capital flows to emerging economies:
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Capital Flows to Capital Flows to Emerging Economies:Emerging Economies:
Capital Flows to Capital Flows to Emerging Economies:Emerging Economies:
Global Dimensions and Global Dimensions and Implications for LACImplications for LAC
Global Dimensions and Global Dimensions and Implications for LACImplications for LAC
Ernesto TalviErnesto Talvi
Prepared for Presentation at the XXII Meeting of the Latin American Prepared for Presentation at the XXII Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington DCNetwork of Central Banks and Finance Ministries, IDB, Washington DC
October 20October 20thth, 2005, 2005
CERESCERES
OUTLINE
I.I. Capital Flight from EMs, 1997-2002: Capital Flight from EMs, 1997-2002: Global RepercussionsGlobal Repercussions
II.II. Revival of Capital Inflows to EMs, 2003-2005: Revival of Capital Inflows to EMs, 2003-2005:
A Latin American Perspective A Latin American Perspective A Global PerspectiveA Global Perspective
III.III. Unwinding of Global Imbalances and Unwinding of Global Imbalances and Latin America Latin America
OUTLINE
I.I. Capital Flight from EMs, 1997-2002: Capital Flight from EMs, 1997-2002: Global RepercussionsGlobal Repercussions
II.II. Revival of Capital Inflows to EMs, 2003-2005: Revival of Capital Inflows to EMs, 2003-2005:
A Latin American Perspective A Latin American Perspective A Global PerspectiveA Global Perspective
III.III. Unwinding of Global Imbalances and Unwinding of Global Imbalances and Latin America Latin America
Private Capital Flows: A Global Perspective(billions of US dollars)
-100-50
050
100150200250
-250-200-150-100
-500
50
-170-130
-90-50-103070
110150190
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
“Neoclassic” Period
USA
Industrialized Countries
Emerging Countries
Source: WEO
-164
187
International Financial Conditions
-170
-130
-90
-50
30
70
110
150
190
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
The Asian and Russian Crisis: An Inflection Point
250
450
650
850
1050
1250
1450
1650
De
c-9
6
Ma
r-9
7
Jun
-97
Se
p-9
7
De
c-9
7
Ma
r-9
8
Jun
-98
Se
p-9
8
De
c-9
8
Ma
r-9
9
Jun
-99
Se
p-9
9
(EMBI spread*, bp over US Treasury bonds) (in billions of US dollars)
“Neoclassic” Period Crisis in EMs
Capital Flows
*adjusted by Argentina
-10
Source: WEO
-87
225
-138
-100-50
050
100150200250
-250-200-150-100
-500
50
-170-130
-90-50-103070
110150190
1992
1993
1994
1995
1996
1997
-8
187
1998
1999
2000
2001
2002
2003
2004
Crisis in EMs
= + 233
= + 41
= -274
-179
(billions of US dollars)
USA
Industrialized Countries
Emerging Countries
“Neoclassic” Period
Source: WEO
Private Capital Flows: A Global Perspective
q0
Interest Rate
(i)
External Financing (q)
i0
Demand of External Financing from the US
Supply of External Financing from the Rest of World to the US
Increase in Supply of External
Financing to USA
Supply Hypothesis
i1
q1
Capital Flight From EMs From the US Perspective:A Graphical Analysis
67
72
77
82
87
92
97
1996
1997
1998
1999
2000
2001
2002
= - 23,0%
Capital Flight from EMs from the US Perspective
(RXR vis-a-vis the Euro and REXR, annual avg,1996 = 100)Appreciation of the Dollar
(real interest rate, 10-year Treasury bond, annual avg)
1998
1999
2000
2001
2002
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1996
1997
2,1%
4,7%
Decline in Interest Rates
97
102
107
112
117
122127
132
137
142
147
1996
1997
1998
1999
2000
2001
2002
= + 43.8%
(Housing Price Index, Dec-1996 = 100)Boom in Asset Prices
-500
-450
-400
-350
-300
-250
-200
-150
-100
-50
0
1996
1997
1998
1999
2000
2001
2002
-5.0%
-4.5%
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
Deterioration of the Current Account(in billions of US dollars and in % of GDP)
% of GDP
billions of US dollars
474
120
278
-474
Global Imbalances(Current Account, billions of US dollars)
