Challenges for Emerging Economies in the Face of Unconventional Monetary Policies in Advanced Economies April 2015

2

Advanced Economies: Central Bank Target Rate %

Source: Bloomberg.

0

2

4

6

8

10

12

14

16

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

April 2015

Figure 1.

U.S.

U.K.

Japan

Eurozone

April 2015 3

Source: Haver Analytics.

Advanced Economies: Assets in the Balance of Central Banks % of GDP

Figure 2.

0%

10%

20%

30%

40%

50%

60%

70%

Dec-

06

Nov

-07

Oct

-08

Sep-

09

Aug-

10

Jul-1

1

Jun-

12

May

-13

Apr-

14

European Central Bank Federal Reserve

Bank of Japan

Bank of England

4

Advanced Economies: 10-Year Interest Rates %

Source: Bloomberg.

0

2

4

6

8

10

12

14

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

April 2015

Figure 3.

U.S.

U.K.

Japan

Eurozone

April 2015 5

Non-resident Flows to Emerging Market Debt Accumulated flows in billions of dollars

(since January 2010)

Non-resident Flows to Emerging Market Equity Accumulated flows in billions of dollars

(since January 2010)

Source: Institute of International Finance. Note: The IIF builds this index based on information gathered from 30 emerging market countries members of the Institute. Within the information that the IIF uses are the balance of payments and published reports by 12 countries for fixed income and 13 countries for equity. About half of all sources of information that concern nonresident flows are published by corresponding central banks and have monthly periodicity with a one month lag. The other half is obtained from weekly reports published by stock markets or by central banks with practically no time lag. Among the members there is Argentina, Brazil, Chile, China, Colombia, Hungary, India, Indonesia, Malaysia, Mexico, Peru, Poland, Russia, South Africa and Turkey.

Figure 4.

-100

0

100

200

300

400

500

600

Jan-

10

Jun-

10

Nov

-10

Apr-

11

Sep-

11

Feb-

12

Jul-1

2

Dec-

12

May

-13

Oct

-13

Mar

-14

Aug-

14

Jan-

15

Emerging Asia

Latin America

Emerging Europe

Africa and Middle East -50

0

50

100

150

200

250

300

Jan-

10

Jun-

10

Nov

-10

Apr-

11

Sep-

11

Feb-

12

Jul-1

2

Dec-

12

May

-13

Oct

-13

Mar

-14

Aug-

14

Jan-

15

Emerging Asia

Latin America

Emerging Europe

Africa and Middle East

April 2015 6

Non-Resident Holdings in Local Currency Government Bonds Percentage

Source: Ministries of finance, central banks and other national authorities. Note: Non-resident holdings of the following countries: Mexico, Peru, Colombia, Brazil, Indonesia, Malaysia, Thailand, Poland, Turkey, Israel, Russia, Hungary, South Africa and South Korea (since December 2009).

Figure 5.

3

7

11

15

19

23

27

4

5

6

7

8

9

10M

ay- 0

8

Apr-

09

Feb-

10

Dec-

10

Oct

- 11

Aug-

12

Jul-

13

May

- 14

Mar

- 15

Average 5-year interest rate SWAP for selected emerging markets

Non-resident holdings in government bonds as percentage of local debt outstanding

April 2015 7

Carry to Risk Index

Figure 6.

Note: Carry to Risk is calculated based on the implied spread between local rate and foreign rate in FX forwards with three-month maturity. This spread is adjusted using the implied volatility in FX options with three-month maturity. Source: Central Bank of Mexico using information from Bloomberg.

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25Ja

n-06

Apr-

07

Aug-

08

Dec-

09

Apr-

11

Aug-

12

Dec-

13

Apr-

15

Brazil

Colombia

Mexico

South Africa

Turkey

Poland

8

International Reserves Billions of dollars

Figure 7.

Source: : International Monetary Fund (IMF). *Advanced Economies.- Canada, Germany, France, Italy, Spain, Japan, United States & United Kingdom. Commonwealth of Independent States.- Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Taijikistan, Turkmenistan, Uzbekistan & Ukraine. Emerging and Developing Asia.- Bangladesh, Bhutan, Brunei Darussalam, Cambodia, China, Fiji, India, Indonesia, Kiribati, Lao P.D.R., Malaysia, Maldives, Marshall Islands, Micronesia, Mongolia, Myanmar, Nepal, Palau, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Timor-Leste, Tonga, Tuvalu, Vanuatu, and Vietnam. Emerging and Developing Europe.- Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Hungary, Kosovo, Lithuania, FYR Macedonia, Montenegro, Poland, Romania, Serbia, and Turkey. Latin America & Caribbean.- Antigua and Barbuda, Argentina, The Bahamas, Barbados, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago, Uruguay, and Venezuela. Middle East & North Africa.- Afghanistan, Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Mauritania, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, United Arab Emirates, and Yemen. Sub-Saharan Africa.- Countries in the continent that lie south of the Sahara Desert (such as South Africa).

0

2,000

4,000

6,000

8,000

10,000

12,000

14,00020

06 Q

1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1

Emerging and Developing Asia Advanced Economies

Middle East, North Africa Latin America & the Caribbean Commonwealth of Independent States Emerging and Developing Europe Sub-Saharan Africa

April 2015

9

Net Non-resident Holdings of Emerging Markets´ Government Bonds Percentage of International Reserves

Source: Ministries of finance, central banks and other national authorities. Note: Average percentage of foreign holdings on local bonds for the following countries: Mexico, Brazil, Indonesia, Malaysia, Thailand, Poland, Turkey, Israel, Hungary and South Korea (since December 2009).

