Transcript Latin America

BROOKINGS
LATIN- AMERICA ECONOMIC
PERSPECTIVES
Mauricio Cárdenas and Eduardo Levy-Yeyati
Outline
1. Common Threads
2. Country Vignettes
–
–
–
–
–
Argentina: Exhausting margins
Brazil: Growing tensions
Colombia: Success without exuberance
Mexico: Unsettled maturity
Venezuela: Recession or implosion?
3. Class Rankings
Outline
1. Common Threads
2. Country Vignettes
–
–
–
–
–
Argentina: Exhausting margins
Brazil: Growing tensions
Colombia: Success without exuberance
Mexico: Unsettled maturity
Venezuela: Recession or implosion?
3. Class Rankings
Rapidly narrowing output gaps
8
6
4
Percent
2
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
-2
-4
-6
-8
-10
-12
Brazil
Chile
Colombia
Mexico
Note: Cyclical output based on the log-linear de-trending. Source: Own
construction based on Central Bank bulletins and the Economist Intelligence
Unit.
Peru
Uruguay
2009
2010f
Reflect limits to non-inflationary growth
Growth decomposition 2000--2007
80%
70%
60%
47.8%
Percents
50%
40%
30%
Human Capital
Physical Capital
Labor Force/Population
TFP
20%
14.9%
7.2%
6.4%
5.5%
1.8%
2.9%
5.1%
2.4%
2.8%
4.7%
2.9%
3.3%
LAC-7 minus Venezuela
plus Uruguay
Rest of LAC
Emerging Asia (w/o
China)
10%
0%
3.4%
Notes: PCE: Peripheral core economies (Australia, Canada, New Zealand,
Norway, Sweden).
Source: own calculations based on data from Blyde, Daude and FernándezArias (2009).
6.7%
23.5%
5.6%
6.3%
1.2%
3.3%
PCE
China
Global Growth: Reduced Speed Ahead
300
16%
14%
12%
10%
200
8%
6%
150
4%
2%
100
0%
-2%
50
-4%
0
-6%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
ToT LAC7 (1999=100)
TOT Other LAC (1999=100)
China GDP (% real change pa)
G7 GDP (% real change pa)
Note: LAC-7: Argentina, Brazil, Chile, Colombia, Mexico, Peru ,and Venezuela.
Other LAC: Costa Rica, Dominican Republic, Ecuador and El Salvador.
Source: Own calculation based on data from the Economist Intelligence Unit.
Real GDP growth (%)
Terms of Trade index 1999=100
250
Cautious monetary unwinding is underway…
Inflation (%)
Monetary policy interest
rate (%)
23
9
8
7
18
6
13
4
Percent
3
8
2
1
3
0
-1
2005
2006
2007
2008
2009
2010
Brazil
Chile
Colombia
Mexico
Peru
United States
2011
Uruguay
Source: International Monetary Fund, World Economic
Outlook; Central Bank bulletins and Economist Intelligence
Unit.
-2
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
Jan-10
Apr-10
Jul-10
2010f
Percent
5
Brasil
Chile
Colombia
Mexico
Peru
US
...while fiscal stimulus is still on
The cyclically-adjusted fiscal primary
surplus
LAC cyclically-adjusted fiscal surplus
and cyclical output
Note: Estimated as the intercept from a regression of the primary surplus on
cyclical output, where the latter is obtained from the log-linear de-trending of
real GDP. Countries include Argentina, Brazil, Chile, Colombia, Mexico, Peru
and Venezuela. Source: Own construction based on Economist Intelligence
Unit.
Hello, global equity funds
Source: own calculations based on EPFR.
Percent
Percent
Shares in total flows
1991M01
1991M06
1991M11
1992M04
1992M09
1993M02
1993M07
1993M12
1994M05
1994M10
1995M03
1995M08
1996M01
1996M06
1996M11
1997M04
1997M09
1998M02
1998M07
1998M12
1999M05
1999M10
2000M03
2000M08
2001M01
2001M06
2001M11
2002M04
2002M09
2003M02
2003M07
2003M12
2004M05
2004M10
2005M03
2005M08
2006M01
2006M06
2006M11
2007M04
2007M09
2008M02
2008M07
2008M12
2009M05
2009M10
2010M03
2010M08
2005=100
Stronger currencies, for now…
180
160
140
120
100
80
60
40
Argentina
Brazil
Source: World Bank’s Global Economic Monitor.
Chile
Colombia
Mexico
Peru
What to do?
• Avoid over-appreciation as part of the countercyclical response…
– …as opposed to undervaluation as a development tool.
