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11
LAC Success Put to the Test
Asobancaria-Felaban Conference
Cartagena, Colombia18 August 2011
Chief Economist Office
Latin America and the Caribbean
The World Bank
Structure of the presentation
2
LAC’s success and the maturing recovery – real decoupling The new face of LAC after a good decade
Maturing recovery cycle
Domestic policy tensions
Rising global uncertainty and risks – financial coupling European ailments: are sovereign debt troubles reaching the core?
U.S. downgraded: is a double-dip in the horizon?
China: how hard a landing?
Whither LAC? Can LAC avoid the traditional boom-bust pattern and achieve a high
trend growth (real trend decoupling)?
How resistant is LAC macro-financial immune system to a potential downward cyclical financial and real re-coupling on a global scale?
LAC’s Success and the Maturing Recovery
3
4
LAC’s successNon-inflationary growth decoupling from rich countries
The trend growth of real GDP growth is computed using the band-pass filter (Baxter and King, 1999). LCRCE staff calculations. Source: WDI – World Bank; National Authorities.
Cyclical-adjusted Growth in Latin America and High-Income Countries
Trend growth computed using the band-pass filter
0%
1%
2%
3%
4%
5%
6%
7%
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
High-Income
Latin America
LAC’s successReduction in poverty and income inequality
5Source: LCSPP based on Socio-Economic Database for Latin America and the Caribbean (CEDLAS and The World Bank).
-0.1 -0.05 0 0.05 0.1
Paraguay
Peru
Brazil
Mexico
Latin America
Panama
Argentina
El Salvador
Chile
Bolivia
Honduras
Uruguay
Colombia
Dominican Republic
Costa Rica
Gini Coefficient Cumulative Change
From 2009 to 1995
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
20
25
30
35
40
45
1994
1996
1998
2000
2002
2004
2006
2008
2010
GD
P P
er C
apit
a
US
Dol
lars
Mod
erat
e P
over
ty R
ate
US$
4 a
Day
Per Capita GDP Growth and Poverty LAC Countries
Poverty Headcount GDP Per Capita
LAC’s successAn expanding middle class
6Source: LAC Chief Economist Office, World Bank.
LAC’s successStellar performance during the 2009 global downturn
7Notes: The figures represent the deviations from regional/group trend growth in real GDP on 13-quarter windows centered on previous and current troughs on real GDP. This figure depicts the behavior of real GDP in previous and current recession-recovery cycles. Sources: IMF’s International Financial Statistics – IFS, National Statistical Institutes and Central Banks, Haver Analytics.
-0.16
-0.12
-0.08
-0.04
0.00
0.04
T-6
T-5
T-4
T-3
T-2
T-1 T
T+
1
T+
2
T+
3
T+
4
T+
5
T+
6
Growth in Real GDP
Latin America and the Caribbean
Previous Cycles Current Cycle
-0.16
-0.12
-0.08
-0.04
0.00
0.04
T-6
T-5
T-4
T-3
T-2
T-1 T
T+
1
T+
2
T+
3
T+
4
T+
5
T+
6
Growth in Real GDPMiddle Income Countries
Previous Cycles Current Cycle
LAC came out of the global crisis without balance sheet damage
LAC’s successJoining the dynamic EMs in the recovery phase
8Note: The group of developed countries refers to OECD countries excluding Turkey, Mexico, Republic of Korea, and Central European countries. Source: CPB (Netherlands Bureau for Economic Policy Analysis).
Emerging economies with strongest recoveries include Brazil, China, India, Korea, Malaysia, Philippines and Thailand
They represent 52% of emerging economies’ GDP
80
85
90
95
100
105
110
115
120
Jan
-06
Au
g-0
6
Mar
-07
Oct
-07
May
-08
Dec
-08
Jul-
09
Feb
-10
Sep
-10
Ap
r-11
World Industrial Production
Index Apr-08 = 100
Crisis
Advanced Economies
Emerging Economies
LAC’s successJoining the dynamic EMs in the recovery phase
9Note: The Dynamic Emerging Economies are those economies which represent 75% of the total GDP PPP of the “Emerging and developing economies“. Source: IMF WEO (April – 2011)
51%
38%27%
31%
41%53%
8%7% 8%
10% 14% 12%
0%
20%
40%
60%
80%
100%
1996-2001 2001-2006 2009-2011
Contribution to World Economic GDP
as a % of World GDP increase (PPP)
Others Other Advanced EconomiesDynamic Emerging Economies Euro (15)+US+Japan+Canada+UK
LAC’s uneven successMutating regional heterogeneity
10Sources: Potential GPD is computed as the average rate of growth between 2007 and 2003. Simple averages are used to construct the composite. The categorization ofeach group is as follow: Slow-growth are those countries that showed a less than 3.5% in their 2011-2008 GDP real growth rate; Medium-growth are those between 3.5%and 10%: High-growth are those with 10% or more. For 2011 we used the last available forecast (Consensus Forecast June-2011). Sources: Consensus Forecast (June –2011); WEO (April – 2011).
