Policy Trade-offs for Unprecedented Times - I Parte - Inter

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Transcript Policy Trade-offs for Unprecedented Times - I Parte - Inter

Coordinators
Alejandro Izquierdo, IADB Ernesto Talvi, CERES
Prepared for Presentation at the XXIX Meeting of the Latin American Network of
Central Banks and Finance Ministries, IADB, Washington DC, April 22nd, 2009.
OUTLINE
I. Latin America and the Global Crisis:
Predominant Views
II. Macro Dynamics in Latin America Under
Two Hypotheses on the Global Economy
III. Policy Trade-offs for Unprecedented
Times: A Liquidity Approach
LATIN AMERICA AND THE GLOBAL CRISIS:
PREDOMINANT VIEWS
 As a result of the global crisis Latin America
suffered a drastic deterioration in the external
environment:
External Factors: Industrial Countries Growth
(GDP; yoy and qoq saar)
2008
2009
08 Q3
United States
2.0%
2.1%
2.0%
1.5%
1.1%
1.0%
09 Q1
09 Q2
09 Q3
3.0%
2.5%
2.0%
1.5%
1.0%
1.0%
0.0%
May-08
Mar-09
08 Q4
4.0%
3.0%
0.0%
-2.0%
-1.0%
-4.0%
-2.0%
-6.0%
-0.5%
-2.0%
-2.5%
-3.0%
-5.0%
-6.2%
-8.0%
Source: JPMorgan
Current US Recession
Average US Post - WWII Recession*
(GDP, real terms)
(GDP, real terms)
102
100.1
May-08
Forecast
Peak
Peak
Trough
Trough
101
99.7
100
99.3
99
98
Current
Forecast
97
98.9
-1.6%
-3.5%
96
98.5
08.II
08.III
*Own calculations based on NBER dating.
08.IV
09.I
09.II
09.III
t
t+1
t+2
t+3
External Factors: Industrial Countries Growth
(GDP, real terms)
United States
102
Japan
102
Trough
Peak
May-08
Forecast
101
100
May-08
Forecast
98
100
99
96
Current
Forecast
Current
Forecast
94
98
97
96
92
-3.5%
08.II
08.III
-9.7%
08.IV
09.I
09.II
09.III
90
08.I 08.II 08.III 08.IV 09.I 09.II 09.III 09.IV
EU-15*
102
Trough
Peak
Peak
May-08
Forecast
Industrial Countries
Trough
103
Trough
Peak
102
101
101
100
May-08
Forecast
100
99
99
Current
Forecast
98
98
Current
Forecast
97
97
96
-3.9%
96
08.II
08.III
08.IV
09.I
09.II
09.III
09.IV
Source: JPMorgan
* EU-15 includes Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Malta, Netherlands, Portugal, Slovenia and Spain.
-4.3%
95
08.I
08.II
08.III 08.IV
09.I
09.II
09.III
External Factors: Commodity Prices
Metals
Oil
Food
(1991-1997 Average = 100)
(1991-1997 Average = 100)
750
US Financial
Crisis
(1991-1997 Average = 100)
US Financial
Crisis
190
725
177
650
US Financial
Crisis
340
313
310
170
280
Variation
Dec.01 – Jul.08:
+616%
Variation
Dec.01 – Jun.08:
+133%
150
250
450
Variation
Dec.01 – Mar.08:
+282%
220
373
130
123
350
-30%
-46%
190
123
-68%
110
160
250
158
91-97 Average
91-97 Average
100
91-97 Average
70
Source: IMF
2007
2006
2005
2004
2003
2008
2007
2006
2005
2004
2003
2002
70
2001
2008
2007
2006
2005
2004
2003
2002
2001
50
2002
150
130
90
2001
228
2008
550
External Factors: Terms of Trade
(LAC-7, Jun-97=100)
Beginning
of the Boom
Russian Crisis
175
US Financial Crisis
165
Annualized
Variation
155
145
1990-2006
2.0%
Dec.01 – Jun-08
9.5%
Variation
Jul.08-Dec.08:
-26%
Variation
Dec.01-Jun.08:
135
82%
125
115
105
95
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
85
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries
represent 91% of Latin America’s GDP.