196
USA
Industrialized Countries
Emerging Countries
-700
-600
-500
-400
-300
-200
-100
0Crisis in EMs“Neoclassic” Period
-136
050
100
150200250 220
-100
0
100
200
300
400
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
-84
= -338
= -24
= + 362
Capital Flight from EMs From a LAC-7 Perspective
Depreciation of LAC-7 Currencies
(LAC-7, RXR vis-a-vis the Dollar, Euro and REXR, 1996 = 100)
90
100
110
120
130
140
150
160
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
*adjusted for Argentina
(EMBI spread*, bp over US Treasury bonds)
200
400
600
800
1000
1200
1400
1600
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Increase in Interest Rates
60
70
80
90
100
110
120
130
140
150
160
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
(LAC-7, stock prices indices in dollars, 1996.I=100)
Collapse in Asset Prices
OUTLINE
I.I. Capital Flight from EMs, 1997-2002: Capital Flight from EMs, 1997-2002: Global RepercussionsGlobal Repercussions
II.II. Revival of Capital Inflows to EMs, 2003-2005: Revival of Capital Inflows to EMs, 2003-2005:
A Latin American Perspective A Latin American Perspective A Global PerspectiveA Global Perspective
III.III. Unwinding of Global Imbalances and Unwinding of Global Imbalances and Latin America Latin America
-100-50
050
100150200250
-250-200-150-100
-500
50
-170-130
-90-50-103070
110150190
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
225
-138
-87
Reflow of Private Capital to EMs
2003
2004
-14
= -239
-85 = + 53
99
= + 186
(billions of US dollars)
USA
Industrialized Countries
Emerging Countries
Crisis in EMs“Neoclassic” Period
Source: WEO
Private Capital Flows: A Global Perspective
Capital Flows to Emerging Countries & EM Bond Spreads
“Neoclassic” Period Crisis in EMs
Pre-Asian Crises EM Spreads
250
450
650
850
1050
1250
1450
1650
Capital Flows
EMBI Spreads(bp over US Treasury
bonds)
(in billions of US dollars)
-170
-90
-10
70
15019
91
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Reflow of Private Capital to EMs
1650
360390
1040
en
e-0
4
feb
-04
ma
r-0
4
ab
r-0
4
ma
y-0
4
jun
-04
jul-
04
ag
o-0
4
sep
-04
oct
-04
no
v-0
4
dic
-04
en
e-0
5
feb
-05
ma
r-0
5
ab
r-0
5
ma
y-0
5
jun
-05
jul-
05
ag
o-0
5
sep
-05
oct
-05
4,10
4,30
4,50
4,70
4,90
5,10
5,30
5,50
5,70
Greenspan’s “Conundrum” & EM Spreads(EMBI+ , 30-year Treasury Bonds and Fed Fund Target Rate)
30-y
ear
Tre
asur
y ra
te
30-Year Treasury Bond
Beginning of FED tightening
Fears of FED tightening
FED Funds Target Rate
Greenspan’s “conundrum” testimony
1,0
3,75
230
280
330
380
430
480
EM
BI s
prea
d
Emerging Markets
Capital Flows
Asset Prices(LAC-7, stock prices in US
dollars, 1991.I=100)
(in billions of US dollars)
95
195
295
395
495
595
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
-170
-90
-10
70
150
Crisis in EMs Reflow of Private Capital to EMs
= + 368% = - 50% = + 174%
“Neoclassic” Period
Capital Flows to Emerging Countries & Asset Prices in LAC-7
85
105
125
145
165
185
205
225
245
265
285
305
325
345
ene-
02
mar
-02
may
-02
jul-0
2
sep-
02
nov-
02
ene-
03
mar
-03
may
-03
jul-0
3
sep-
03
nov-
03
ene-
04
mar
-04
may
-04
jul-0
4
sep-
04
nov-
04
ene-
05
mar
-05
may
-05
jul-0
5
sep-
05
Boom in Asset Prices (local stock indices in units of domestic currency, 09 Oct 02 = 100)
LAC - 7
Emerging Asia
Nasdaq
NikkeiS&P500
EU500
+242.5%
+100.4%
+89.8%
+55.9%+56.1%
+55.7%
Oct 02– Sep 05% Change
Fears of FED tightening due
to stream of positive US
economic data
Beginning of easing in external financial conditions
Greenspan’s “conundrum”
testimonyLAC -
7
Emerging Asia
Nasdaq
Nikkei
S&P500
EU500
“Neoclassic” Period Crisis in EMs Reflow of Private Capital to EMs
95
110
125
140
155
170
185
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Capital Flows(in billions of US dollars)
-170
-90
-10
70
150
Bank Credit(LAC-7, real credit to private
sector, 1991.I=100)
