Transcript Confronting the Global Crisis in Latin America

Alejandro Izquierdo
Inter-American Development Bank
EMDB Meeting on Debt Issues
Policy Trade-offs for Unprecedented
Times:
Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
July
8, 2009
OUTLINE
I. Latin America and the Global Crisis:
Initial Resilience
II. Macro Dynamics in Latin America Under
Two Hypotheses on the Global Economy
III. Policy Trade-offs and Policy Proposals:
A Liquidity Approach
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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:
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
External Factors: Industrial Countries Growth
(GDP, real terms)
United States
Japan
102
102
May-08
Forecast
Peak
Trough
Trough
Peak
100
101
May-08
Forecast
98
100
Current
Forecast
96
99
Current
Forecast
98
94
97
92
-8,4%
-3,4%
96
08.II
08.III
08.IV
09.I
09.II
09.III
90
08.I
EU-15*
102
Peak
May-08
Forecast
08.III
08.IV
09.I
09.II
09.III
Industrial Countries
Trough
103
102
101
Trough
Peak
101
100
100
99
Current
Forecast
98
98
96
97
-4,8%
94
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.
May-08
Forecast
99
97
95
08.II
Current
Forecast
96
-4,3%
95
08.II
08.III
08.IV
09.I
09.II
09.III
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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
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
Source: IMF
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
2008
550
The End of the Panglossian Period:
International Financial Conditions
Corporate Bond Spreads
Corporate Bonds: Issuance
(Latin CEMBI; 01-Jan-07 = 100)
(LAC-7, billions of USD)
25
Variation in bps
900
Jan-07 Jan.07May.08
800
CEMBI
221
Jun.08Mar.09
Total
06-Mar-09
516
603
824
87
21.2
20
700
600
15
500
400
10
300
200
5
2.5
100
0
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-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
0
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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
Jan-07
0
65
*Assumes a coupon of 11% and a 10Y maturity.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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
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%
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.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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’s fundamentals were strong
enough to withstand (at least initially) the worsening
of global conditions…
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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%
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%
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.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Latin America:
International Liquidity Indicators
International Reserves in Latin America
(LAC-7, in billions of USD)
450
Russian
Crisis
Beginning of the
Boom
447
US Financial
Crisis
400
350
300
250
275
200
174
150
147
100
50
2008
2007
2005
2006
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
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.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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%
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%
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.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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’s fundamentals were strong
enough to withstand (at least initially) the worsening
of global conditions…
…and, thus, the region was better equipped to
pursue countercyclical monetary and fiscal
policies to mitigate the impact of adverse external
shocks
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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%
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%
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
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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
 Predominant views: The recession in 2009 will be
relatively deep but short lived, the region will return
to positive growth in 2010…
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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%
2.7 %
2%
1%
98-02 Growth Average :
0.7%
0%
Current
Forecast
-1%
US Financial Crisis
2010
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
2009
-1.9 %
-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
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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
 Predominant views: 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
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Impact of Distension of the Financial Crisis
in the US on Key External Factors for LAC
External Factors
World Growth
International Financial
Conditions
Commodity Prices
Manufacturing PMI*
Commodity Prices
(difussion Index, Over 50= expansion)
(S&P GSCI Commodity Index, 03-Jan-07 = 100)
Phase 1
Phase
3
Phase 2
65
60
Phase 1
Spreads
Phase
3
Phase 2
200
(EMBI+, Latin EMBI Spread in basis points)
76
Germany
800
160
Variaction in bps
Phase 1 Phase 2 Phase 3
-71%
700
50
Phase
3
Phase 2
900
180
55
Phase 1
1000
140
Latin EMBI
67
469
-193
EMBI+
71
448
-205
600
45
120
500
40
100
USA
400
35
80
30
60
Latin
EMBI
28
300
EMBI+
22
200
26%
* Purchasing Managers Index
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Abr-09
Ene-09
Oct-08
Jul-08
Abr-08
Ene-08
Oct-07
Jul-07
Abr-07
100
Ene-07
May-09
Mar-09
Ene-09
Nov-08
Sep-08
Jul-08
May-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Ene-07
Ene-09
Mar-09
Nov-08
Sep-08
Jul-08
May-08
Ene-08
Mar-08
Nov-07
Sep-07
May-07
Jul-07
Mar-07
Ene-07
40
Mar-08
25
Ene-08
Japan
Catastrophic scenarios seem to have been
ruled out as distension continues, making
scenarios covered in our report more
relevant.
But: Will recovery be quick (as initially
predicted by markets) or will it be more
protracted (as experience on financial
crisis would tell)?
