Transcript La Regulación y el Desarrollo de Los Mercados de Capitales en

Global Financial Crisis and Recession:
How will Latin America Perform?
LILIANA ROJAS-SUÁREZ
October 2008
Four Major Features of the Crisis with Potential
Impact on Latin America
1. It is Now a Full-Blown Credit Crisis
• The crisis has spread from a sub-prime mortgage crisis to an
overall credit crisis, involving consumer and corporate loans.
• The US$ 1,600 billion commercial paper market has shrunk
severely as money market funds have curtailed lending to both
banks and companies.
TED Spreads, Treasury Bill and Libor (%)
5
4.5
4
3.5
T-bill (3 mo.)
3
Libor (3 mo.)
2.5
TED Spread
2
1.5
1
0.5
0
Jan-08
Apr-08
Jul-08
Oct-08
Source: JP Morgan
The “TED” spread, a measure of credit risk for interbank
lending has increased sharply in the last six weeks.
Four Major Features of the Crisis with Potential
Impact on Latin America
2. The Crisis has Gone Global
Market Capitalization ($bn)
HSBC (UK)
Santander (Spain)
UniCredit (Italy)
Intesa Sanpaolo (Italy)
BNP Paribas (France)
BBVA (Spain)
UBS (Switzerland)
Société Générale (France)
Barclays (UK)
0
Source: Thomson Datastream
20
40
60
80 100 120 140 160 180 200 220
Jan-07
Sep-08
and is affecting European financial systems severely.
Four Major Features of the Crisis with Potential
Impact on Latin America
2. The Crisis has Gone Global
… and so have the rescue packages.
Some Examples:
Liquidity Injections by Central Banks
• Reductions in interests rates (most recently in a coordinated fashion: USEurope-China)
• Provision of liquidity: US, Japan, Australia, UK
• Federal Reserve Term Auction Facility (TAF): banks could borrow against a
wider range of assets used as collateral
Four Major Features of the Crisis with Potential
Impact on Latin America
2. The Crisis has Gone Global
Public Sector Bailouts and Guarantees
• Fannie Mae / Freddie Mac, with the US becoming a stakeholder (US$ 200
billion)
• IAG rescue (US$ 85 billion 2-year credit line – US$ 38 billion on October 9)
• TARP (Troubled Asset Relief Program) US$ 700 billion plan
• US deposit insurance expanded limits; Ireland blanket guarantee of deposits,
covered bonds, subordinated debt
• Fortis partly taken over by governments of Belgium, Netherlands and
Luxemburg
• Emergency Funds. Ex: Spain’s offer to buy assets from banks (40-70 billion
dollars)
• Banks recapitalization in the UK (60-80 billion dollars)
Change in Market Structure
• US investment banks not longer allowed to be independent institutions (without
a commercial bank)
Four Major Features of the Crisis with Potential
Impact on Latin America
3. The Financial Crisis has Expanded into the Real
Sector
Real GDP Growth (%) - quarter on quarter
4
3
2
1
0
-1
-2
-3
-4
08Q1
08Q2
08Q3
08Q4
Source: National sources and market projections
09Q1
09Q2
Euroland
09Q3
09Q4
Japan
US
The Credit Crunch is now squeezing corporates’
and consumers’ financing availability and a
recession is forecasted in the industrialized world.
Four Major Features of the Crisis with Potential
Impact on Latin America
3. The Financial Crisis has Expanded into the Real Sector
In previous downturns, consumption has saved the day, offsetting declines in investment.
GDP, Consumption and Investment Growth (%) quarter on quarter
35
25
Forecast
15
5
-5
-15
08Q4
08Q3
-25
1998
1999
2000
2001
2002
2003
2004
Source: Bureau of Economic Analysis and Market Forecasts
2005
2006
Consumption
2007
2008
Investment
NOT THIS TIME. Consumers have been hit by a triple whammy:
• Decline in the value of their houses (wealth effect)
• Decline in the value of their savings (through the stock market; other wealth effect)
• Increased unemployment
Since consumption accounts for about 70 percent of GDP, the recession will be
deeper than in other recent episodes.
Four Major Features of the Crisis with Potential
Impact on Latin America
3. The Financial Crisis has Expanded into the Real
Sector
Contribution of Net Exports to Real GDP
Growth (%)
3
2.5
2
1.5
1
0.5
0
-0.5
-1
-1.5
-2
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Bureau of Economic Analysis
• Net exports have been the driver of growth recently and will continue
to do so, but at a slower pace in the face of a decreased global
activity.
• However, the recession will only be over when the consumer
recovers.