Average annual growth Jan-91 - Dec-97:
+8.2%
Average annual growth Dec-97 – Dec-02: -
2.8%
Average annual growth
Dec-02 – Dec-04: +5.8%
Financial and Capital Flows to Emerging Markets and Bank Credit in LAC-7
72
76
80
84
88
92
96
100
Jan-
98
May
-98
Sep
-98
Jan-
99
May
-99
Sep
-99
Jan-
00
May
-00
Sep
-00
Jan-
01
May
-01
Sep
-01
Jan-
02
May
-02
Sep
-02
Jan-
03
May
-03
Sep
-03
Jan-
04
May
-04
Sep
-04
Jan-
05
May
-05
-12%
-7%
-2%
3%
8%
13%
18%
Revival of Domestic Bank Credit(LAC-7, real credit to the private sector, Jun-98=100 and yoy variation)
yoy
varia
tion
Rea
l Ban
k C
redi
t
real bank credit
yoy variation
-18%
-13%
-8%
-3%
2%
7%
12%
17%
22%
27%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
-18%
-13%
-8%
-3%
2%
7%
12%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
-40%
-30%
-20%
-10%
0%
10%
20%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Argentina Brazil Mexico
Domestic Bank Credit in LAC’s G-3(real credit to the private sector, yoy variation)
-40%
-20%
0%
20%
40%
60%
80%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
-20%
-15%
-10%
-5%
0%
5%
10%
15%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Domestic Bank Credit in Other LAC-7 Countries
Chile Colombia Venezuela
(real credit to the private sector, yoy variation)
Reflow of Private Capital to EMs
“Neoclassic” Period Crisis in EMs
-170
-130
-90
-50
-10
30
70
110
150
190Capital Flows
(in billion of UD dollars)
75
80
85
90
95
100
105
110
102,5
Commodity Prices(Non-oil primary commodity prices index, annual average, Jan-1991 =
100)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
104.6
82,6
Capital Flows to Emerging Countries & Commodity Prices
Commodity Prices
Petroleum Metals Foods
40
90
140
190
240
290
340
1990
1992
1994
1996
1998
2000
2002
2004
69
79
89
99
109
119
129
139
149
1990
1992
1994
1996
1998
2000
2002
2004
70
75
80
85
90
95
100
105
110
115
120
1990
1992
1994
1996
1998
2000
2002
2004
Avg 90-97 234%
Avg 90-97
100%
Avg 90-97
23%
Focus on Venezuela:
Oil Prices and Public Finances
Oil Prices and Public Finances
Mar-02 Jun-05
+129.1%
Oil Prices and Expenditure(s.a real expenditures and US dollars per barrel, Mar-02=100)
Oil Prices
32
57
82
107
132
157
182
207
232
Jan
-98
Jul-9
8Ja
n-9
9Ju
l-99
Jan
-00
Jul-0
0Ja
n-0
1Ju
l-01
Jan
-02
Jul-0
2Ja
n-0
3Ju
l-03
Jan
-04
Jul-0
4Ja
n-0
5
Oil
Pric
e Oil
Expenditure +39.5%
70
80
90
100
110
120
130
140
150
Exp
en
ditu
re
Expenditure
Beginning of rise in oil prices
-9.0%
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
Ma
r-9
8
Se
p-9
8
Ma
r-9
9
Se
p-9
9
Ma
r-0
0
Se
p-0
0
Ma
r-0
1
Se
p-0
1
Ma
r-0
2
Se
p-0
2
Ma
r-0
3
Se
p-0
3
Ma
r-0
4
Se
p-0
4
Ma
r-0
5
Beginning of rise in commodity prices
Adjusted Fiscal Balance(central government balance, % GDP)
6.6%
Mar-02 Oil Price
Observed
Chavez Inauguration
Chavez Inauguration
2,2%
- 4,4%
Capital Flows to Emerging Countries & Investment in LAC-7
“Neoclassic” Period Crisis in EMs Reflow of private Capital to EMs
average annual growth 1991.I-1998.II: 8.6%
average annual growth 1998.II-2002.IV: -4.1%
average annual growth
2002.IV-2004.IV: 11.9%
-170
-130
-90
-50
-10
30
70
110
150
190Capital Flows
(in billions of US dollars)
95
105
115
125
135
145
155
165
175
185
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Investment(s.a. GFKF*, 1991.I=100 )
*Gross Fixed Capital Formation
Capital Flows(in billions of US dollars)
-170
-90
-10
70
150Crisis in EMs Reflow of private
Capital to EMs
95
105
115
125
135
145
I-19
91
I-19
92
I-19
93
I-19
94
I-19
95
I-19
96
I-19
97
I-19
98
I-19
99
I-20
00
I-20
01
I-20
02
I-20
03
I-20
04
Investment(s.a. GFKF*, 1991.I=100)
average annual growth: 1991.I-1998.II: 5.2%
average annual growth: 1998.II-2003.II: -3.0% average annual
growth: 2003.II-2004.IV:
9.1%
Capital Flows to Emerging Countries & Investment in Brazil
“Neoclassic” Period
*Gross Fixed Capital Formation