90
100
110
120
130
140
150
160
170
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Slow-Growth Countries within LACGDP Index 2002 = 100
Actual
Potential
90
100
110
120
130
140
150
160
170
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Medium-Growth Countries within LACGDP Index 2002 = 100
Actual
Potential
90
100
110
120
130
140
150
160
170
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
High-Growth Countries within LACGDP Index 2002 = 100
Actual
Potential
LAC’s uneven successWhere you are matters less than to whom you are connected
11Sources: World Bank’s World Development Indicators – WDI (December 2010), IMF's World Economic Outlook – WEO (April 2011), and Consensus Forecasts (June 2011) –Latest available forecasts. Potential GDP is calculated computing the annual average real growth rate for the 2002-2007 to 2007 GDP. Weighted averages (2007 NominalGDP in USD Billions).
Low growth (<4%): St. Kitts and Nevis, Antigua and Barbuda, Grenada, Barbados, Jamaica, Bahamas,
Venezuela, Trinidad and Tobago, St. Vincent and the Grenadines, El Salvador, St. Lucia, Dominica and Mexico
Medium growth (4%-10%): Honduras, Belize, Haiti, Nicaragua, Guatemala, Costa Rica and
Ecuador
High growth (>10%): Chile, Colombia, Brazil, Guyana, Bolivia, Suriname, Paraguay, Dominican
Republic, Peru, Argentina, Uruguay and Panama
Number of
countries
Mean growth
2003-2007*
Mean Growth
2003-2011
Mean Growth
2008-2011**
Max.
2008-2011
Min.
2008-2011
Low growth 13 4.4% 2.3% -0.3% 3.3% -12.3%
Medium growth 7 4.4% 3.5% 2.4% 7.9% 4.1%
High growth 12 5.4% 5.2% 4.9% 18.8% 10.0%
Total 32 4.8% 3.7% 2.2% 18.8% -12.3%
* This is the measure used to construct the "Potential GDP"
** This is the measure used to define the classification as "Low", "Medium" and "High".
Cumulative
LAC’s maturing cyclical recovery Overheating and endogenous inflationary pressures
12Notes: The area inside the box represents the range between the lowest and highest midpoints among inflation targeting countries. Sources: National Statistical Institutes and Central Banks, Haver Analytics.
URYPRY
ARG
PER
PANBRA
CHL
DOM
BOL
COL
ECUMEX
SLV
CRI
BRB
DMA
GUA
HND
HTI
JAM
VEN
ARG 2
0%
3%
6%
9%
12%
15%
18%
21%
24%
27%
30%
-8% -6% -4% -2% 0% 2% 4% 6% 8%
CP
I In
flat
ion
Rat
e (
at J
un
e-11
)3
Mon
ths
Mov
ing
Ave
rage
, YoY
Output Gap
2011
Output Gap and InflationLAC Countries
LAC’s maturing cyclical recoveryDouble tail spin push: commodity prices & capital inflows
13Notes: Annualized capital inflows to LAC-7. Sources: IMF’s Balance of Payments Statistics, National Statistical Institutes, and CentralBanks.
-100
-50
0
50
100
150
200
250
300
350
400
Mar
-02
Au
g-0
2
Jan
-03
Jun
-03
No
v-0
3
Ap
r-0
4
Sep
-04
Feb
-05
Jul-
05
Dec
-05
May
-06
Oct
-06
Mar
-07
Au
g-0
7
Jan
-08
Jun
-08
No
v-0
8
Ap
r-0
9
Sep
-09
Feb
-10
Jul-
10
Dec
-10
Gross Capital Inflows to LAC-7 Countries US$ Billions, Annual Flows
Gross Inflows Non-FDI
Gross Inflows FDI
30
50
70
90
110
130
150
50
100
150
200
250
300
350
Jan
-05
Feb
-06
Mar
-07
Ap
r-0
8
May
-
09
Jun
-10
Jul-
11
Oil
WT
I, C
urr
ent
US
$
Wh
eat,
Co
pp
er a
nd
So
yb
ean
,
Ind
ex 0
1-J
an
-05
=10
0
Commodity Prices
Most Relevant for LAC countries
Oil
Copper
Soybean
Wheat
LAC gaining share in non-FDI flows to EMs
Sep-2010
2006
FDI
63%
Non-FDI
37%
FDI
31%
Non-FDI
69%
Distribution of Capital Flows to EMsLAC-7: Composition of Capital Inflows
14
PerdedoresGanadores
Medio Oriente 8%
(Participación del PBI 11%)
China 25%
(Participación del PBI 28%)Resto de los Emergentes 12%
(Participación del PBI 16%)
Europa Emergente 9%
(Participación del PBI 9%)
EA-5 12%
(Participación del PBI 7%)
India 8%
(Participación del PBI 7%)
LAC* 25,4%
(Participación del
PBI 22%)
2009
India 5%
EA-57%
Europa Emergente
19%
Resto de los Emergentes
16%
China
17%
Medio Oriente23%
2006
LAC*11,7%
Source: Talvi and Izquierdo (2011), “Una Región Dos Velocidades,” IDB.