External Factors:
International Financial Conditions
Corporate Bond Prices
Corporate Bond Spreads
(Latin CEMBI; 01-Jan-07 = 100)
(Latin CEMBI; Bond Price Equivalent*, 01-Jan-07 = 100)
105
Variation in bps
900
Jan-07 Jan.07May.08
100
800
95
CEMBI
221
Jun.08Mar.09
Total
06-Mar-09
516
603
824
87
700
600
90
500
% Variation
85
Jan.07May.08
Jun.08Mar.09
Total
-0.1
-.22.3
-.22.4
CEMBI
80
400
300
75
200
70
100
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
*Assumes a coupon of 11% and a 10Y maturity.
Jan-07
0
65
External Factors:
International Financial Conditions
Corporate Bonds: Maturity
Corporate Bonds: Issuance
(LAC-7, issuances with maturity less than 1 year, % of
total issuance)
(LAC-7, billions of USD)
45%
25
40.5%
40%
21.2
20
35%
30%
15
25%
20%
10
15%
10%
5
2.5
5%
LAC-7 is the simple sum of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries
represent 91% of Latin America’s GDP.
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
Mar-07
0%
0
External Factors:
International Financial Conditions
Sovereign Bond Prices
Sovereign Bond Spreads
(EMBI+, Latin EMBI and US AA Corporates; Bond Price
Equivalent*, 01-Jan-07 = 100)
(EMBI+ and Latin EMBI; Spreads, Basis Points)
105
1000
US AA
900
100
Jan-07
800
95
Variation in bps
Phase 1 Phase 2 Total 06-Mar-09
Latin EMBI
186
67
401
468
654
EMBI+
170
71
448
519
689
Latin EMBI
EMBI+
700
90
600
85
500
% Variation
Jan.07May.08
80
75
400
Jun.08Mar.09
Total
Latin EMBI
-1.0
-18.4
-19.2
EMBI+
.-0.6
-18.0
-18.4
0.5
-6.4
-5.9
AA
Latin
EMBI
300
200
70
EMBI+
100
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
*Assumes a coupon of 11% and a 10Y maturity.
Jan-07
0
65
External Factors:
International Financial Conditions
Sovereign Bonds: Maturity
Sovereign Bonds: Issuance
(LAC-7, issuances with maturity less than 1 year, % of
total issuance)
(LAC-7, billions of USD)
100
97.8
65%
63.3%
60%
90
55%
80
50%
45%
70
40%
60
56.6
35%
28.6%
30%
50
LAC-7 is the simple sum of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries
represent 91% of Latin America’s GDP.
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
20%
Jun-07
40
Mar-07
25%
LATIN AMERICA AND THE GLOBAL CRISIS:
PREDOMINANT VIEWS
 As a result of the global crisis Latin America
suffered a drastic deterioration in the external
environment
 However, Latin America has very strong
fundamentals to withstand the worsening of global
conditions…
Latin America:
Fiscal Balance and Public Debt
Fiscal Balance in Latin America
Public Debt in Latin America
(LAC-7; Overall Balance, % of GDP)
(LAC-7; Public Debt, % of GDP)
Beginning of
2000s Boom
Russian Crisis
2.0%
US Financial
Crisis
Russian Crisis
1.5%
1.5%
Beginning of
2000s Boom
52%
50%
1.0%
48%
0.5%
46%
0.0%
44%
-0.5%
42%
-1.0%
40%
-1.5%
38%
-2.0%
36%
-2.5%
34%
52%
50%
US
Financial
Crisis
35%
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
2007
2005
2003
2001
1999
1997
30%
1995
-3.5%
1993
32%
1991
-3.0%
33%
Latin America:
Banking Indicators
Non Performing Loans in Latin America
Loan Loss Provisions in Latin America
(LAC-7, Loan Loss Provisions to Non Performing Loans)
(LAC-7, % of Total Loans)
10
2.5
9.5
2.4
9
2.1
2.2
8
2.0
7
6.2
1.7
6
1.5
5
1.4
4.4
4
3.7
1.2
3.3
3
2.5
1.0
2
1
0.5
0
2002
2003
2004
2005
2006
2007
2002
2003
2004
Source: Bankscope
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
2005
2006
2007
Latin America:
International Liquidity Indicators
Liquidity Indicators in Latin America
International Reserves in Latin America
(LAC-7*, International Reserves to External Public Debt Amortizations in the
next twelve months plus Central Bank Short Term Liabilities)
(LAC-7, in billions of USD)
450
Russian
Crisis
Beginning of the
Boom
447
US Financial
Crisis
400
Beginning of the
Boom
Russian
Crisis
1.8
US Financial
Crisis
1.8
1.7
350
1.6
300
1.5
250
275
200
1.4
1.3
174
150
1.2
147
LAC-7 is the simple sum (*average) of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries
represent 91% of Latin America’s GDP.