99
149
199
249
299
1991
.I
1992
.I
1993
.I
1994
.I
1995
.I
1996
.I
1997
.I
1998
.I
1999
.I
2000
.I
2001
.I
2002
.I
2003
.I
2004
.I
Investment in Chile and Peru
Crisis in EMs Reflow of private Capital to EMs
Average annual growth 1991.I-1998.II: 14.3%
Average annual growth 1998.II-2002.IV: -2.3%
Average annual growth 2002.IV-2004.IV:
12.6%
Chile
Peru
99
119
139
159
179
199
219
1991
.I
1992
.I
1993
.I
1994
.I
1995
.I
1996
.I
1997
.I
1998
.I
1999
.I
2000
.I
2001
.I
2002
.I
2003
.I
2004
.I
Average annual growth 1991.I-1998.II: 12.1%
Average annual growth 1998.II-2002.IV: -5.8%
Average annual growth 2002.IV-2004.IV:
8.5%
(s.a. GFKF*, 1991.I=100 )
“Neoclassic” Period
*Gross Fixed Capital Formation
Reflow of private Capital to EMs
Colombia
Crisis in EMs
90100110120130140150160170180190
1991
.I
1992
.I
1993
.I
1994
.I
1995
.I
1996
.I
1997
.I
1998
.I
1999
.I
2000
.I
2001
. I
2002
.I
2003
.I
2004
.I
Average annual growth 1991.I-1998.II: 6.0%
Average annual growth 2002.IV-2004.IV:
13.8%
Average annual growth 1998.II-2002.IV: -5,8%
60
7080
90100
110120
130140
150
1991
.I
1992
.I
1993
.I
1994
.I
1995
.I
1996
.I
1997
.I
1998
.I
1999
.I
2000
.I
2001
.I
2002
.I
2003
.I
2004
.I
Average annual growth 1991.I-1998.II: 2.2%
Average annual growth 1991.I-1998.II: -4.0%
Average annual growth 2002.IV-2004.IV:
10.1%
Venezuela
Investment in Colombia and Venezuela
“Neoclassic” Period
(s.a. GFKF*, 1991.I=100 )
*Gross Fixed Capital Formation
65
85
105
125
145
165
185
1991
.I
1992
.I
1993
.I
1994
.I
1995
.I
1996
.I
1997
.I
1998
.I
1999
.I
2000
.I
2001
.I
2002
.I
2003
.I
2004
.I
92
112
132
152
172
192
212
232
1991
.I
1992
.I
1993
.I
1994
.I
1995
.I
1996
.I
1997
.I
1998
.I
1999
.I
2000
.I
2001
.I
2002
.I
2003
.I
2004
.I
Investment en Argentina y Uruguay
Crisis in EMs Reflow of private Capital to EMs
Average annual growth 1991.I-1998.II: 12.8%
Average annual growth 1998.II-2002.IV: -16.0%
Average annual growth 2002.IV-2004.IV:
35.1%
Argentina
Uruguay
Average annual growth 1991.I-1998.III: 9.1%
Average annual growth 1998.III-2002.IV: -20.8%
Average annual growth 2002.IV-2004.IV:
29.3%
“Neoclassic” Period
(s.a. GFKF*, 1991.I=100 )
*Gross Fixed Capital Formation
Capital Flows to Emerging Countries & The Real Exchange Rate in LAC-7
Capital Flows(in billions of US dollars)
-170
-90
-10
70
150
“Neoclassic” Period Crisis in EMs Reflow of Private Capital to EMs
70
80
90
100
110
120
= -24,0% = + 52,3% = - 14,4%
Real Exchange Rate(LAC-7, bilateral RER, quarterly
average, Mar-1991 = 100)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Capital Flows to Emerging Countries & Economic Activity in LAC-7
“Neoclassic” Period Crisis in EMs Reflow of Private Capital to EMs
-170
-130
-90
-50
-10
30
70
110
150
190Capital Flows
(in billions of US dollars)
Economic Activity
(s.a. GDP, 1991.I =100 )
98
108
118
128
138
148
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
average annual growth 1991.I-1998.II: 4.6%
average annual growth
2002.IV-2004.IV: 4.9%average annual growth
1998.II-2002.IV: 0.5%
BrazilBrazil
ChileChile
ColombiaColombia
ArgentinaArgentina
3.2%3.2%
5.9%5.9%
3.7%3.7%
6.8%6.8%
20052005 ForecastsForecasts
MexicoMexico 3.4%3.4%
PeruPeru 5.0%5.0%
VenezuelaVenezuela 6.3%6.3%
LAC-7LAC-7 4.9%4.9%
99
109
119
129
139
149
I-19
91
I-19
92
I-19
93
I-19
94
I-19
95
I-19
96
I-19
97
I-19
98
I-19
99
I-20
00
I-20
01
I-20
02
I-20
03
I-20
04
Capital Flows(in billions of US dollars)
-170
-90
-10
70
150Crisis in EMs Reflow of private
Capital to EMs
Economic Activity
(s.a. GDP, 1991.I =100 )average annual growth:
1991.I-1998.II: 3.7%
average annual growth 1998.II-2003.II: 1.4%
average annual growth 2003.II-2004.IV: 4.6%
“Neoclassic” Period
Capital Flows to Emerging Countries & Economic Activity in Brazil
97
107
117
127
137
147
157
167
177
19
91.I
19
92.I
19
93.I
19
94.I
19
95.I
19
96.I
19
97.I
19
98.I
19
99.I
20
00.I
20
01.
