march 28, 2004 lac-7 macroeconomic outlook. i.post-adjustment latin america: back in vogue with...

March 28, 2004March 28, 2004

LAC-7 Macroeconomic Outlook

LAC-7 Macroeconomic Outlook

I.I. Post-Adjustment Latin America: Back in Vogue with Post-Adjustment Latin America: Back in Vogue with International InvestorsInternational Investors

II.II. LAC-7 Macroeconomic Outlook: a Rosier Scenario LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004for 2004

III.III. Risks Ahead: the Specter of Fed TighteningRisks Ahead: the Specter of Fed Tightening

IV.IV. The Banking Sector: Introduction to SeminarThe Banking Sector: Introduction to Seminar

OUTLINE

200

400

600

800

1000

1200

1400

Jun-

97

Jun-

98

Jun-

99

Jun-

00

Jun-

01

Jun-

02

Jun-

03

35

55

75

95

115

135

155

Interest Rates

Spread

Spreads & Domestic Interest Rates

Russian Crisis

Do

me

stic

len

din

g r

ate

s

EM

BI+

ad

j. fo

r A

rge

ntin

a

(domestic lending rates, June 1998=100)

200

400

600

800

1000

1200

1400

Jun-

97

Jun-

98

Jun-

99

Jun-

00

Jun-

01

Jun-

02

Jun-

03

Emerging Markets Spreads & Domestic Interest Rates

Includes: Brazil, Chile, Colombia, Mexico, Peru & Venezuela

EM

BI+

ad

j. fo

r A

rge

ntin

a

Russian Crisis

Pre- Russian Crisis Spread

Emerging Markets Spreads(EMBI+ adj. for Argentina, in bp)

ENRON effect

0

20000

40000

60000

80000

100000

1997

-I

1997

-III

1998

-I

1998

-III

1999

-I

1999

-III

2000

-I

2000

-III

2001

-I

2001

-III

2002

-I

2002

-III

2003

-I

2003

-III

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

LAC-7 Total Capital Flows(4 quarters, millions of US dollars and in % of GDP)

Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela

Russian Crisis

% GDP (LAC-7 average)

Post-Adjustment Period

-10

40

90

140

190

240

290

En

e-9

0

En

e-9

2

En

e-9

4

En

e-9

6

En

e-9

8

En

e-0

0

En

e-0

2

En

e-0

4

LAC-7: External & Domestic Deleveraging

Russian Crisis

External Deleveraging(Financial flows in billions of real US dollars, cumulative since 1990)

79

84

89

94

99

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

150

170

190

210

230

250

270

Re

al D

om

est

ic B

an

k C

red

it (s

et

98

=1

00

)

Cu

mm

ula

tive

fin

an

cia

l flo

ws

Cumulative Financial Flows

Domestic bank credit

External &Domestic Deleveraging(real bank credit, Set-98=10)

LAC-7: Exchange Rate & International Reserves

Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

90

110

130

150

170

190

210

Jun-

98

Dic

-98

Jun-

99

Dic

-99

Jun-

00

Dic

-00

Jun-

01

Dic

-01

Jun-

02

Dic

-02

Jun-

03

Dic

-03

Nominal & Real Exchange Rate(vis-à-vis US dollar)

Real exchange rate

Nominal exchange rate

125000

135000

145000

155000

165000

175000

185000

195000

Jun

-98

Jun

-99

Jun

-00

Jun

-01

Jun

-02

Jun

-03


Stock of International Reserves(millions of US dollars)


+16%

+8%

LAC-7: Current Account Adjustment(4 quarters, millions of US dollars and % of GDP)

Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela

-14000

-12000

-10000

-8000

-6000

-4000

-2000

0

20001

99

7-I

19

97

-III

19

98

-I

19

98

-III

19

99

-I

19

99

-III

20

00

-I

20

00

-III

20

01

-I

20

01

-III

20

02

-I

20

02

-III

20

03

-I

20

03

-III

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

% GDP (LAC-7 average)

Russian Crisis Post-Adjustment Period

LAC-7: Asset Prices (Local stock market indices & bond prices, in US dollars, Oct. 2002=100)

