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1 1 LAC Success Put to the Test Asobancaria-Felaban Conference Cartagena, Colombia 18 August 2011 Chief Economist Office Latin America and the Caribbean The World Bank

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Page 1: LAC Success Put to the Test - Amazon Web Servicesfelaban.s3-website-us-west-2.amazonaws.com/... · LAC Success Put to the Test Asobancaria-Felaban Conference Cartagena, Colombia

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

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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?

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LAC’s Success and the Maturing Recovery

3

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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

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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

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LAC’s successAn expanding middle class

6Source: LAC Chief Economist Office, World Bank.

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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

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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

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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

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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

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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

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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

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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

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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.

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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

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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

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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

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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

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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

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Rising Global Uncertainty and Risks

20

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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

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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

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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

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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

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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)

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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

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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)

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Whither LAC?

28

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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

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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

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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

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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

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… 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

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34

Thank you