Four Major Features of the Crisis with Potential
Impact on Latin America
4. The Depth and Length of the Crisis is Uncertain
And this is due to a number of reasons:
• Industrial country authorities have taken too long in
recognizing that this is a systemic crisis that needs a
comprehensive (and global) resolution plan, rather than a
case-by-case approach.
• The only way to solve a systemic crisis is to use public
funds for the recapitalization of institutions assessed as
solvent in the long run.
• Political interference has prevented the approval of
“clean” fiscal packages for “recapitalization-purposes
only”. The problems with TARP (tranches, added tax
exceptions, purchase of assets rather than
recapitalization) is the best example.
How will Latin America Perform?
Main Message:
In spite of significant improvements
in macroeconomic management over
the last few years, Latin America will
be strongly affected by the crisis.
And:
• Together with Eastern Europe, Latin America will be the region of
the developing world with the slowest rate of growth (although
positive) in 2009.
• The effects of the crisis will be felt in “stages”.
• There will be important differences among countries in the region.
But:
• Policy reaction in some countries, although insufficient, is helping
to ameliorate the adverse impact of the crisis.
• Although important concerns in the social/political areas are reemerging.
How will Latin America Perform?
As a region, Latin America growth will be strongly
affected.
Real GDP Growth (%)
12
10
8
6
4
2
0
Developing Asia
Source: WEO-IMF.
Africa
Commonwealth
of Independent
States
2006
Middle East
2007
2008
Central and
Eastern Europe
Latin America
and The
Caribbean
2009
Although at this time, no recession is expected, the
significant slowdown reflects the impact of the
crisis on some large countries in the region.
How will Latin America Perform?
Real GDP Growth (% )
10
9
8
7
6
2007
5
2008F
4
2009F
3
2
1
0
Argentina
Source: WEO-IMF
•
•
Brazil
Chile
Colombia
Mexico
Peru
Venezuela
Growth will slowdown in all countries in the region.
While the external shock is the common factor,
idiosyncratic vulnerabilities (to be discussed later on)
explain differences in performance. For example, while
Argentina’s growth will sharply decline by almost 6
percentage points in the period 2007-2009, Chile is
forecasted to decline only 1.5 percentage points in the
same period.
How will Latin America Perform?
The Effects of the Crisis is being Felt in overlapping stages
Stage 1: First started.
At this time, the global credit crunch is mainly affecting financial
variables:
•
Increased risk aversion has resulted in a “flight to quality” by
global investors that is affecting the emerging markets asset class.
US High Yield and EMBI+ Spreads (Jan2005=100)
280
260
240
220
200
180
160
140
120
100
80
60
40
20
Jan-05
JP Morgan US HY Spread
EMBI+ Asia
EMBI+ Eastern Europe
EMBI+ Latin America
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Source: JP Morgan
Perceptions of risk as reflected in the EMBI+ is affecting all emerging
markets, with Asia being the least affected.
How will Latin America Perform?
Stage 1:
EMBI+ Spreads in Latin America (Jul2005=100)
300
260
Argentina
220
180
Colombia
140
Mexico
100
60
20
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Source: JP Morgan
EMBI+ Spreads in Latin America (Jul2005=100)
300
260
Brazil
220
Ecuador
180
140
Peru
100
Venezuela
60
20
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Source: JP Morgan
And the deteriorated perceptions of risk is affecting all Latin American
countries but especially those with more restrictions to the capital
account: Argentina and Venezuela.
How will Latin America Perform?
Stage 1:
In terms of local stock markets, all emerging market regions have been
affected (this is the market where international arbitrage occurs the
fastest).
MSCI Emerging Markets Index and US S&P 500
(Jan2007=100)
180
Start Sub-prime Crisis
160
MSCI Emerging Asia
140
MSCI Eastern Europe
120
MSCI Latin America
US S&P 500
100
80
60
40
Jan-07 Mar-07 May-07
Jul-07
Sep-07 Nov-07 Jan-08 Mar-08 May-08
Jul-08
Sep-08
Source: Bloomberg
•
Eastern Europe has experienced the largest percentage decline since
the beginning of the sub-prime crisis (51%). In the last four months,
the decline in Latin America has accelerated.
How will Latin America Perform?
Stage 1:
Stocks Exchange Indexes in Latin America
(Jan2007=100)
140
200
Stocks Exchange Indexes in Latin America
(Jan2007=100)
Start Sub-prime Crisis
Start Sub-prime Crisis
130
180
120
160
110
140
100
120
90
100
80
80
70
60
60
Jan-07
May-07
Source: Securities
Exchanges
Sep-07
Argentina MERVAL
Jan-08
Chile IGPA
May-08
Mexico IPC
Sep-08
Venezuela IBC
Jan-07
May-07
Source: Securities Exchanges
Sep-07
Brazil BOVESPA
Jan-08
May-08
Colombia IGBC
Sep-08
Peru IGBVL
The local equity markets most affected have been: Argentina, Brazil,
Mexico and Peru.