I
20
02.I
20
03.I
20
04.I
(s.a. GDP, 1991=100)
Crisis in EMs Reflow of private Capital to EMs
Chile
Perú
97
117
137
157
177
197
2171
991
.I
19
92.I
19
93.I
19
94.I
19
95.I
19
96.I
19
97.I
19
98.I
19
99.I
20
00.I
20
01.
I
20
02.I
20
03.I
20
04.I
Average annual growth 1991.I-1998.II: 8.1% Average annual growth
2002.IV-2004.IV: 5.4%
Average annual growth 1998.II-2002.IV: 2,2%
average annual growth 1991.I-1998.II: 4.8% average annual growth
2002.IV-2004.IV: 4.8%
Average annual growth 1998.II-2002.IV: 2.4%
Economic Activity in Chile and Peru
“Neoclassic” Period
Crisis in EMs Reflow of private Capital to EMs
Colombia
97
107
117
127
137
147
1991
.I
1992
.I
1993
.I
1994
.I
1995
.I
1996
.I
1997
.I
1998
.I
1999
.I
2000
.I
2001
. I
2002
.I
2003
.I
2004
.I
Average annual growth 1991.I-1998.II: 3.6% Average annual growth
2002.IV-2004.IV: 4.5%
Average annual growth 1998.II-2002.IV: 0,9%
95
100
105
110
115
120
125
1991
.I
1992
.I
1993
.I
1994
.I
1995
.I
1996
.I
1997
.I
1998
.I
1999
.I
2000
.I
2001
. I
2002
.I
2003
.I
2004
.I
average annual growth 2002.IV-2004.IV:
4.5%
average annual growth 1998.II-2002.IV: 0,9%
average annual growth 1991.I-1998.II: 3.6%
Venezuela
Economic Activity in Colombia and Venezuela
“Neoclassic” Period
(s.a. GDP, 1991=100)
97
102
107
112
117
122
127
132
137
19
91.I
19
92.I
19
93.I
19
94.I
19
95.I
19
96.I
19
97.I
19
98.I
19
99.I
20
00.I
20
01.
I
20
02.I
20
03.I
20
04.I
Crisis in EMs Reflow of private Capital to EMs
97102107112117122127132137142147
19
91.I
19
92.I
19
93.I
19
94.I
19
95.I
19
96.I
19
97.I
19
98.I
19
99.I
20
00.I
20
01.
I
20
02.I
20
03.I
20
04.I
Average annual growth 1991.I-1998.II: 5.7%
Average annual growth 2002.IV-2004.IV:
10,2%Average annual growth 1998.II-2002.IV: -4,4%
average annual growth 1991.I-1998.III: 4,4%
average annual growth 2002.IV-2004.IV:
12,4%average annual growth 1998.III-2002.IV: -6,0%
Argentina
Uruguay
Economic Activity in Argentina and Uruguay
“Neoclassic” Period
(s.a. GDP, 1991=100)
0
10
20
30
40
50
60
70
80
90
100
Jan
-70
Jan
-72
Jan
-74
Jan
-76
Jan
-78
Jan
-80
Jan
-82
Jan
-84
Jan
-86
Jan
-88
Jan
-90
Jan
-92
Jan
-94
Jan
-96
Jan
-98
Jan
-00
Jan
-02
Jan
-04
Oil Prices: A Historical Perspective (USD per barrel in 2004 prices)
US$ 99
US$ 49US$ 59
US$ 12
Oil: average of U.K. Brent, Dubai, and West Texas Intermediate
US$ 76 (2005 US$ 80)
Short Term Impact of an $80 Oil Price on Growth(deviations from WEO GDP growth baseline projections, in percentage points)
-0.8%
-0.6%
-0.4%
Industrialized Countries
United States Euro AreaJapan United Kingdom
Average: -0.6%
Emerging Market Net Oil Importing Countries
-0.9%
-0.9%
-0.8%
-0.8%
-0.7%
-0.7%
-0.6%
Latin AmericaAfrica
Emerging Asia
Central and Eastern Europe
Newly Industrialized
Asia
Average: -0.8%
Source: “Oil Market Developments and Issues”, IMF, March 2005.