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1.0
1993
2008
2007
2005
2006
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0.9
1994
0
1993
1.0
1992
50
1991
1.1
1990
100
Latin America:
Financial Dollarization
Public Debt Dollarization in Latin America
Credit Dollarization in Latin America
(LAC-7; Foreign Currency Debt, % of Total Debt)
(LAC-7; Bank Credit in Foreign Currency , % of Total Credit)
65%
65%
Beginning of
2000s Boom
Beginning of
2000s Boom
55%
50%
50%
60%
45%
55%
40%
50%
35%
30%
45%
25%
23%
40%
35%
35%
20%
15%
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
For bank credit figures, LAC-7 excludes Brazil, Colombia and Venezuela.
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
1994
10%
30%
Latin America:
Exchange Rate Flexibility
‘Fear of Floating’ Coefficient in Latin America*
(LAC-7**)
Central Bank’s Reaction Function
1.6
1.4
Rt = ρR Rt-1 +( 1 - ρR )[ψ1 πt + ψ2 yt + ψ3 Δst ]+ εtR
1.34
1.2
Fear of Floating
Coefficient
1
where:
0.8
Rt denotes the Central Bank policy interest rate
πt denotes the inflation rate
0.6
yt denotes output
0.4
st denotes the nominal effective exchange rate
0.28
0.10
pR captures the partial adjustment of the interest
rate to target
Industrial Countries***
ψ1 ,ψ2 , and ψ3 captures the monetary authorities
reaction to inflation, output and exchange rate
fluctuations respectively
0.2
0
Pre Asian/Russian
Crisis
Current
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
* Sturzenegger and Talvi (2008): “Unveiling Monetary Policy in Latin America”
**Excludes Venezuela
***Includes Australia, Canada, New Zealand, South Africa and United Kingdom
LATIN AMERICA AND THE GLOBAL CRISIS:
PREDOMINANT VIEWS
 As a result of the global crisis Latin America
suffered a drastic deterioration in the external
environment
However, Latin America has very strong
fundamentals to withstand the worsening of global
conditions…
…and thus better equipped to pursue
countercyclical monetary and fiscal policies to
mitigate the impact of adverse external shocks
Latin America:
Monetary and Fiscal Policy Response
Fiscal Stimulus Announcements
in Latin America
Monetary Policy
(LAC-7*, Interbank interest rate and Nominal
Exchange Rate, in % and Sep-15-08=100)
(% of GDP)
126
9.9%
ON - BUDGET
OFF – TOTAL
BUDGET
Revenue-side Expenditure-side
122
9.7%
118
114
9.3%
110
9.1%
Exchange Rate
Interest Rate
9.5%
Argentina
5.1
0.2
1.1
6.4
Brazil
0.3
0.1
3.3
3.6
Chile
1.0
1.1
0.7
2.8
Mexico
0.5
1.0
0.0
1.5
Peru
0.0
1.4
1.1
2.5
106
8.9%
Source: Credit Suisse
Exchange Rate
102
Interest Rate
8.7%
8.5%
98
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
*Excludes Argentina and Venezuela
Monetary and Fiscal Policy Response:
Russian Crisis vs. Current Crisis
Monetary Policy
Fiscal Policy
(LAC-7*, Interbank Interest Rate and Nominal
Exchange Rate, in % and Jul-98=100)
40%
118
38%
116
36%
114
0.0%
-0.5%
34%
112
32%
110
30%
108
28%
106
26%
104
Exchange Rate
24%
-1.0%
Exchange Rate
Interest Rate
Interest Rate
(LAC-7, Structural Fiscal Balance, % of GDP)
-1.2%
-1.5%
-2.0%
-2.5%
102
-3.0%
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
*Excludes Argentina and Venezuela