• Arguments for smoothing-out exchange rates:
– Portfolio capital has never applied for permanent
residence
– QE2 in developed countries is not sustainable in the
medium term
– Current accounts are expected to deteriorate in LAC
• Ultimately, reasonably priced currencies and
limited external deficits are the best protection
against procyclical flows
What to do?
• Save for the rainy days
– The region saved in the early 2000s to gain
reputation, and spend during the crisis: Will it
unwind now that reputation has been built?
• Reserves as a form of countercyclical saving
– Sterilized interventions generate quasi fiscal
losses…but the reversion of the exchange rate
during a dollar squeeze recoups valuation losses...
– …and lower spreads and investment of reserves in
longer-term, higher yielding instruments should
reduce carrying costs.
Outline
1. Common Threads
2. Country Vignettes
–
–
–
–
–
Argentina: Exhausting margins
Brazil: Growing tensions
Colombia: Success without exuberance
Mexico: Unsettled maturity
Venezuela: Recession or implosion?
3. Class Rankings
Argentina’s confidence may drag down growth
momentum
100
90
80
70
60
50
40
30
20
10
Real Index
Financial Index
Confidence Index
Source: Own calculations based on International Labor Organization, World
Bank’s GEM; The Economist Intelligence Unit ; Deloitte Argentina and
Universidad Torcuato di Tella-Finance Research Center.
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
0
Argentina: Agony of the twin surpluses
Current account and trade
balance
% GDP
% GDP
Primary fiscal surplus (%
GDP)
Note: Adjusted primary surplus excludes from the official figures the central
bank´s quasi fiscal surplus, FGS profits and SDR issuance. Consolidated
adds to the official figures the contributions to the social security system
allocated to private pension funds prior to the 2008 renationalization. Source:
Ministry of Economics, Central Bank of Argentina and INDEC.
Argentina’s inflationary growth: what to expect?
• Low real interest rates (+ lack of investment
instruments)  Real estate and durables consumption
boom
• Expansionary fiscal spending (+ wage indexation) 
Growing (and latent) inflation
• No policy change until the end-2011 election  Political
dilemmas
– Who will switch to a non-inflationary slower growth path?
– How much time can a renewed access to capital markets buy for
a smooth transition to sustainable growth?
• Binomial scenario
– Reelection: Smooth ride into a slow descent
– New administration: Near term risks and significant upsides
Brazil: Confidence offsets financial downturn
100
90
80
70
60
50
40
30
20
10
Real Index
Financial Index
Confidence Index
Source: Own calculations based on International Labor Organization, World
Bank’s GEM; The Economist Intelligence Unit and OECD.
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
0
Brazil’s policy imperatives
1. Macroeconomic stability
2. Social progress (expansion of the middle
class)
3. Active industrial policies (e.g., BNDES)
Is this sustainable?
–
–
–
–
Taxes are already high
Low hanging social fruit already collected
Development banks will begin to deal with NPLs
Public investment is extremely low
Brazil: reduction in inequality is noteworthy….
0.64
0.634
0.63
0.62
0.615
0.612
Gini coefficient
0.61
0.602
0.601
0.60
0.59
0.595
0.595
0.594
0.596
0.599
0.589
0.588
0.58
0.599
0.600 0.600
0.598
0.593
0.587
0.592
0.587
0.581
0.580
0.581
0.57
0.569
0.56
0.566
0.559
0.552
0.55
0.54
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
Year
Source: Barros, R., de Carvalho, M. , Franco, S., and Mendonça, R. (2010).
1997
1999
2001
2003
2005
2007
% GDP
..and so is the very low public investment
Brazil
Public
Private
Source: J.R. Afonso (2010) "O Nó dos Investimentos Públicos no Brasil“
based on data from the IMF’s WEO.
Brazil’s low non-inflationary growth: what to do?
• High real interest rates  Subsidies to long-term
financing (BNDES)  Weak monetary transmission 
High interest rates.
• Low public (and corporate) investment.
• Alternative equilibrium  Redirect BNDES resources to
infrastructure  Increase potential growth and create
room for lower real interest rates.
Colombia: Consistency without exuberance
120
100
80
60
40
20
Real Index
Financial
confidence Index
Source: Own calculations based on International Labor Organization, World
Bank’s GEM; The Economist Intelligence Unit and Fedesarrollo.
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
0
Colombia’s main downside: Venezuela
Colombia’s exports to Venezuela up until July, 2010
7000
90%
Millons of US$ FOB
6000
70%
50%
5000
30%
4000
10%
3000
-10%
-30%
2000
-50%
1000
-70%
-79%
0
-90%
2005
2006
2007
Exports to Venezuela (left axis)
Source: Fedesarrollo, original source DANE.