Capital Flows to Emerging Countries & The Real Exchange Rate in LAC-7
Capital Flows(in billions of US dollars)
-170
-90
-10
70
150
“Neoclassic” Period Crisis in EMs Reflow of Private Capital to EMs
70
80
90
100
110
120
= -24,0% = + 52,3% = - 14,4%
Real Exchange Rate(LAC-7, bilateral RER, quarterly
average, Mar-1991 = 100)
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
45
55
65
75
85
95
105
115
oct
-02
dic
-02
feb
-03
ab
r-0
3
jun
-03
ag
o-0
3
oct
-03
dic
-03
feb
-04
ab
r-0
4
jun
-04
ag
o-0
4
oct
-04
dic
-04
feb
-05
ab
r-0
5
jun
-05
ag
o-0
5
Appreciation by country Oct-02 – Aug-05
Colombia (-27,2%)
Mexico (0.7%)
Brazil (-50,7%)
Argentina (-27,1%)
Chile (-23,4%)
Peru (-9,2%)
Venezuela (-6,8%)
Exchange Rate Appreciation in LAC-7(Oct-2002 = 100)
Capital Flows to Emerging Countries & Official Reserves in LAC-7
Capital Flows(in billions of US dollars)
-170
-90
-10
70
150
“neoclassic” Period Crisis in EMs Reflow of Private Capital to EMs
35
75
115
155
195Reserves
(LAC-7, in billion of US dollars)
= + 113,1 = - 12,2 = + 53,4
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
-170
-130
-90
-50
-10
30
70
110
150
190
Inflation(median, in %)
0%
5%
10%
15%
20%
25%
30%
35%
40%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Reflow of Private Capital to EMs
Inflation Expectations(CPI, yoy variation)
BrazilBrazil
ChileChile
ColombiaColombia
ArgentinaArgentina
Observed 2004Observed 2004
7.6%7.6%
2.4%2.4%
5.5%5.5%
6.1%6.1%
Expected 2005Expected 2005
5.6%5.6%
3.3%3.3%
5.2%5.2%
10.7%10.7%
MexicoMexico 5.2%5.2% 3.7%3.7%
PeruPeru 3.5%3.5% 2.1%2.1%
VenezuelaVenezuela 19.2%19.2% 17.4%17.4%
Capital Flows to Emerging Countries & Inflation in LAC-7
Capital Flows(in billions of US dollars)
“Neoclassic” Period Crisis in EMs
Focus on Argentina:
Exchange Rate Intervention, Inflation and Sterilization
2.6
2.7
2.8
2.9
3.0
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
Jun
-02
Se
p-0
2
De
c-0
2
Ma
r-0
3
Jun
-03
Se
p-0
3
De
c-0
3
Ma
r-0
4
Jun
-04
Se
p-0
4
De
c-0
4
Ma
r-0
5
Jun
-05
Se
p-0
5
2.95
26,105
7,000
9,000
11,000
13,000
15,000
17,000
19,000
21,000
23,000
25,000
27,000
Jun
-02
Oct
-02
Fe
b-0
3
Jun
-03
Oct
-03
Fe
b-0
4
Jun
-04
Oct
-04
Fe
b-0
5
Jun
-05
Oct
-05
Nominal Exchange Rate and Intervention in the Exchange Rate Market
Nominal Exchange Rate(RER vis-à-vis the US)
International Reserves(Millions of US Dollars)
XR stabilizes in a 2.7-3.1 range
XR stabilizes in a 2.7-3.1 range
Observed Inflation(CPI, 12-month rate and annualized monthly
rate of quarterly moving average)
Upper limit
Lower limit
10.2%
Inflation Expectations(2005, market expectatons and BCRA target band)
Upper limit
Lower limit
11.1%
9.8%
2005 Expectations
Inflation and Expectations
2006 Expectations
12-month rate
Annualized monthly rate
17.2%Sharp Acceleration
of InflationSharp Acceleration
of Inflation
1%
3%
5%
7%
9%
11%
13%
15%
17%
19%
Jan
-04
Ma
r-0
4
Ma
y-0
4
Jul-0
4
Se
p-0
4
No
v-0
4
Jan
-05
Ma
r-0
5
Ma
y-0
5
Jul-0
5
Se
p-0
5
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
Jan
-04
Ma
r-0
4
Ma
y-0
4
Jul-0
4
Se
p-0
4
No
v-0
4
Jan
-05
Ma
r-0
5
Ma
y-0
5
Jun
-05
Au
g-0
5
2
3
4
5
6
7
8
Jan
-04
Ma
r-0
4
Ma
y-0
4
Jul-
04
Se
p-0
4
No
v-0
4
Jan
-05
Ma
r-0
5
Ma
y-0
5
Jul-
05
Se
p-0
5
Augmented Monetary Base plus LEBACS
Monetary Objectives of the BCRA(billion of pesos)
Reserve Accumulation and Sterilization
Monetary Base
Mon
etar
y B
ase
Aug
men
ted
Mon
etar
y pl
us L
EB
AC
S*
71%71%Repos + LebacsRepos + Lebacs
29%29%Monetary BaseMonetary Base
Reserve Accumulation Financing 7.5
2.6
Interest Rates on BCRA Bills(180 day LEBACS in pesos)