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
OUTLINE
I. Latin America and the Global Crisis:
Initial Resilience
II. Macro Dynamics in Latin America Under
Two Hypotheses on the Global Economy
III. Policy Trade-offs and Policy Proposals:
A Liquidity Approach
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
ROADMAP
 To assess the predominant view 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 macrodynamics 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
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Hypotheses on the Global Economy
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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
Trough
Peak
T-to-P
Recovery*
V-Shaped
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
2006 2007 2008 2009 2010 2011 2012 2013
Source: JPMorgan for Bond Spreads
*Recovery to Pre-Asian crisis levels
*Recovery to pre-crisis levels of output
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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
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”, IADB and CERES Working Paper
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
-6%
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
2008
2009
2010
2011
2012
*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.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
2013
Fiscal Position Under Two Hypotheses on the
Global Economy: Are Debt Dynamics Sustainable?
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
2010
2011
2012
2013
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.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Liquidity Indicators
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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

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)
4
t
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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
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. Therefore, problems may
not be evident until it is too late
Country 2
Threshold
Liquidity Crisis
0
1
2
3
4
t
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Liquidity Indicators Under Two
Hypotheses on the Global Economy
ILR Dynamics: Precarization and Fiscal Effects
(LAC-7)
Normal International
Financial Conditions
200%
180%
160%
140%
V - Shaped Scenario
120%
100%
L - Shaped Scenario
80%
60%
Sudden Stop
40%
20%
0%
2009
2010
2011
2012
2013
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Liquidity Indicators Under Two
Hypotheses on the Global Economy
ILR Dynamics Under V-Shaped Scenario
ILR Dynamics Under L-Shaped Scenario
(LAC-7)
(LAC-7)
190%
180%
180%
170%
170%
160%
160%
150%
ILR 1
150%
130%
130%
120%
110%
100%
100%
90%
90%
80%
2010
2011
ILR 1
110%
ILR 2
2009
ILR Dynamics are
before IMF flexible
credit line
140%
140%
120%
Key to consider:
2012
2013
ILR 2
2009
2010
2011
2012
2013
ILR 1t = Reservest / Public Debt Amortizationst+1
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.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
MACRO DYNAMICS IN LATIN AMERICA UNDER
TWO HYPOTHESES ON THE GLOBAL ECONOMY
CONCLUSIONS
 Under a V-shaped global recovery, the dynamics of key macro
fundamentals suggest that the predominant views on the region
are largely correct
 Under 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
 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 crucial 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
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
OUTLINE
I. Latin America and the Global Crisis:
Initial Resilience
II. Macro Dynamics in Latin America Under
Two Hypotheses on the Global Economy
III. Policy Trade-offs and Policy Proposals:
A Liquidity Approach
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
Confronting the Global Crisis in Latin
America: Policy Trade Offs
EXPANSIONARY FISCAL POLICY
Mitigate
Recessionary
Pressures
Weaken Liquidity
Position
Trade - Off
ILR
GDP
GDP with
expansionary policy
and no liquidity crisis
ILR with
no policy
GDP with
no policy
ILR with
expansionary
policy
Threshold
Threshold
GDP with
expansionary policy
and liquidity crisis
-1
0
1
2
0
3
t
1
2
3
4
t
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
POLICY PRINCIPLES:
MAIN GOALS
 Anticipate gathering problems early on to act in a
timely fashion
 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
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
POLICY PRINCIPLES:
CONSTRAINTS
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
8.5
4.0
8.0
3.5
7.5
7.0
3.0
BBB
US 10Y
11
9.0
US 10Y
10
9
8
Latin
CEMBI
6.5
7
2.5
6.0
Latin EMBI
BBB
Source: Bloomberg
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
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
Jan-07
2.0
POLICY PROPOSALS
THE ROLE OF MULTILATERALS
 Precarious access to credit markets for many emerging
market governments calls for multilaterals to step in and
play a key role as a lenders (and borrowers)-of-last
resort, akin to the role that credible governments, such
as the US government, play domestically
 The question then is not whether multilaterals should
play a key role in the current crisis, but which is the most
effective way to channel their intervention and at what
financial cost
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
POLICY PRINCIPLES
1. Strengthen the role of multilateral institutions. Multilateral support
will be vital under precarious access to credit markets.
2. Move away from short-term financing. Multilaterals should avoid
short-term emergency financing and only consider medium to
long-term financing in order to partially “complete” markets in
terms of maturities.
3. Redefine the emphasis of multilateral support. Multilaterals
should not only provide medium to long-term financing for fiscal
stimulus –when fiscal sustainability is not at stake– but more
importantly, they should provide liquidity for refinancing of
maturing debt obligations.
4. Ensure that countries work towards sustainable fiscal policy while
strengthening social protection. Multilateral support should be
complemented with incentive-compatible conditionality, to ensure
fiscal sustainability and strengthen social protection.
Policy Trade-offs for Unprecedented Times: Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
FULL REPORT AVAILABLE AT:
http://www.iadb.org/res/pub_desc.cfm?pub_id=B-635
Alejandro Izquierdo,
Inter-American Development Bank
EMDB Meeting on Debt Issues
Policy Trade-offs for Unprecedented
Times:
Confronting the Global Crisis in Latin America, IADB, 2009 (A. Izquierdo & E. Talvi, coordinators)
July
8, 2009