2008
2009
GDP Growth % (right axis)
2010
Countercyclical policy during the crisis rose
public debt
Public debt % GDP- Central Government (net of
financial assets)
42%
41%
40%
39%
38%
37%
36%
35%
34%
33%
2005
Source: Fedesarrollo.
2006
2007
2008
2009
2010*
Budget Balance (% GDP)- Chile, Colombia and
Peru
10
8
6
4
2
0
-2
2005
2006
2007
2008
-4
-6
Chile
Source: The Economist Intelligence Unit
Colombia
Peru
2009
2010
Source: Own construction based on Fedesarrollo.
Business Confidence
Consumer Confidence
Mar-10
Dec-09
Sep-09
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
Dec-06
Sep-06
Jun-06
Mar-06
Dec-05
Sep-05
Jun-05
Mar-05
Dec-04
Sep-04
Jun-04
Mar-04
Dec-03
Sep-03
Jun-03
Mar-03
Dec-02
Sep-02
Jun-02
Mar-02
Dec-01
Sep-01
Jun-01
Consumer and business confidence
100
90
80
70
60
50
40
30
20
10
0
Colombia’s encouraging medium-term outlook
• Continuity has been the trademark of macroeconomic
and security policies.
• Growth:
– Expected to reach 5% in 2011 and remain at same level for next
4-5 years.
– Main growth engine: investment rates are particularly high:
25% GDP
– Major constraint to growth: Infrastructure new administration
is focusing on closing the gap.
• Venezuela is a key market for Colombia, and conditions
there remain very unpredictable Colombia’s main
downside.
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
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
Jan-10
Apr-10
Mexico’s real sector index is unsustainably high
100
90
80
70
60
50
40
30
20
10
0
Real Index
Financial Index
Source: Own calculations based on International Labor Organization, World
Bank’s GEM; The Economist Intelligence Unit and OECD.
Confidence Index
Source: Own calculations OECD.
Business Confidence
Consumer Confidence
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Historically low consumer confidence
120
100
80
60
40
20
0
Mexico: unsettled maturity
• Subpar economic growth average per capita growth
1.6% (1990-2008); 1.3% (1990s); compared with 3.6% in
Chile.
• Exhaustion of the Cantarell oil field 25% decline in oil
production between the peak level in 2004 and mid2009.
– Reluctance of offset fiscal loss with additional taxation.
• Sectors opened to competition (manufactures, finance,
retail, and housing) have experienced much faster
growth than sectors where competition has been
restrained (telecommunications and energy).
Real Index
Source: Own calculations based on International Labor Organization and
World Bank’s GEM.
Financial
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
Jan-04
Sep-03
May-03
Jan-03
Sep-02
May-02
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Venezuela’s new equilibrium?
120
100
80
60
40
20
0
Mar-00
Jun-00
Sep-00
Dec-00
Mar-01
Jun-01
Sep-01
Dec-01
Mar-02
Jun-02
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
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
Sep-09
Dec-09
Mar-10
U.S. current dollars
Venezuela: chasing capital out
20000
15000
10000
5000
0
-5000
-10000
-15000
-20000
Official Reserves
FDI
Portfolio
Current Account
Source: International Monetary Fund’s International Financial Statistics.
Capital Account +Financial Account
Venezuela: Recession or implosion?
50
40
20
10
0
-10
-20
-30
I
II
III
IV
I
II
2007 (*)
Private consumption (yoy growth %)
Source: Banco Central de Venezuela.
III
2008 (*)
IV
I
II
III
2009 (*)
Total investment (yoy growth %)
IV
I
II
2010 (*)
Exports (yoy growth %)
Growth (%)
30
What’s next in Venezuela?
• Radicalization vs. Moderation: Past experience
suggests that Chavez is more dogmatic than
pragmatic, so hard-line seems more likely.
• This means more nationalizations (which now
are confiscations) and interference in key
markets and sectors.
• A currency depreciation seems unavoidable to
provide government additional fiscal firepower.
• Private sector will not react positively.
• Optimism regarding 2012 elections, tamed by
tumultuous uncertainty in the next two years.
Regional repercussions
• Venezuela’s economy will not recover, affecting
growth prospects in Colombia.
• Moderate fiscal and monetary unwinding in
Colombia, relative to Chile and Peru.
• Additional pressures from the private sector in
Colombia for policies that restrain the appreciation
of the currency.
• Problems in Venezuela will affect Petrocaribe’s
support to Central American and Caribbean
countries, exacerbating problems in many of them,
including Cuba.
Outline
1. Common Threads
2. Country Vignettes
–
–
–
–
–
Argentina: Exhausting margins
Brazil: Growing tensions
Colombia: Success without exuberance
Mexico: Unsettled maturity
Venezuela: Recession or implosion?