Repos +
Lebacs
1.1%1.1%May-04May-04
90-d rates90-d rates
243243
Average Average MaturityMaturity
6.9%6.9%Sep-05Sep-05 158158
2.5%2.5%
180-d rates180-d rates
7.5%7.5%
*Augmented Monetary Base = Monetariy Base + Repos
Sharp Acceleration of Inflation
Sharp Acceleration of Inflation
42
45
47
50
52
55
57
60
62
65
67
Jan
-04
Ma
r-0
4
Ma
y-0
4
Jul-0
4
Se
p-0
4
No
v-0
4
Jan
-05
Ma
r-0
5
Ma
y-0
5
Jul-0
5
Se
p-0
5
52
56
60
64
68
72
76
80
84
88
Exchange Rate and Inflation(TCR vis á vis the US dollar, ago-04 = NER)
Exc
hang
e R
ate
Real Exchange Rate
2.7
Sharp Acceleration of Inflation
Nominal Exchange Rate
2.9
2,55
2,60
2,65
2,70
2,75
2,80
2,85
2,90
2,95
3,00
3,05
ag
o-0
4
sep
-04
oct
-04
no
v-0
4
dic
-04
en
e-0
5
feb
-05
ma
r-0
5
ab
r-0
5
ma
y-0
5
jun
-05
jul-0
5
ag
o-0
5
sep
-05
Domestic Inflation
12-m
onth
Infla
tion
5,0%
5,5%
6,0%
6,5%
7,0%
7,5%
8,0%
8,5%
9,0%
9,5%
10,0%
10,5%10.2%
Average 2002-2004:
-1.4%Average 1998-2002:
-3.0%
Average 1991-1997:
-1.1%
“Neoclassic” Period Crisis in EMs Reflow of Private Capitals to EMsCapital Flows
(in billions of US dollars)
Fiscal Result(% of GDP)
-5%
-4%
-3%
-2%
-1%
0%
1%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
-170
-130
-90
-50
-10
30
70
110
150
190
Capital Flows to Emerging Countries & Fiscal Performance in LAC-7
40.8%
Capital Flows to Emerging Countries & Public Debt in LAC-7
“Neoclassic” Period Crisis in EMs Reflow of Private Capitals to EMs
Capital Flows
Public Debt*
(in billions of US dollars)
(% of GDP)
25%
30%
35%
40%
45%
50%
20%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
-170
-130
-90
-50
-10
30
70
110
150
190
*adjusted by Argentina’s debt reestructuring
27.7%
47.6%
43.7%
Focus on Brazil:
The Real Exchange Rate, Interest Rates and Fiscal Performance
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
Jul-0
1
Sep
-01
Nov
-01
Jan-
02
Mar
-02
May
-02
Jul-0
2
Sep
-02
Nov
-02
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep
-03
Nov
-03
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep
-04
Nov
-04
Jan-
05
Mar
-05
May
-05
Jul-0
5
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
Fiscal Balance (last 12 months, in % of GDP)
Fis
cal D
efic
it
Primary Surplus: 4.2%
Fiscal Deficit: 6.3%Interest Payments: 10.5%
Prim
ary
Su
rplu
s &
In
tere
st P
aym
en
ts
FiscalDeficit: 2.8%
Interest Payments: 7.9%
Primary Surplus: 5.1%
Public Debt Composition
Fixed
Rate 21%
Others
14%
External or FX indexed Public
Debt 12% Indexed to the Interest Rate
49%
Public Debt Structure
Repos 4%
46%
48%
50%
52%
54%
56%
58%
60%
62%
64%
66%
Jan-
00
Jun-
00
Nov
-00
Apr
-01
Sep
-01
Fe
b-0
2
Jul-0
2
Dec
-02
Ma
y-0
3
Oct
-03
Ma
r-0
4
Aug
-04
Jan-
05
Jun-
05
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Exchange Rate
Public debt/GDP
63.6%
Public Debt Level and the Exchange Rate
51.7%
Interest Payments
15
17
19
21
23
25
27
Jul-0
1
Nov
-01
Mar
-02
Jul-0
2
Nov
-02
Mar
-03
Jul-0
3
Nov
-03
Mar
-04
Jul-0
4
Nov
-04
Mar
-05
Jul-0
5
7%
8%
9%
10%
11%
Interest Payments and the Interest Rate
Selic Rate
Inte
rest
Pay
men
ts
Inte
rest
Rat
e
10.5%
7.9%
OUTLINE
I.I. Capital Flight from EMs, 1997-2002: Capital Flight from EMs, 1997-2002: Global RepercussionsGlobal Repercussions
II.II. Revival of Capital Inflows to EMs, 2003-2005: Revival of Capital Inflows to EMs, 2003-2005:
A Latin American Perspective A Latin American Perspective A Global PerspectiveA Global Perspective
III.III. Unwinding of Global Imbalances and Unwinding of Global Imbalances and Latin America Latin America
-100-50
050
100150200250
-250-200-150-100
-500
50
-170-130