•
•
•
In Brazil and Mexico, foreign investors are the largest investor base for local
equities (in Mexico they account for about 50 percent of market capitalization).
In Peru, foreigners account for about 90% of overall trading; but market liquidity
is extremely concentrated: 3 stocks (Southern Copper, Buenaventura and
Credicorp account for more than 95% of the overall volume).
In Argentina, where local investors totally dominate, concentration in Energy and
weakening fundamentals are at play.
How will Latin America Perform?
Stage 1:
The increase in risk perceptions and the associated decline in capital
inflows to the region is also being reflected in depreciation of the
local currencies against the US dollar.
Exchange Rate in Argentina
(ARS per USD)
Exchange Rate in Brasil
(BRL per USD)
3.25
2.5
3.2
2.3
3.15
625
600
575
550
525
500
475
450
425
400
2.1
3.1
1.9
3.05
1.7
3
2.95
1.5
2.9
1.3
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
Source: JP Morgan
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
Source: JP Morgan
Exchange Rate in Colombia
(COP per USD)
Exchange Rate in Chile
(CLP per USD)
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
Source: JP Morgan
Exchange Rate in Mexico
(MXN per USD)
Exchange Rate in Peru
(PEN per USD)
2800
13
2600
12.5
2400
12
2200
11.5
3.1
2000
11
2.9
1800
10.5
1600
10
1400
9.5
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
Source: JP Morgan
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
Source: JP Morgan
3.5
3.3
2.7
2.5
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
Source: JP Morgan
How will Latin America Perform?
Stage 2: Overlapping with Stage 1, it will Deepen through
year-end and through 2009
Global deleveraging implies that there will be less net
capital flows to meet the financing needs of the region.
•
All types of capital flows: bank loans, portfolio flows, FDI and
remittances have started to decrease.
For example: Syndicated net lending to banks from emerging
markets is entering into negative territory.
Quarterly Net Syndicated Loans (US$bn)
20
15
10
5
0
-5
2005
Source: Deutsche Bank
2006
2007
2008
How will Latin America Perform?
Stage 2:
For Latin America as a whole, external financing needs, as
reflected by the overall current account balances are not
large, but deteriorating.
Source: WEO-IMF
While in much better position than Eastern Europe, Latin
America is not as financially strong as Emerging Asia.
How will Latin America Perform?
Stage 2:
But aggregates disguise significant differences between Latin
American countries.
Short-term External Debt / International Reserves (%)
Country
Argentina
Brazil
Chile
Colombia
Ecuador
Mexico
Peru
Venezuela
2007
85.33
21.57
66.08
26.39
59.89
45.08
20.97
27.29
2008
85.32
23.96
40.93
25.44
32.10
38.29
26.89
28.85
Source: Central Banks and Market Forecasts
Although in contrast to previous periods of external shocks,
accumulation of international reserves can easily cover
payments on short-term external debt in all countries…
How will Latin America Perform?
Stage 2:
Current Acount Balance (% GDP)
10
8
6
2007
4
2008F
2
2009F
0
-2
-4
Argentina
Brazil
Chile
Colombia Ecuador
Mexico
Peru
Venezuela
Source: WEO-IMF
…Vulnerabilities remain in countries with twin deficits: current account
and fiscal balances (actual and forecasted): Colombia, followed by
Brazil and Mexico.
Ex: Brazil is facing problems in the roll-over of credit lines –largely
trade finance--. Interest rates have increased and maturity has
declined.
How will Latin America Perform?
Stage 2:
In the current environment, current account deficits are
extremely dangerous since even FDI, the most important
source of external finance in Latin America tends to be
pro-cyclical in the face of global slowdowns.
Foreign Direct Investment
(as % of GDP)
23%
18%
13%
8%
3%
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
Source: IFS - IMF.
1992
1991
1990
-2%
In the 2001 US recession, global FDI dropped sharply.
How will Latin America Perform?
Stage 2:
Overall Fiscal Balance (% GDP)
10
8
6
4
2007
2
2008F
0
2009F
-2
-4
Argentina
Brazil
Chile
Colombia Mexico
Peru
Venezuela
Source: Market Forecasts
In Colombia, Brazil and Mexico, overall fiscal deficits are
fueling the current account imbalance, calling for prompt
fiscal adjustments, if the effects of the global credit crunch
is to be minimized.
How will Latin America Perform?