Demands on domestic macro-financial policyMaintain inflation expectations well anchored
15Notes: There is a change in the methodology of calculation for both food and overall PCI index for Chile since January 2009. For the figure on the right, we used the latest available figure for each country. Weighted averages (2007 Nominal GDP in USD Billions) were used in the case of the regional numbers. Sources: Bloomberg, Instituto Nacional de Estadísticas de Chile – INE, and Food and Agriculture Organization – FAO (2010) and IMF's World Economic Outlook – WEO (October 2010).
0%
2%
4%
6%
8%
10%
12%
14%
16%
Jan-
05
Jul-
05
Jan-
06
Jul-
06
Jan-
07
Jul-
07
Jan-
08
Jul-
08
Jan-
09
Jul-
09
Jan-
10
Jul-
10
Jan
-11
Food and Overall CPI Inflation : LAC-7 + URY
YoY Variation, Medians
Food Inflation
Overall CPI Inflation
Demands on domestic macro-financial policyAvoid “excessive” currency appreciation
16Notes: Weighted averages were calculated using the 2007 nominal GDP in USD Billions. An increase means an appreciation of the REER. Sources: IMF’s International Financial Statistics – IFS and IMF's World Economic Outlook – WEO (April 2011).
80
85
90
95
100
105
110
115
120
Jan-
08
Jun-
08
Nov
-08
Apr
-09
Sep
-09
Feb
-10
Jul-
10
Dec
-10
May
-11
Real Effective Exchange Rate
Weighted Averages, Index Jan-05 = 100
China East Asian Tigers ECA
High Income LAC Euro Area
Demands on domestic macro-financial policyCurb systemic risk buildup (financial excesses)
17Notes: The figure depicts the (PPP-GDP) weighted average of the growth rates of (total, personal and housing) credit to the private sector for the sixlargest LAC countries (Argentina, Brazil, Chile, Colombia, Mexico, and Peru). Sources: National Statistical Institutes, Central Banks, and Superintendenceof Banking.
-5%
5%
15%
25%
35%
45%
Feb
-05
Jul-
05
Dec
-05
May
-06
Oct
-06
Mar
-07
Au
g-0
7
Jan
-08
Jun
-08
No
v-0
8
Ap
r-0
9
Sep
-09
Feb
-10
Jul-
10
Dec
-10
Real Credit Growth in LAC-6 Countries
YoY Growth, %
Total Housing Personal
Adjusting the macro-financial policy responseThe need to rebalance the monetary-fiscal policy mix
18Notes: The figures in Panels B is the cyclically-adjusted primary expenditure and primary balance for the major six LAC countries (Argentina, Brazil, Chile, Colombia, Mexico, and Peru). Sources: Bloomberg, Haver Analytics, National Statistical Institutes, and Central Banks.
