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