3. Class Rankings
A way to measure progress towards development
Variables used in the rankings:
Real GDP growth
Inflation, average CPI (%)
Cyclically adjusted fiscal balance (%GDP)
Net external debt (%GDP)
Net external financing needs/CAR (%)
Public sector external debt (%GDP)
Emerging market bond spreads (bp)
Gini coefficient (%)
Human development index
Composite world governance indicator
Stable Growth
Policy Track Record
Financial
vulnerabilities
Development
factors
6
60
5
50
4
40
3
30
2
20
1
10
0
Taiwan
Singapore
Developed (avg)
Malaysia
China
Korea
Peru
Thailand
Israel
Czech Republic
Chile
Lithuania
Poland
Estonia
Philippines
India
Colombia
South Africa
Hungary
Bulgaria
Latvia
Brazil
Mexico
Egypt
Uruguay
Vietnam
Indonesia
Argentina
Ukraine
Venezuela
Romania
Russia
Turkey
Ecuador
Vietnam
China
Egypt
India
Indonesia
Philippines
Poland
Korea
South Africa
Malaysia
Developed (avg)
Thailand
Peru
Brazil
Chile
Singapore
Bulgaria
Israel
Taiwan
Russia
Czech Republic
Colombia
Romania
Ecuador
Hungary
Lithuania
Estonia
Mexico
Ukraine
Turkey
Latvia
Argentina
Uruguay
Venezuela
Graduation scorecard: Core program
Risk adjusted GDP
Risk adjusted CPI
0
Notes: Risk adjusted GDP is constructed as the mean of the real GDP
growth (1999-2009)/standard deviation real GDP growth (1999-2009);
Risk adjusted CPI is constructed as the mean of the CPI inflation rate
(1999-2009)/standard deviation of the CPI inflation rate (1999-2009)
Source: The Economist Intelligence Unit and IMF World Economic
Outlook Data Base, April 2010.
-4
-1.5
-5
-2
5
4
2
1
0.5
0
0
-1
-3
Singapore
Chile
Estonia
Czech Republic
Hungary
Taiwan
Korea
Lithuania
Uruguay
Latvia
Poland
Israel
Malaysia
Bulgaria
Romania
Brazil
Turkey
Mexico
India
Argentina
Thailand
Peru
Colombia
Ukraine
China
Philippines
Indonesia
Egypt
Vietnam
Russia
Ecuador
Venezuela
South Africa
Developed (avg)
Russia
Bulgaria
Chile
Brazil
Argentina
Colombia
Peru
Turkey
Israel
Estonia
Mexico
Taiwan
Philippines
Singapore
Uruguay
Poland
South Africa
Indonesia
Thailand
Hungary
Korea
Ukraine
Lithuania
China
Latvia
Egypt
Vietnam
Romania
Czech Republic
India
Ecuador
Malaysia
Venezuela
Graduation scorecard: the hard sciences
Cyclically adjusted fiscal
balance (%GDP)
World Governance
Indicators
2
3
1.5
1
-2
-0.5
-1
Notes: Cyclically adjusted fiscal balance estimated as the intercept from a
regression of the primary surplus on cyclical output, where the latter is
obtained from the log-linear de-trending of real GDP. The Economist
Intelligence Unit and Kaufmann, Kraay and Mastruzzi (2009).
Governance Matters VIII
Graduation scorecard: Final report
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
Sources: The Economist Intelligence Unit; IMF World Economic Outlook,
April 2010; Bank of International Settlements; Moody's; World Bank Global
Economic Monitor and World Development Indicators; Human
Development Report 2009; Kaufmann, D., Kraay, A., Mastruzzi, M. (2009)
Governance Matters VIII.
Venezuela
Ecuador
Latvia
Romania
Ukraine
Lithuania
Turkey
South Africa
Russia
Hungary
Argentina
Colombia
Philippines
Estonia
Uruguay
Indonesia
Mexico
Czech Republic
Bulgaria
India
Egypt
Vietnam
Peru
Thailand
Poland
Malaysia
Brazil
Israel
Korea
China
Chile
Taiwan
Singapore
0.0
BROOKINGS
LATIN- AMERICA ECONOMIC
PERSPECTIVES
Mauricio Cárdenas and Eduardo Levy-Yeyati
Assessing the recovery: Where are we now?
PCA analysis based on 8 variables
(all monthly, yoy growth, 2000:01-2010:07)
Employment
Real Index
Import volume
Industrial production volume
GDP (quarterly)
Financial Index
Equity prices
Emerging market bond spreads (bp)
Business confidence surveys (balances)
Consumer confidence surveys (balances) Confidence Index