Sep-99
Jun-99
Mar-99
Dec-98
Sep-98
Jun-98
Sep-98
Mar-98
Aug-98
Dec-97
Jul-98
-3.5%
Sep-97
98
Jun-97
20%
Russian
Crisis
-3.2%
Mar-97
100
Dec-96
22%
LATIN AMERICA AND THE GLOBAL CRISIS:
PREDOMINANT VIEWS
However, Latin America has very strong
fundamentals to withstand the worsening of global
conditions…
…and thus better equipped to pursue
countercyclical monetary and fiscal policies to
mitigate the impact of adverse external shocks
 As a result, the recession in 2009 will be relatively
deep but short lived, the region will return to
positive growth in 2010…
Market Forecasts:
Economic Performance
(LAC-7; real GDP, annual variation)
7%
Russian Crisis
Forecasts*
Beginning of the
Current Boom
6%
03-06 Growth
Average: 5.6%
5%
Apr-08
Forecast
4.9 %
91-97 Growth Average : 4.6%
4%
Average
71-06: 3.4%
3.0 %
3%
2%
1%
98-02 Growth Average :
0.7%
0%
Current
Forecast
-1%
-0.9 %
US Financial Crisis
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
-2%
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
*Source: JPMorgan
LATIN AMERICA AND THE GLOBAL CRISIS:
PREDOMINANT VIEWS
However, Latin America has very strong
fundamentals to withstand the worsening of global
conditions…
…and thus better equipped to pursue
countercyclical monetary and fiscal policies to
mitigate the impact of adverse external shocks
 As a result, the recession in 2009 will be relatively
deep but short lived, the region will return to
positive growth in 2010…
…and liquidity crises and economic collapses, so
prevalent in the past, will be largely avoided
OUTLINE
I. Latin America and the Global Crisis:
Predominant Views
II. Macro Dynamics in Latin America Under
Two Hypotheses on the Global Economy
III. Policy Trade-offs for Unprecedented
Times: A Liquidity Approach
ROADMAP
 To assess the predominant views on the region in the
face of the global crisis, we proceed as follows:
i. Go beyond a snapshot of the region and see the
motion picture right to the end, tracing the macro
dynamics of a key set of variables under alternative
hypotheses on how the global recovery unfolds
ii. Develop a simple framework emphasizing liquidity
issues as a key element in evaluating the region’s
risks and policy trade-offs
Hypotheses on the Global Economy
Two Hypotheses on the Global
Economy
EXTERNAL FACTORS
International Financial
Conditions
Industrial Countries
Growth
Commodity
Prices
G7 Industrial Production
Global Commodity Price Index
(2006 = 100)
Sovereign Bond Spread
(2006 = 100)
(EMBI +, bps)
700
109
107
V-Shaped
L-Shaped
Mar-08
Jun-09
-4.3%
Sep-10
Mar-08
Jun-09
-4.3%
Dec-13
Peak
Trough
P-to-T
Recovery*
V-Shaped
Scenario
105
135
Peak
Trough
P-to-T
Recovery*
125
V-Shaped
L-Shaped
Jun-08
Jun-09
-47.3%
Sep-10
Jun-08
Jun-09
-47.3%
Dec-13
L-Shaped
Scenario
V-Shaped
Scenario
500
115
V-Shaped
Scenario
400
105
103
600
Pre- Asian Crisis Levels
Pre-Crisis Levels
95
101
L-Shaped
Scenario
99
Pre-Crisis Levels
300
200
85
L-Shaped
Scenario
75
97
2006 2007 2008 2009 2010 2011 2012 2013
L-Shaped
Jun-07
Jun-09
512
Sep-10
Jun-07
Jun-09
512 .
Dec-13
100
2006 2007 2008 2009 2010 2011 2012 2013
Source: Own calculations based on WEO and JPMorgan*, Oct-08.
