11
Latin-America confronts market turmoilLatin-America confronts market turmoil and does well…so far and does well…so far
Claudio M. Loser Claudio M. Loser Inter-American Dialogue/Centennial LAInter-American Dialogue/Centennial LA
XXVI Meeting of Latin American Network XXVI Meeting of Latin American Network of Central Banks and Finance Ministriesof Central Banks and Finance Ministries
IADB-October 16-17, 2007IADB-October 16-17, 2007
22
Economic Growth in LA has recovered in Economic Growth in LA has recovered in recent years. However, it has lagged behind recent years. However, it has lagged behind
the Worldthe World
-6
-4
-2
0
2
4
6
8
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Latam Difference World
33
The region has lagged others in terms ofThe region has lagged others in terms ofGDP Per Capita(1979=100)GDP Per Capita(1979=100)
50
100
150
200
250
300
350
400
450
500
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Developing Asia Advanced Economies Developing Economies Latam and Caribbean
44
0
50
100
150
200
250
LATAM Adv Economies Dev. Asia China0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Net Investment Combined Inv & Education GDP per capita growth
55
GDP Per Capita levels are very differentGDP Per Capita levels are very different
1000
11000
21000
31000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Developing Asia Advanced Economies Developing Economies Latam and Caribbean
1000
4000
7000
10000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Developing Asia Developing Economies Latam and Caribbean
66
There has been a healthy recovery in several There has been a healthy recovery in several countries, in addition to Chilecountries, in addition to Chile
60
70
80
90
100
110
120
130
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Argentina Brasil Chile Mexico Venezuela LATAM y Caribe
77
The greatest progress in a short and long term has The greatest progress in a short and long term has been in the inflation frontbeen in the inflation front
0
100
200
300
400
500
600
Inflation
88
Until recently private flows dominated the current account. Until recently private flows dominated the current account.
-6
-4
-2
0
2
4
6
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
C ur r ent A c c ount (%of G DP ) P r i vate Fl ows (% of G DP )
99
And as a consequence, growth rates And as a consequence, growth rates
-6
-4
-2
0
2
4
6
8
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
P r i vate Fl ows (% of G DP ) G D P gr owth
1010
With limited foreign reserves and official borrowing With limited foreign reserves and official borrowing there was limited space for countercyclical policiesthere was limited space for countercyclical policies
-3
-2
-1
0
1
2
3
4
5
6
Off . C api tal and I R P r i vate Fl ows
1111
The growth in International reserves and the decline in short-term debt is helping a lot in improving
the prospect of the region
International reservesShort Term debtRatio of s t debt to Reserves
200
7
1212
Fiscal Positions strengthenedFiscal Positions strengthened
-5
-4
-3
-2
-1
0
1
2
3
4
5
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
% o
f G
DP
PS Deficit Primary Balance
1313
……debt has declineddebt has declined
0
10
20
30
40
50
% o
f GD
P
External Debt External Public Debt
1414
……particularly with the IMFparticularly with the IMF
IMF FInancing to LA
0
5
10
15
20
25
30
35
40
45
50
1977-1981
1982-1984
1985-1987
1988-1991
1992-1994
1995-1997
1998-2000
2001-2002
2003-2004
2006-2007
bill
ion
US
$
0
0.5
1
1.5
2
2.5
3
% G
DP
US$ billion % GDP
1515
External Accounts improved because of Domestic External Accounts improved because of Domestic Policies...Namely Fiscal PolicyPolicies...Namely Fiscal Policy
-2-101234567
Ex C/A Fiscal Deficit
1616
...and Exchange Rate Policy. However, the current ...and Exchange Rate Policy. However, the current account has now reversed reflecting movements in account has now reversed reflecting movements in
policy variablespolicy variables
-2-101234567
80
100
120
Ex C/A REER
1717
Terms of Trade and Balance of payments
0.8
0.9
1
1.1
1.2
1.3
Term
s o
f T
rad
e
-5
-4
-3
-2
-1
0
1
2
3
Cu
rren
t A
cco
un
t(%
of
GD
P)
T of T LATAM C/A LATAM (%GDP)
……even as terms of trade continued to even as terms of trade continued to improveimprove
1818
Trade with China has grown significantlyTrade with China has grown significantly
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
US
$ m
illio
n
Source: IMF Direction of Trade Statistics
1919
Remittances as percentage of GDP
0
2
4
6
8
10%
GD
P
And Remittances have become very importantAnd Remittances have become very importantWorkers' remittances (current US$)
$0
$10
$20
$30
$40
$50
$60
$70
$80
1980
1983
1986
1989
1992
1995
1998
2001
2004
US
$ B
illio
ns
..
2020
Financial Markets have tightenedFinancial Markets have tightened Spreads had declined to historic lows, but Spreads had declined to historic lows, but
jumped recently with existing turbulencejumped recently with existing turbulence
2121
Spreads remain “widespread”, and with some Spreads remain “widespread”, and with some deterioration at every level, particularly on the deterioration at every level, particularly on the
riskier sideriskier side
0
100
200
300
400
500
600
700
Dic 06 May 4 07 Oct.10 07
2222
Foreign Direct Investment has recovered but the region is Foreign Direct Investment has recovered but the region is investing increasingly outsideinvesting increasingly outside
0102030405060708090
100
Investment Inflow s Investment Outf low s
cepal
2323
Financially, the region does well, but it Financially, the region does well, but it is smallis small
L atin Americ a: F inanc ial Development vs F inanc ial S oundnes s 2005
C hn
HK
Ind
Idn
J ap
K or
Malay
P hl
S ing
Thai
V iet
S .A frA rg
B ra
C an
Mex
US A
F ra
Deu
Ita
R us
E s p
S wi
UK
C hiIs r
C ol
C R
DR
E c u
P er
Uru
V en
R 2 = 0.3242
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
8
0 1 2 3 4 5 6 7
F ina nc ia l Deve lopment
Fina
ncia
l Sou
ndne
ss
2424
Financial Market Indicators (2006)
(US$ billion)
Market capitalization
Public Debt
Private Debt
Bank Deposits
Total Assets
% of GDP
GDP
WorldWorld 5080050800 2560025600 4310043100 7086070860 190400190400 39539548204820
00
EU 13070 7700 15500 36640 72900 534 13640
USA 19570 6230 20500 10200 56500 428 13200
Emerging Markets 11700 3880 2180 11270 29020 206 14080
Asia 6860 2020 1490 7490 17860 286 6250
Latin America 1450 1100 460 1430 4440 151 2940
Share of Latin America 2.8 4.4 1.1 2.0 2.3 6.1
Sources; BIS, IMF, Stock Matrket Federación
2525
In the EndIn the End The region is much strongerThe region is much stronger The debt burden is lower and reserves are higherThe debt burden is lower and reserves are higher The fiscal position is solidThe fiscal position is solid But, high terms of trade cannot last foreverBut, high terms of trade cannot last forever Public expenditure is increasing fastPublic expenditure is increasing fast Financial conditions have tightened somewhat Financial conditions have tightened somewhat A small financial system and increased flows A small financial system and increased flows
abroad are making the region vulnerable, but abroad are making the region vulnerable, but manageabllemanageablle
The current liquidity crisis has been a The current liquidity crisis has been a softsoft warning..warning..
……but the region seems too complacentbut the region seems too complacent