-200
0
200
400
600
800
1,000
1,200
1,400
1,600
Jul-
07
Feb
-08
Sep
-08
Ap
r-09
No
v-0
9
Jun
-10
Jan
-11
Au
g-11
Monetary Policy Interest Rate Differential
Spread w.r.t FED Funds Rate, In Basis Points
Brazil
Chile
Colombia
Peru
Mexico
15%
16%
17%
18%
19%
20%
20
04
.04
20
05
.02
20
05
.04
20
06
.02
20
06
.04
20
07
.02
20
07
.04
20
08
.02
20
08
.04
20
09
.02
20
09
.04
20
10
.02
20
10
.04
Primary Expenditure % of GDP, LAC-6 Countries
Domestic macro-financial policyThe need to hone the macro prudential policy agenda
Avoid contributing to amplification – don’t rock the boat Remove pro-cyclicality in macro and traditional regulatory policy
Allow prudential buffers to be true buffers – i.e., to be used without penalty during downswings (Goodhart, 2010; Hellwig, 2010)
Remove deeper pro-cyclical factors, such as currency mismatches and social moral hazard (expectation of bailouts or “Greenspan put”)
Enhance financial system resiliency to cycle – build a better boat Add more, systemically-oriented buffers (liquidity and solvency)
Dampen the cycle – tame the (excess) amplitude of the waves Incorporate an explicit dampening function into MMP design
Nip the gestation of adverse financial amplifications in the bud Induce the internalization of externalities and prevent buildup of
exuberance (Pigovian taxes, approval protocols for innovations)
19
Rising Global Uncertainty and Risks
20
The European EpicenterFrom drama to trauma
21Note: The average CDS is computed for Ireland, Greece and Portugal. Source: Bloomberg
0
200
400
600
800
1000
1200
1400
1600
1800
Aug
-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Nov
-10
Dec
-10
Jan-
11
Jan-
11
Feb
-11
Mar
-11
Mar
-11
Ap
r-11
May
-11
May
-11
Jun-
11
Jul-
11
Aug
-11
CDS (5 years) in Europe
In Basis Points
France
UK
Ireland+Greece+Portugal
Spain
Italy
The European EpicenterReversal of fortune!
22Source: Own calculation based on Bloomberg
0 500 1000 1500 2000
SwedenGermany
Chile
MalaysiaPanama
KoreaMexico
ColombiaBrazil
ThailandPeru
Slovak RepSouth Africa
Phillipines
IndonesiaFranceRussia
KazakhastanPoland
TukeyBelgiumBulgariaRomania
avgCroatia
VietnamHungary
ItalySpain
UkrainArgentina
VenezuelaPortugal
Greece
Global Sovereign CDS
Aug-2011, in basis points
0 500 1000 1500 2000
SwedenGermany
FranceBelgium
SpainPortugal
Slovak Rep
GreeceItaly
PolandChile
MalaysiaKorea
HungaryThailand
CroatiaMexico
BulgariaSouth Africa
RomaniaRussia
AvgBrazil
Vietnam
PeruPanama
ColombiaIndonesia
Phillipines
TukeyKazakhastan
UkrainVenezuelaArgentina
Global Sovereign CDS
Dec-2007, in basis points
The U.S. EpicenterStill well below potential and a risk of a double dip
23Source: National sources
90
95
100
105
110
115
120
125
130M
ar-0
3
Sep
-03
Mar
-04
Sep
-04
Mar
-05
Sep
-05
Mar
-06
Sep
-06
Mar
-07
Sep
-07
Mar
-08
Sep
-08
Mar
-09
Sep
-09
Mar
-10
Sep
-10
Mar
-11
US Economic Activity
GDP Index base 100 = Iq - 2003
GDP Index
2003-2007
Trend
The U.S. EpicenterThe downgrade and the swing in market sentiment
24Source: Bloomberg
0
200
400
600
800
1000
1200
1400
1600
1800
0
10
20
30
40
50
60
70
80
90
Jan
-07
Ap
r-0
7
Jul-
07
Oct
-07
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-11
Jul-
11
Market Trends and Volatility
VIX Index and S&P 500
VIX Index
S&P 500 (rhs)
Flash Crash/
PIGS
Japan
Jackson Hole
(QEII)
Lehman Briothers
QEI
USdowngrade
The U.S. EpicenterThe downgrade and global financial coupling
25Source: Bloomberg
70
80
90
100
110
120
Jan-
11
Jan-
11
Jan-
11
Feb
-11
Feb
-11
Mar
-11
Mar
-11
Ap
r-11
Ap
r-11
May
-11
May
-11
Jun-
11
Jun-
11
Jul-
11
Jul-
11
Jul-
11
Stock Markets: 2011
In USD, Index base 100 = Jan - 2011
Brazil
S&P 500
Japan
UK
Germany
France
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Equity Foreign Exchange CDS Spreads
Per
cen
t
Emerging Market Asset Returns and Common Factors
Average R-Squared from Country Regressions
Early Period (2000-2005)
Late Period (Jan-05 to Jul-08)
Crisis (Aug-08 to Apr-09)
The U.S. EpicenterDowngraded but still the safe haven
26Source: Bloomberg
2.0%
2.5%
3.0%
3.5%
4.0%
1200
1300
1400
1500
1600
1700
1800
Jan-
11
Jan-
11
Feb
-11
Feb
-11
Mar
-11
Mar
-11
Mar
-11
Apr
-11
Apr
-11
May
-11
May
-11
Jun-
11
Jun-
11
Jul-
11
Jul-
11
Aug
-11
Gold and US T10 2011
Gold
US T10 (rhs)
90
95
100
105
110
115
Dec
-10
Jan
-11
Mar
-11
Ap
r-11
May
-11
Jun
-11
Jul-
11
Au
g-11
Currencies: 2011
Index base 100 = 1-Jan-2011
Japan UK
US-EUR Brazil
The China EpicenterDanger of an abrupt adjustment?