Source: IMF and Bloomberg*
G7 is the PPP-weighted average of the Canada, France, Germany, Italy,
Japan, United States, UK
*Recovery to Dec-06 levels
*Recovery to pre-crisis levels of output
Trough
Peak
T-to-P
Recovery*
V-Shaped
2006 2007 2008 2009 2010 2011 2012 2013
Source: JPMorgan for Bond Spreads
*Recovery to Pre-Asian crisis levels
Economic Performance
Economic Fluctuations in Latin America:
The Role of External Factors*
(LAC-7; real GDP, annual growth rate)
External Factors
Growth in Industrial
Countries
10%
Tequila
Crisis
Asian / Russian
Crises
Dot-Com
Crisis
Beginning of the
Boom
8%
6%
Actual
4%
Commodity Prices
2%
0%
-2%
International Financial
Conditions
-4%
Fitted
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
-6%
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
*Izquierdo,
A., Romero, R. and Talvi, E. (2008): “Booms and Busts in Latin America: The Role of External Factors”, Working Paper 631, IADB Research Department
Economic Activity Under Two
Hypotheses on the Global Economy
Economic Activity
GDP Growth
(LAC-7 GDP, 2006 = 100)
(LAC-7, annual growth rate)
7%
125
120
V-Shaped
L-Shaped
Dec-08
Sep-09
-3.9%
Mar-11
Dec-08
Dec-10
-5.1%
Dec-13
6%
V-Shaped
Scenario
4%
Peak
Trough
P-to-T
Recovery*
115
2003-2007 Avg.: 5.8%
5%
1991-2007 Avg.: 3.3%
3%
Pre-Crisis Levels
V-Shaped
2009-13 Avg.: 1.9%
2%
110
1%
L-Shaped
2009-13 Avg.: 0.1%
L-Shaped
Scenario
105
0%
V-Shaped
Scenario
-1%
100
L-Shaped
Scenario
-2%
-3%
95
2006
2007
2008
2009
2010
2011
2012
2013
2006
2007
2008
2009
*Recovery to pre-crisis levels of output
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
2010
2011
2012
2013
ECONOMIC ACTIVITY UNDER TWO HYPOTHESES
ON THE GLOBAL ECONOMY
CONCLUSIONS
 Under both hypotheses, output performance for the
next five years will be mediocre at best and
substantially below the 6 percent average growth
rates of the previous boom (2003-2007)
 Moreover, in the L-shaped scenario the region could
experience negative growth in 2009 and 2010 and
average growth will be close to zero in the next five
years, indicating that Latin America should prepare
for tougher economic conditions in the years to come
Fiscal Position
Fiscal Position Under Two
Hypotheses on the Global Economy
Fiscal Revenues
Interest Payments
Primary Expenditure
(LAC-7, 2008 = 100)
(LAC-7, % of GDP)
(LAC-7, 2008 = 100)
105
V-Shaped
105
Peak
Trough
P-to-T
Recovery*
2008
2010
-7.2%
2012
L-Shaped
4.3%
2008
2011
-13.5%
n.a.
Trough
Peak
Δ T-to-P
Recovery*
105
V-Shaped
L-Shaped
2008
2012
0.4%
n.a.
2008
2013
1.8%
n.a.
4.1%
100
3.8%
101
100
V-Shaped
Scenario
L-Shaped
Scenario
3.3%
96
95
95
90
2.8%
93
2.6%
92
V-Shaped
Scenario
2.3%
86
87
2.3%
L-Shaped
Scenario
1.8%
2006
2007
2008 2009
2010 2011
85
2012
2013
80
2006
2007
2008
2009
2010
2011
2012
2013
2006
2007
*Recovery to pre-crisis levels of output
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
2008
2009
2010
2011
2012
2013
Fiscal Position Under Two
Hypotheses on the Global Economy
Fiscal Balance
Public Debt
(LAC-7, % of GDP)
2%
(LAC-7, % of GDP)
53%
1.6%
49%
1%
0.3%
48%
L-Shaped
Scenario
0%
43%
V-Shaped
Scenario
-1%
-2%
38%
V-Shaped
Scenario
-2.6%
34%
-3%
-3.7%
33%
L-Shaped
Scenario
-4%
-5.0%
28%
-5%
27%
-6%
23%
2006
2007
2008
2009
2010
2011
2012
2013
2006
2007
2008
2009
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
2010
2011
2012
2013
FISCAL POSITION UNDER TWO HYPOTHESES
ON THE GLOBAL ECONOMY
CONCLUSIONS
 Although the region starts from a strong fiscal position,
under the L-shaped scenario the combination of
declining economic activity, collapsing commodity prices