Loca

l Sto

ck M

arke

t ind

ex (

US

$)

Bon

d P

rice

inde

x

*Includes: Argentina, Brazil, Colombia, Mexico, Peru & Venezuela

95

105

115

125

135

145

155E

ne-0

2

Mar

-02

May

-02

Jul-0

2

Sep

-02

Nov

-02

Ene

-03

Mar

-03

May

-03

Jul-0

3

Sep

-03

Nov

-03

95

115

135

155

175

195

215

235

255

Stock Market Indices*

Bond Price Indices*


-3%

-2%

-1%

1%

2%

3%

4%

5%

6%

7%

8%M

ar-9

7

Sep

-97

Mar

-98

Sep

-98

Mar

-99

Sep

-99

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

-4%

-3%

-2%

-1%

0%

1%

2%

LAC-7: Business Cycle and Financial Flows (GDP and financial flows, last four quarters)

GD

P (

yoy

% c

hang

e)

Fin

an

cia

l Flo

ws

(% G

DP

)

GDP

Financial Flows

Post-Adjustment PeriodRussian Crisis

LAC-7: Labour Market (s.a. unemployment, simple average)

Includes: Argentina, Brazil, Chile, Colombia, Mexico,Peru and Venezuela

Post-Adjustment PeriodAdjustment Period

5

6

7

8

9

10

11

12

13

Jun-

98

Dic

-98

Jun-

99

Dic

-99

Jun-

00

Dic

-00

Jun-

01

Dic

-01

Jun-

02

Dic

-02

Jun-

03

Dic

-03

LAC-7 excluding VenezuelaLAC-7





OUTLINE

(US HY corporate bonds, bps over US Treasuries, and EMBI+ adjusted for Argentina)

300

400

500

600

700

800

900

1000

1100

1200

Jul-0

1

Sep

-01

Nov

-01

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

200

300

400

500

600

700

800

900

1000

EM

BI+

Ad

just

ed

fo

r A

rgen

tin

a

Hig

h Y

ield

B

on

ds

ENRON effectEMBI+

(adjusted for Argentina)

US HY Corporate spread

International Financial Conditions for EMs

Pre Asian Crisis Spread

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

19

97

-I

19

98

-I

19

99

-I

20

00

-I

20

01

-I

20

02

-I

20

03

-I

20

04

-I0

20000

40000

60000

80000

100000

1997

-I

1997

-IV

1998

-III

1999

-II

2000

-I

2000

-IV

2001

-III

2002

-II

2003

-I

2003

-IV

2004

-III

LAC-7 Capital Flows(4 quarters, millions of US dollars)

Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

Russian Crisis

Total Capital Flows Financial Flows

Russian Crisis

IIF Forecasts

IIF Forecasts

50

70

90

110

130

150

170

190

Oct

-97

Oct

-98

Oct

-99

Oct

-00

Oct

-01

Oct

-02

Oct

-03

Commodity Prices(1997.II=100)

