Transcript Comments on “Policy Trade-offs for Unprecedented Times”

Comments on
“Policy Trade-offs for
Unprecedented Times”
Mauricio Cardenas, Senior Fellow and Director, Latin America Initiative
Brookings Institution
April 22, 2009
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Comments
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Very good report
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It makes two major key points:
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Problems in LAC are only about to begin
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Policymakers should worry more about a sustained recovery
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Structures analysis around a fundamental concept (ILR)
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Challenges complacency
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But reaches excessively pessimistic conclusions
I will make 8 points
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Point 1: LAC governments should not bet on a V-shaped recovery
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Point 1: LAC governments should not bet on a V-shaped recovery
And according to the latest IMF’s
projection, there are severe downside
risks to LAC’s GDP growth:
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2009 GDP Projections
2009 GDP Growth Projections
RGE April 2009
JP Morgan March 2009
WEO April 2009
Argentina
-1.8%
-3.0%
-1.5%
Brazil
-1.4%
-1.4%
-1.3%
Chile
-0.4%
-1.5%
0.1%
Colombia
-0.7%
0.5%
0.0%
Mexico
-4.6%
-4.0%
-3.7%
Peru
2.8%
3.5%
3.5%
Venezuela
-2.0%
-0.5%
-2.2%
Latin America
-2.1%
-2.2%
-1.5%
Sources: IMF, WEO, April 2009, JP Morgan, and RGE Monitor.
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Point 2: Reserves are at record highs and external debt at record lows
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Point 3: Fiscal accounts have worsened, but not too much.
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Point 4. This crisis started differently, but now looks familiar
Source: IMF, WEO, April 2009
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The paper’s key contribution: Focus on Precarization and Liquidity
International Liquidity Ratio
(+)
International Reserves
(-)
All public sector maturing debt (domestic and
external)
(-)
Stock of sterilization instruments
(-)
Short term external liabilities of the private sector
Determinants:
Initial debt levels, effective level of reserves, debt maturities,
future fiscal deficits
Missing: Current accounts, FDI, and new lending.
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Point 5. A note of optimism on new issues and FDI
Balance of Payments Financing: Latin America and
the Caribbean
(Percent of GDP)
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Private direct investment
Other private
Net financing flows
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Private portfolio
Official flows
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4
4
2
2
0
0
-2
-2
3Total
of equity, syndicated loans,
and international bond issuances.
-4
-4
1990 92
Source: IMF, WEO, April 2009
94
96
98
00
02
04
06
08
10
12
14
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Point 6. Nonfinancial Firms are not excessively leveraged, and banks
are making significant profits
Source: IMF, WEO, April 2009
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Point 7. Assumptions and Results
The maturity structure of public debt is assumed to deteriorate,
but:
“On April 14, Colombia sold $1 billion worth of sovereign bonds
(offering of additional 2019 bonds with a yield of 7.375
percent)
On April 21, Peru offered up to 200 million soles ($65 million) in soldenominated sovereign bonds on the local market. The bonds
will be a reopening of the outstanding Aug. 12, 2031 bond.
Brazil issued a sovereign bond in January worth $1.025 billion. The
bond, due in 2019, came with an interest coupon of 5.875% for
an effective yield of 6.127%. The government may reopen its
Global 2019 overseas bond later this year.”
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Point 7. Assumptions and Results (cont.)
The paper says: “A general implication that emerges from these
scenarios is that in the absence of policies, in some cases
liquidity ratios could arguably reach dangerous thresholds that
could lead to a crisis.”
The question is what is that dangerous threshold. We start at
200%. When should we begin to worry (adjust)? Now?
ILR’s seem to be doomed to fall:
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Automatic fiscal stabilizers
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Fiscal stimulus measures
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Financial precarization
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Monetary expansion
So, determining the reasonable level is crucial
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Point 8. Conclusion
Measure the impact of ILR’s on key economic variables
(financial and real).
A reduction in the ILR is desirable (the purpose of having
reserves)
The question is how much?