and rising financial costs, leads to a gradual, persistent
and potentially severe deterioration in the overall fiscal
position (even under very conservative assumptions on
primary expenditures)
 Fiscal deterioration results in an exponential dynamics of
public debt
Banking Indicators
Banking Indicators Under Two
Hypotheses on the Global Economy
Non Performing Loans
Loan Loss Provisions
(LAC-7, in % of Total Loans)
(LAC-7, Loan Loss Provisions to Non Performing Loans)
3.0
10%
Bank Capital Losses
V-Shaped L-Shaped
8.8%
9%
In %
2.4
2.5
5.9%
32.1%
8%
7%
2.0
L-Shaped
Scenario
6%
5%
4.3%
1.5
V-Shaped
Scenario
4%
1.1
1.0
3%
V-Shaped
Scenario
2.1%
2%
L-Shaped
Scenario
0.5
0.4
1%
0.0
0%
2006
2007
2008
2009
2010
2011
2012
2013
2006
2007
2008
2009
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
2010
2011
2012
2013
BANKING INDICATORS UNDER TWO HYPOTHESES
ON THE GLOBAL ECONOMY
CONCLUSIONS
 Although initial conditions of banks in the region are
sound, the decline in economic activity in the L-shaped
scenario could lead to a gradual and relatively large
deterioration in bank’s loan portfolios resulting in equally
large capital losses
Liquidity Indicators
Liquidity Indicators:
A Simple Analytical Framework
Liquidity Indicators
Definition
ILR t =
Debt Amortization Profile
B ST
t
Rt
B ST
t+1
where
ILRt = International Liquidity Ratio in t
Rt = International Reserves in t
BSTt+1 = Public Debt Amortizations in t+1
1
2
3
4
5
t
Liquidity Indicators:
A Simple Analytical Framework
ILR Dynamics
Debt Amortization Profile
Rt
B ST
t
B ST
t+1
ILR with no Financial
Precarization
0
1
2
3
4
1
t
2
3
4
5
6
t
Liquidity Indicators:
A Simple Analytical Framework
ILR Dynamics
Debt Amortization Profile
Rt
B ST
t
B ST
t+1
ILR with no Financial
Precarization
Precarization
Effect
ILR with Financial
Precarization
Precarization
Effect
0
1
2
3
4
t
1
2
3
4
5
t
Liquidity Indicators:
A Simple Analytical Framework
ILR Dynamics
Debt Amortization Profile
Rt
B ST
t
B ST
t+1
Precarization
Effect
Fiscal
Effect
Fiscal Effect
Precarization
Effect
0
1
2
3
4
t
1
2
3
4
5
t
Liquidity Indicators:
A Simple Analytical Framework
ILR Dynamics
Effective Level of Reserves (R’)
Rt
B ST
t+1

Degree of intervention in the FX market

Degree of liquidity assistance to the
corporate and banking sector

Willingness to use reserves for public debt
repayments
Precarization
Effect
R’t
B t+1
ST
Fiscal
Effect
Effective Level of
Reserves Effect
0
1
2
3
4
t
Liquidity Indicators:
A Simple Analytical Framework
ILR Dynamics
Determinants of ILR Dynamics
Rt
B ST
t+1
Precarization
Effect
R’t
B ST
t+1
Fiscal
Effect
Effective Level of
Reserves Effect
0
1
2
3
4
t

Initial level of public debt

‘Effective’ level of international reserves

Time profile of debt amortizations

Dynamics of fiscal deficit and public debt
(which will depend on the initial fiscal
deficit and the policy response)
Liquidity Indicators:
A Simple Analytical Framework
ILR Dynamics
Conclusions
Rt

B ST
t+1
The likelihood of a liquidity crisis as
determined by ILRs will depend on the
interaction between external factors (i.e.
duration of the global crisis) and
idiosyncratic factors (i.e. determinants of
ILRs dynamics)
Country 1

Not every country may hit a critical threshold
in the relevant period of the global crisis and
for those that do, they will not do so at the
same time. Liquidity crises, if they occur, will
be sequential rather than simultaneous

Liquidity problems may evolve gradually
but materialize suddenly when a critical
threshold is hit.