Prim

ary

Co

mm

od

itie

s &

Fo

od

Oil Food

Non oil primary commodities

Non Oil Commodity PricesOil Pices

70

75

80

85

90

95

100

Oct

-97

Oct

-98

Oct

-99

Oct

-00

Oct

-01

Oct

-02

Oct

-03

Source: IMF

Source: LatinFocus Consensus Forecasts

(GDP growth forecasts weighted by GDP and LAC exports)G-3 Growth Forecasts

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2001 2002 2003 2004

Weigted by GDP

Weigted by LAC Exports

0 1 2 3 4 5

Japan

Euro Area

USA

2003 2004

(GDP yoy variation in %)LAC-7 Growth Forecasts

Source: Latin Focus Consensus Forecasts

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2002 2003 2004

Per CountryLAC-7

3 4 5 6 7

Mexico

Colombia

Brazil

Peru

Chile

Argentina

VenezuelaRebound Countries

(Investment yoy variation in %)LAC-7 Investment Forecasts


-10

-8

-6

-4

-2

0

2

4

6

8

10

2002 2003 2004 3 8 13 18

Peru

Mexico

Brazil

Chile

Colombia

Venezuela

Argentina

Rebound Countries

Per CountryLAC-7

(Unemployment rate in %)LAC-7 Unemployment Forecasts


10.2

10.4

10.6

10.8

11.0

11.2

11.4

11.6

11.8

2002 2003 2004 0 5 10 15

Mexico

Chile

Peru

Brazil

Venezuela

Colombia

Argentina

2003 2004

Per CountryLAC-7





OUTLINE

200

400

600

800

1000

1200

1400

1600

1800

Dic

-93

Dic

-94

Dic

-95

Dic

-96

Dic

-97

Dic

-98

Dic

-99

Dic

-00

Dic

-01

Dic

-02

Dic

-03

0

1

2

3

4

5

6

7

EM

BÎ+

FE

D F

unds

Rat

e

(EMBI+ and FED Funds Rate)Emerging Markets and the FED

FED Funds Rate

EMBI+ Spread

Russian Crisis

The impact of the Fed Funds rate on Emerging Markets spreads during periods of Fed tightening: per 100 bp increase in the Fed Funds rate EM spreads increase 150 bp*

Lowest rate in 45 years

*Source: UBS estimations

FED tightening period: Dec 1993 - June 1995

Fed’s Open Market Committee January Statement

The FOMC changed the wording of its previous statement from:

The Fed’s Open Market Committee (FOMC) meeting took place January 27th-28th and the minutes were made public on January 28th

“keep rates low for a considerable period”

“be patient in removing its current policy accommodation”

to

99

101

103

105

107

109

111

23/1

0/03

06/1

1/03

20/1

1/03

04/1

2/03

18/1

2/03

01/0

1/04

15/0

1/04

29/0

1/04

300

310

320

330

340

350

360

370

380

390

400

23/1

0/03

30/1

0/03

06/1

1/03

13/1

1/03

20/1

1/03

27/1

1/03

04/1

2/03

11/1

2/03

18/1

2/03

25/1

2/03

01/0

1/04

08/0

1/04

15/0

1/04

22/0

1/04

29/0

1/04

EM

BI+

adj

. for

Arg

entin

a


LAC-7: Sell-Off After Fed Statement

EMBI Spreads EMBI Bond Prices(Sovereign spread, b.p.) (23-10-2003 = 100, US$)

Current Jan-09 Variation

Argentina 5845 5268 +577

Brazil 537 396 +141

Perú 361 255 +106

Venezuela 643 570 +73

Colombia 434 361 +73

Mexico 205 178 +27

Chile 94 83 +11

EMBI 349 304 +45


Argentina 68 74 -8%

Brazil 381 404 -6%

Peru 426 449 -5%

Venezuela 378 391 -3%

Colombia 213 219 -3%

Mexico 284 286 -1%

Chile 164 165 -1%

EMBI 252 261 -4%

Jan-09

Jan-09

Fed Statement

Fed Statement

97.0

97.5

98.0

98.5

99.0

99.5

100.0

100.5

101.0

23/1

0/03

06/1

1/03

20/1

1/03

04/1

2/03

18/1

2/03

01/0

1/04

15/0

1/04

29/0

1/04


Current Jan- 09 Depreciation

Chile 595 558 +7%

Mexico 11 11 +4%

Brazil 3 3 +3%

Argentina 3 3 +3%

Peru 3 3 +1%

Venezuela* 3027 2890 +5%

Colombia 2751 2768 -1%

* Parallel Market Exchange Rate 99

102

105

108

111

114

117

120

123

126

129

23/1

0/03

06/1

1/03

20/1

1/03

04/1

2/03

18/1

2/03

01/0

1/04

15/0

1/04

29/0

1/04


Brasil 192 215 -11%

Peru 195 210 -7%

Argentina 214 224 -4%

Chile 141 144 -2%

Mexico 158 149 +6%

Venezuela 353 325 +8%

Colombia 169 150 +13%

Nominal Exchange Rates Stock Markets(23-10-2003 = 100, domestic currency per dollar) (23-10-2003 = 100, local currency)

LAC-7: Sell-Off After Fed Statement

Jan-09

Jan-09

Fed Statement Fed Statement





OUTLINE

2626

Public Sector Banks, PSBPublic Sector Banks, PSB. Their share is large in LAC, . Their share is large in LAC, although it decreased in the second half of the 1990s.although it decreased in the second half of the 1990s.