Figure 8.

15

20

25

30

35

40

45De

c-07

Sep-

08

Jun-

09

Feb-

10

Nov

-10

Aug-

11

Apr-

12

Jan-

13

Sep-

13

Jun-

14

Mar

-15

April 2015

10

Emerging Economies: Capital Flows (Debt and Equity) Weekly Billion USD

April 2015

-15

-10

-5

0

5

10

15

Jan-

01Ju

n-01

Nov

-01

Apr-

02Se

p-02

Feb-

03Ju

l-03

Dec-

03M

ay-0

4O

ct-0

4M

ar-0

5Au

g-05

Jan-

06Ju

n-06

Nov

-06

Apr-

07Se

p-07

Feb-

08Ju

l-08

Dec-

08M

ay-0

9O

ct-0

9M

ar-1

0Au

g-10

Jan-

11Ju

n-11

Nov

-11

Apr-

12Se

p-12

Feb-

13Ju

l-13

Dec-

13M

ay-1

4O

ct-1

4M

ar-1

5

Source: Emerging Portfolio Fund Research.

April

Figure 9.

11

USD Appreciation over a 9-month Period 1/ and Days it Took to Reach the Highest Level

Percentage, days

1/ The USD appreciation was computed using the DXY Index. Source: Banco de Mexico's own calculations using data from Bloomberg.

April 2015

Figure 10.

0%

5%

10%

15%

20%

25%

30%

0 30 60 90 120 150 180 210 240 270

Maxim

um gain in a 9-m

oth period

Calendar days to realize the gain

Financial crisis 2008-2009: 23.98%

Actual: 25.77%

12

1/ The sample includes funds used to sell or buy equity and bonds from emerging markets registered in advanced economies. Flows exclude changes in market value of portfolios and changes in foreign exchange rates. Source: Emerging Portfolio Fund Research.

Emerging Economies: Accumulated Capital Flows to Emerging Markets (Debt and Equity) 1/

Billion USD

Weeks

-80

-60

-40

-20

0

20

40

60

80

100

120

140

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

2008

2009

2010

2012

2013

2014

2015 2011

Figure 11.

April 2015

13

Latam FX Depreciation and Broad USD Appreciation Index 31-Dec-14 =100

Source: Goldman Sachs Analysis replicated with Bloomberg data. Note: Latam 5 FX Index is computed using an equally weighted average of the returns in the Mexican Peso, the Brazilian Real, the Chilean Peso, the Colombian Peso and the Peruvian Sol.

Figure 12.

April 2015

80

85

90

95

100

105

110

11580

85

90

95

100

105

110

115Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15

DXY

Latam 5 Currency Index

14

Latam Currency Depreciation Amid Flatter Commodity Prices in 2015 Index 31-Dec-2014 = 100

Source: Goldman Sachs Analysis replicated with Bloomberg data. Note: Latam 5 FX Index is computed using an equally weighted average of the returns in the Mexican Peso, the Brazilian Real, the Chilean Peso, the Colombian Peso and the Peruvian Sol.

Figure 13.

April 2015

80

85

90

95

100

105

110

115

120

125

80

90

100

110

120

130

140

150

160

170Ju

n 14

Aug

14

Oct

14

Dec

14

Feb

15

Apr 1

5

S&P Goldman Sachs Commodity Index

Latam 5 Currency Index

April 2015 15

Note:*** p<0.05, ** p<0.15, *p<0.3. The percentage was calculated using a regression where the dependent variable is the percentage change on the exchange rate for each developing country currency and the independent variable is the difference between the expected Nonfarm Payrolls data and the observed.

Figure 14. Percentage Change in the Foreign Exchange Rates per unit of Difference Between the

Expected Nonfarm Payrolls Data and the Observed

Percentage -0

.002

%

0.00

0%

0.00

2%

0.00

4%

0.00

6%

0.00

8%

0.01

0%

Brazil**

Turkey*

Chile***

Colombia**

South Africa

Mexico**

Poland

Peru

Hungary

0.00

8%

0.00

6%

0.00

4%

0.00

2%

0.00

0%

0.00

2%

0.00

4%

Turkey

Poland

Thailand

Hungary

Brazil

Colombia*

Chile

Peru*

Mexico*

South Africa*

Pre-crisis 2000-2008 Post-crisis 2009-2015

April 2015 16

1/ Estimations include data from 2000m1 to 2015m2. For the Fed Funds Rate after 2008 a shadow rate estimated by Wu and Xia (2014) is used. MQE: Mean Quadratic Error. Source: Own calculations with data from Bank of Mexico, Haver Analytics and Wu and Xia (2014).

Figure 15. Taylor Rule for Mexico (augmented) 1/:

𝒊𝒕 = 𝒓∗ + 𝝅∗ + 𝜷𝟏(𝝅𝒕𝒄𝒄𝒓𝒄−𝝅∗) + 𝜷𝟐𝒈𝒈𝒈𝒕𝑮𝑮𝑮 + 𝜷𝟑𝒊𝒕𝑼𝑼𝑼 𝟏 − 𝝆 + 𝝆𝒊𝒕−𝟏

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Feb-

10

Jun-

10

Oct

-10

Feb-

11

Jun-

11

Oct

-11

Feb-

12

Jun-

12

Oct

-12

Feb-

13

Jun-

13

Oct

-13

Feb-

14

Jun-

14

Oct

-14

Feb-

15

Observed

No Fed

Fed

MQE: 1.38

MQE: 0.13