Stage 2:
As reflected in the EMBI+ spreads, Argentina and Venezuela,
countries with very high, and increasing, rates of inflation
are facing a deteriorated perception of risk, even in the
context of significant reserve accumulation.
Inflation (%)
40
35
30
25
2007
20
2008F
15
2009F
10
5
0
Argentina
Brazil
Chile
Colombia Ecuador
Source: WEO-IMF and Market Forecasts
Mexico
Peru
Venezuela
How will Latin America Perform?
Stage 3: Overlapping with Stages 1 and 2, but perhaps with
longer-term duration (due to lags)
The global recession implies a decrease in aggregate demand
for goods and services exported by the region. This might
affect both volumes and prices.
Global Real GDP and Merchandise Export Volume
(Annual % change)
15
10
5
0
-5
1980
1982
1984
Source: WEO - IMF.
1986
1988
1990
1992
Real GDP
1994
1996
1998
2000
2002
2004
2006
2008 2009
Merchandise Export Volume
Export growth has suffered the most in periods of slowdowns.
The decline in the growth of export volume is already
forecasted.
How will Latin America Perform?
Stage 3:
Although the continuous growth of China will help to mitigate the
impact of reduced aggregate demand from industrial countries, the
price of some important commodities are forecasted to decline.
140
650
130
550
120
450
110
350
100
90
250
80
150
Jan-01
Jan-02
Source: FED and CRB.
•
•
Jan-03
Jan-04
Jan-05
Dollar Index
Jan-06
Jan-07
CRB Index
Dollar Index
Nominal Dollar Broad Index (traded weighted) and
CRB Commodities Index
Jan-08
CRB Index
There is an inverse correlation between the value of the dollar and
the prices of commodities.
The recent “flight to quality” has increased the demand for USTreasury bills and reduced the demand for many commodities.
How will Latin America Perform?
Stage 3:
Oil Prices: Spots and Futures
160
Futures
140
USD per barrel
120
100
80
60
40
20
0
2002
2003
Source: IFS-IMF and NYMEX
•
•
2004
2005
2006
2007
Spot
2008
2009
2010
Future Oct-08
Particularly important is the decline in the price of oil.
However, future markets call for an oil price still well
above the levels of 2005. This is partly because there is an
expectation of a production cut by OPEC.
Forecasts on oil prices, however, tend to not be very
accurate.
How will Latin America Perform?
Stage 3:
Prices of non-oil commodities such as copper, silver and food
commodities are also expected to decline further.
Soybean Meal Prices: Spots and Futures
Copper prices: Spots and Futures
9200
600
500
7200
6200
5200
4200
Futures
3200
2200
1200
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: IFS-IMF and LME
USD per metric ton
USD per metric ton
8200
400
300
200
Futures
100
0
2002
2003
2004
Source: IFS-IMF and CBOT.
2005
2006
2007
2008
2009
2010
How will Latin America Perform?
Stage 3:
The clear exception is gold, which together with US-Treasury
bills is demanded as a save haven.
Gold prices: Spots and Futures
1200
USD per troy ounce
1000
800
600
Futures
400
200
2002
2003
2004
Source: IFS-IMF and NYMEX
2005
2006
2007
2008
2009
2010
How will Latin America Perform?
Stage 3:
•
•
But the external developments and the current economic
stance only tell part of the story.
There are two additional factors:
On the positive side:
A number of countries are implementing some policies to deal with a
more adverse environment. Examples:
• In Brazil, the Central Bank is lowering reserves requirements for
banks that purchase loans from small financial entities, and
providing liquidity through dollar repos.
• In Mexico, the Central Bank is auctioning up to 400 million
dollars daily every time that the peso depreciates at least 2% in a
day.
• Most other Latin American countries are also providing dollar
liquidity.
How will Latin America Perform?
On the negative side:
• More action is needed on the fiscal side, including
incorporating the new commodity prices in the budget.
• As fiscal tightening is needed, social programs need to be
protected to avoid political disruptions associated with
lower growth.
• Anti-market forces led by the Venezuelan government run
the risk to spread even further over the region in the
context of slower growth.
• Political crises, such as the one just started in Peru (a good
performer, in terms of economic fundamentals) might fuel
credit concerns about the region.
In a nutshell:
• The crisis will adversely affect the region as a
whole.
• Macroeconomic disequilibria built up over several
years, like very high inflation, is affecting the
creditworthiness of Venezuela and Argentina.
• Countries with twin-deficits: Brazil, Colombia and
Mexico need prompt fiscal adjustments to mitigate
the adverse effect of the global credit crunch.
• Social programs need to be protected in the region
to avoid political disruptions.