27Source: National sources.
-5%
0%
5%
10%
15%
20%
25%
Jan
-06
May
-06
Sep
-06
Jan
-07
May
-07
Sep
-07
Jan
-08
May
-08
Sep
-08
Jan
-09
May
-09
Sep
-09
Jan
-10
May
-10
Sep
-10
Jan
-11
May
-11
China: Inflation and Industrial Production
YoY %Inflation
Industrial Production
0
100
200
300
400
500
600
700
0
20
40
60
80
100
120
140
160
180
Jan
-06
Jun
-06
No
v-0
6
Ap
r-07
Sep
-07
Feb
-08
Jul-
08
Dec
-08
May
-09
Oct
-09
Mar
-10
Au
g-1
0
Jan
-11
Jun
-11
CR
B I
nd
ex
To
tal I
mp
ort
s, U
S$
Bil
lio
ns
China Total Imports and CRB Index
Imports in U$S Billions
China Total Imports
CRB Index (rhs)
Whither LAC?
28
Benign scenario: real decoupling continuesCan LAC turn cyclical recovery into higher trend growth?
Successful management of the cycle is essential to break free from the historical boom-bust pattern
LAC bumps against structural speed limits at comparatively low growth rates Productive capacity in LAC lacks the efficiency and flexibility to
accommodate robust long-run growth rates
Could the region turn natural resources into a blessing? Saving – for stabilization and asset building
Diversification – avoiding the “enclave” syndrome
Institutions – avoiding corrosive effects of rent-seeking
29
LAC has experienced 100 years of growth solitude
30Notes: was . Source: IFM’s IFSNote: The group of East Asian tigers includes Hong Kong (China), Indonesia, Malaysia, Republic of Korea, Singapore, Thailand, and Taiwan (China). Maddison (2007-2009) was used from 1900 to 2006. We used the Real Per Capita GDP growth from WDI to calculate the levels from 2006 to 2010. Source: LCRCE Staff calculations based on Maddison (2007, 2009) and WDI
0%
10%
20%
30%
40%
50%
60%
19
00
19
05
19
10
19
15
19
20
19
25
19
30
19
35
19
40
19
45
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
10
One Hundred Years of SolitudeGDP Per Capita Relative to the US, Weighted Averages
WashingtonDissensus
Gold Standard Period
Interwar Period Import Substitution
WashingtonConsensus
LostDecade
LAC
East Asian Tigers / US
Bad scenario: global downward re-couplingHow much can LAC’s new “immune system” resist?
Robust monetary policy frameworks in LAC, mostly Shock absorption via e-rate flexibility/monetary policy independence
How good are LAC’s fiscal buffers? Comfortable public debt situation but insufficient fiscal flexibility
How good are LAC’s financial system buffers? Strong capital and liquidity positions
Have systemic risks been brewing in the past year or so?
How good are LAC’s social safety nets? Ability to scale up social assistance programs vary widely in the region
Social insurance frameworks are the weak link
31
So far, no revisions in growth forecasts for LAC…
32Note: Consensus Forecasts.
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Ant
. & B
arb.
Ven
ezue
la
Gre
nada
Jam
aica
Tri
n. &
Tob
.
Dom
inic
a
El S
alva
dor
Bel
ize
Gua
tem
ala
Hon
dura
s
Ecu
ador
Guy
ana
Nic
arag
ua
Bol
ivia
Cos
ta R
ica
Col
ombi
a
Sur
inam
e
Chi
le
Mex
ico
LA
C
Dom
. Rep
.
Pan
ama
Bra
zil
Uru
guay
Per
u
Arg
enti
na
Par
agua
y
Actual Growth and Growth Forecasts: LAC Countries
weighted averages for LAC
2010
2010
2012
… and LAC is expected to continue to perform well in comparison to other EM regions
33Note: Consensus Forecasts.
0%
2%
4%
6%
8%
10%
12%
High
Income
South
Africa
Europe &
Central Asia
Latin
America & Caribbean
East Asian
Tigers
India China
Real GDP Growth Forecasts Around the WorldAnnual Real GDP Growth Rate, Weighted Averages
2010 2011 2012
34
Thank you