW: the Big Picture on a Small Screen
A new RES feature
8-7-02