Bank PrivatizationBank Privatization:: Before 1995Before 1995: Bolivia, Chile, Ecuador, Peru, Brazil and : Bolivia, Chile, Ecuador, Peru, Brazil and

Mexico. Mexico. After 1995After 1995: Argentina and Nicaragua.: Argentina and Nicaragua.

Foreign BanksForeign Banks. Their share increased in the 1990s, especially . Their share increased in the 1990s, especially in Argentina Mexico and Peruin Argentina Mexico and Peru

Why the Change in Banking StructureWhy the Change in Banking Structure? Partly as a result of ? Partly as a result of crises that hit the regioncrises that hit the region

Argentina 1995: 32 banks closed & 37 merged.Argentina 1995: 32 banks closed & 37 merged.Colombia 1998-99: 4 banks closed & 3 merged.Colombia 1998-99: 4 banks closed & 3 merged.Mexico 1995-96: massive foreign bank entryMexico 1995-96: massive foreign bank entry

Banking Sector: Stylized Facts

2727

Public Sector Banks, PSBPublic Sector Banks, PSB. They tend to have weaker . They tend to have weaker balance sheets and profitability than their private sector balance sheets and profitability than their private sector counterparts counterparts

Thus, PBS may increase the probability that an external Thus, PBS may increase the probability that an external shock will lead to a crisis. However, a poorly shock will lead to a crisis. However, a poorly implemented privatization process may make the implemented privatization process may make the situation even worsesituation even worse

Foreign Banks, ProcyclicalForeign Banks, Procyclical? There is a lively debate ? There is a lively debate about this. The recent experience in Chile suggests that about this. The recent experience in Chile suggests that they may exacerbate capital outflows in times of crisis.they may exacerbate capital outflows in times of crisis.

Is Bank Privatization a Good Thing?

Public Sector Banks Around the World

0

10

20

30

40

50

60

70

80

90

100

Industrial

Countries

Sub-Saharan

Africa

Latin America

East Asia and

Pacific

Developing

Countries

East and Central

Europe

Middle East and

North Africa

South Asia

Sha

re o

f P

SB

Ass

ets

(%

)

1970

1985

1995

Source: IDB calculations based on data from La Porta et al. (2001)

2929

Public Sector Commercial BanksPublic Sector Commercial Banks

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00%

Nicaragua

Guatemala

El Salvador

Chile

Colombia

Argentina

Brazil

Costa Rica

2000

1995

Source: IDB calculations based on bank superintendence data

Share of PSB assets (%)

3030

Foreign-Owned BanksForeign-Owned Banks

0 10 20 30 40 50 60 70 80

El Salvador

Guatemala

Costa Rica

Bolivia

Colombia

Brazil

Chile

Argentina

Peru

Mexico

2002

1995

Share of Foreign Owned banksSource: Own calculations based on superintendence data

* For Argentina 2001

3131

COMMERCIAL BANKS: Relationships Between COMMERCIAL BANKS: Relationships Between Public and Private BanksPublic and Private Banks

-2%-1%0%1%2%3%4%5%6%7%8%9%

Loans to PublicSector

Non PerformingLoans

Return onAssets

3232

CHILEAN BANKS: Foreign / Total Assets

0

1

2

3

4

5

6

7

1994 1995 1996 1997 1998 1999 2000 2001 2002

0

1

2

3

4

5

6

7

Domestic

Foreign

System

% %

Source: Caballero, Cowan and Kearns (2003)

march 28, 2004 lac-7 macroeconomic outlook. i.post-adjustment latin america: back in vogue with...

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gdp lac

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gdpincludes argentina

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billions of real us

local stock market index

financial flows gdp

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