Country 2
Threshold
Liquidity Crisis
0
1
2
3
4
t
Liquidity Indicators Under Two
Hypotheses on the Global Economy
ILR Dynamics
(LAC-7, ILR2)
140%
Normal International
Financial Conditions
130%
120%
V-Shaped Scenario
110%
100%
L-Shaped Scenario
90%
80%
2008
2009
2010
2011
ILR 2t = Reservest / (Public Debt Amortizationst+1 + Short Term Private External Debt Amortizations)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
2012
LIQUIDITY INDICATORS UNDER TWO
HYPOTHESES ON THE GLOBAL ECONOMY
CONCLUSIONS
 Under the L-shaped scenario, liquidity ratios could
gradually evolve towards critical thresholds increasing
the likelihood of a liquidity crisis and a severe output
contraction
CLOSING REMARKS (I)
 Under a V-shaped global recovery, the dynamics of key
macro fundamentals, i.e., fiscal, banking and liquidity
indicators, suggest that the predominant views on the
region are largely correct
 Thus, the recessionary impact of the global crisis will be
inevitable, but liquidity crises and economic collapses will
be largely prevented
 However, a moderate perturbation from the V-shaped
scenario completely changes the region’s outlook
CLOSING REMARKS (II)
 Under an L-shaped scenario, there is a large and persistent
deterioration in key macro fundamentals, i.e., fiscal,
banking and liquidity indicators
 A key feature of this scenario is that the deterioration in
fundamentals is gradual and therefore problems may not
become evident until it is too late
 It is against this backdrop, of a potentially more fragile
scenario evolving through time, that proposals to pursue
active countercyclical fiscal policies must be evaluated
with care
CLOSING REMARKS (III)
 The challenge is thus to anticipate gathering problems
early on to act in a timely fashion, and to design a set of
policies that prevent countries from entering into
financially fragile territory that might expose them to a
liquidity crisis and a major economic collapse
 Precarious access to credit markets for many emerging
market governments calls for multilaterals to step in and
play a key role as a lenders-of-last resort, akin to the role
that credible governments, such as the US government,
play domestically
PRECARIOUS CREDIT MARKETS:
US VS EMs
Sovereign and Corporate Bonds in US
Sovereign and Corporate Bonds in LAC
(US 10y T-Bonds and US BBB Corporate, Yield in %)
(Latin EMBI and Latin CEMBI, Yield in %)
5.5
10.5
13
10.0
5.0
12
9.5
4.5
8.0
3.5
7.5
7.0
3.0
BBB
8.5
4.0
10
9
8
Latin
CEMBI
6.5
7
2.5
6.0
Latin EMBI
BBB
Source: Bloomberg
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
5.5
6
Jan-07
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
2.0
Jan-07
US 10Y
11
9.0
US 10Y
Support by Multilaterals: Alternative Strategies
(LAC-7, billions of dollars, 2009-2010)
ILR Dynamics Under Alternative Strategies
Strategy
Full
Support
Public Debt
Amortizations
402
Partial Fiscal Deficit
Support Financing Only
228
0
(LAC-7, L-Shaped Scenario, ILR2)
125%
115%
Domestic
350
194
0
110%
External
52
34
0
105%
236
236
236
Fiscal Deficit
Financing
Normal International
Financial Conditions
120%
Full Financing of Fiscal
Deficit and Partial
Financing of Debt
Amortizations
100%
95%
Passive Fiscal Deficit
198
198
198
90%
Geithner’s Proposal*
39
39
39
85%
Full Financing of
Fiscal Deficit and
No Financing of
Debt Amortizations
No Multilateral
Support
80%
Total Borrowing
Requirements
638
464
236
75%
2008
*Assuming full impact of the Keynesian multiplier on output and fiscal revenues.
2009
2010
2011
2012
ILR 2t = Reservest / (Public Debt Amortizationst+1 + Short Term Private External
Debt Amortizations)
LAC-7 is the sum of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
These countries represent 91% of Latin America’s GDP.
RECENT INICIATIVES:
POINTING IN THE RIGHT DIRECTION
 Increase in the lending capacity of multilaterals with
a focus on liquidity and crisis prevention
•
Increase in resources of the IMF (US$ 500 bn)
•
New SDR allocation (US$ 250 bn)
•
Provision of trade financing (US$ 250 bn)
 New (and more flexible) array of financial instruments
•
IMF new FCL and HAPA
 Recognition of the complementary role of the IMF
and MDBs
•
Recapitalization of MDBs
Coordinators
Alejandro Izquierdo, IADB Ernesto Talvi, CERES
Prepared for Presentation at the XXIX Meeting of the Latin American Network of
Central Banks and Finance Ministries, IADB, Washington DC, April 22nd, 2009.