-90-50-103070
110150190
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
225
-138
-87
Reflow of Private Capital to EMs
2003
2004
-14
= -239
-85 = + 53
99
= + 186
(billions of US dollars)
USA
Industrialized Countries
Emerging Countries
Crisis in EMs“Neoclassic” Period
Source: WEO
Private Capital Flows: A Global Perspective
US External Deficit Financing
Reflow of Private Capital to EMs
Current Account
-700
-600
-500
-400
-300
-200
-100
0
-414
(billions of US dollars)
Crisis in EMs“Neoclassic” Period
Private Financing
Official Financing
-1000
100200300400500600700800
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
-14-1000
100200
2003
2004
246
167
Source: WEO
679
-666
Massive Intervention of Central Banks(International reserves, in billions of US dollars)
*Includes: Korea, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, Taiwan & Thailand.
20
50
80
110
140
170
200
230
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
China Japan
LAC-7**
10
110
210
310
410
510
610
710
1990
1992
1994
1996
1998
2000
2002
2004
10
110
210
310
410
510
610
710
810
910
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
216
664
396
834
Rest of Asia*
100
200
300
400
500
600
700
800
900
1.000
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
= + 439
561
1.000
148
211
**Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru & Venezuela
= + 448 = + 438
= + 63
330
340
350
360
370
380
390
400
410
1999
2000
2001
2002
2003
2004
2005
Euro -Zone
353
374
= + 21
Official Financing and the US
(10-year Treasury bond real rate, annual avg)Interest Rates
-700
-600
-500
-400
-300
-200
-100
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
Current Account(in billions of US dollars and in % of GDP)
% of GDP
billions of US dollars
(annual avg,1996 = 100)Real Effective Exchange Rate
1.0%
1998
2000
2002
2004
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1996
2,1% 1,7%
1997
1999
2001
2003
= + 11,6%
77
82
87
92
97
1996
1998
2000
2002
2004
1997
1999
2001
2003
666
Euro
China
Japan
95
100
105
110
115
120
125
130
135
140
Oct
-02
Dic
-02
Feb
-03
Abr
-03
Jun-
03
Ago
-03
Oct
-03
Dic
-03
Feb
-04
Abr
-04
Jun-
04
Ago
-04
Oct
-04
Dic
-04
Feb
-05
Abr
-05
Jun-
05
Ago
-05
Selected Bilateral Real Exchange Rates(Oct-2002=100)
= + 23,5%
= + 3,3%
= + 2,4%
OUTLINE
I.I. Capital Flight from EMs, 1997-2002: Capital Flight from EMs, 1997-2002: Global RepercussionsGlobal Repercussions
II.II. Revival of Capital Inflows to EMs, 2003-2005: Revival of Capital Inflows to EMs, 2003-2005:
A Latin American Perspective A Latin American Perspective A Global PerspectiveA Global Perspective
III.III. Unwinding of Global Imbalances and Unwinding of Global Imbalances and Latin America Latin America
Will the unwinding of current global imbalances result in imminent major
turmoil in capital markets?
If so, how is LAC likely to fare in that scenario?
Capital Flows to/from Capital Flows to/from Emerging Economies:Emerging Economies:Capital Flows to/from Capital Flows to/from Emerging Economies:Emerging Economies:
Global Dimensions and Global Dimensions and Implications for LACImplications for LAC
Global Dimensions and Global Dimensions and Implications for LACImplications for LAC
Ernesto TalviErnesto Talvi
Prepared for Presentation at the XXII Meeting of the Latin American Prepared for Presentation at the XXII Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington DCNetwork of Central Banks and Finance Ministries, IDB, Washington DC
October 20October 20thth, 2005, 2005
CERESCERES
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