Post on 19-Jan-2016
All That Glitters May Not Be Gold: All That Glitters May Not Be Gold: Debating Key IssuesDebating Key Issues
All That Glitters May Not Be Gold: All That Glitters May Not Be Gold: Debating Key IssuesDebating Key Issues
May 8May 8thth, 2008, 2008
Prepared for Presentation at the XXVII Meeting of the Latin American Network of Prepared for Presentation at the XXVII Meeting of the Latin American Network of Central Banks and Finance Ministries, IADB, Washington DC. This Presentation is Central Banks and Finance Ministries, IADB, Washington DC. This Presentation is
based on the IADB Research Department report “All That Glitters May Not Be Gold: based on the IADB Research Department report “All That Glitters May Not Be Gold: Assessing Latin America’s Recent Macroeconomic Performance”, coordinated by Assessing Latin America’s Recent Macroeconomic Performance”, coordinated by
Alejandro Izquierdo and Ernesto Talvi Alejandro Izquierdo and Ernesto Talvi
OBJECTIVES
To present a To present a regionalregional macroeconomic perspective macroeconomic perspective
-15%
-10%
-5%
0%
5%
10%
15%
Dic
-91
Dic
-92
Dic
-93
Dic
-94
Dic
-95
Dic
-96
Dic
-97
Dic
-98
Dic
-99
Dic
-00
Dic
-01
Dic
-02
Dic
-03
Dic
-04
Dic
-05
Dic
-06
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Venezuela
Beginning of Current Boom
Tequila Crisis
Russian Crisis
Cumulative R2
1st PC
2nd PC
PC= Principal Component
0.42
0.64
Synchronization of Economic Fluctuations in Latin America(Real GDP, average annual growth)
OBJECTIVES
To evaluate macroeconomic performance and To evaluate macroeconomic performance and fundamentals internalizing fundamentals internalizing the impact of external the impact of external factorsfactors
To present a To present a regionalregional macroeconomic perspective macroeconomic perspective
External Conditions for Latin America
*World-7 includes G-3 (EU-15, Japan and USA) and EM-4 (China, India, Korea and Russia)
4.8%
World Production(World-7 GDP Index, Annual Variation,
Weighted by PPP adjusted GDP*)
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
Ma
r-0
3
Jul-0
3
Nov
-03
Ma
r-0
4
Jul-0
4
Nov
-04
Ma
r-0
5
Jul-0
5
Nov
-05
Ma
r-0
6
Jul-0
6
Nov
-06
Ma
r-0
7
Jul-0
7
Average 91-97
299
264
External Financial Conditions(EMBI spread, basis points)
100
200
300
400
500
600
700
800
900
1000
Oct
-02
Ma
r-0
3
Ago
-03
Ene
-04
Jun-
04
Nov
-04
Abr
-05
Sep
-05
Fe
b-0
6
Jul-0
6
Dic
-06
Ma
y-0
7
Oct
-07
Ma
r-0
8
984
548
EMBI+
Non-LatinEMBI
Average 91-97
200
364
Average 91-97
Average 91-97
Oil
Non-Oil
Commodity Prices(Index of Oil and Non-Oil
Commodities, Oct-02=100)
65
115
165
215
265
315
365
Oct
-02
Abr
-03
Oct
-03
Abr
-04
Oct
-04
Abr
-05
Oct
-05
Abr
-06
Oct
-06
Abr
-07
Oct
-07
OBJECTIVES
To stimulate a To stimulate a constructive policy debateconstructive policy debate
To evaluate macroeconomic performance and To evaluate macroeconomic performance and fundamentals internalizing fundamentals internalizing the impact of external the impact of external factorsfactors
To present a To present a regionalregional macroeconomic perspective macroeconomic perspective
Growth PerformanceGrowth Performance
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
03-07
Average:
5.8%
74-06
Average:
3.2%
Observed GDP Growth(LAC-7, GDP Annual Growth)
90s Boom Current BoomRussian Crisis
91-97
Average:
4.6%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1991
1993
1995
1997
1999
2001
2003
2005
2007
*Izquierdo, Romero and Talvi (2007)
Forecast for GDP: 2003 – 2006*
(LAC-7, Values in logs)
4.55
4.60
4.65
4.70
4.75
4.80
4.85
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
Nov
-05
Mar
-06
Jul-0
6
GDP at long run average
growthObserved
GDP
90% confidence interval
Predicted GDP with Observed
External Factors
Growth Performance in Latin America
‘This Time Is Different’ ‘All That Glitters May Not Be Gold’
03-07
Average:
5.8%
74-06
Average:
3.2%
Growth Performance in Latin America
‘All That Glitters May Not Be Gold’
World: 5.0%
2% 3% 4% 5% 6% 7% 8% 9%
Latin America
Africa
Emerging Europe
Middle East
Ex USSR
Emerging Asia
Growth in EMs: A Comparative Perspective(Real GDP, 2003-2007 annual growth)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
‘This Time Is Different’
03-07
Average:
5.8%
74-06
Average:
3.2%
Observed GDP Growth(LAC-7, GDP Annual Growth)
90s Boom Current BoomRussian Crisis
91-97
Average:
4.6%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1991
1993
1995
1997
1999
2001
2003
2005
2007
90s Boom Russian Crisis Current Boom
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
0,11
0,12
0,13
0,14
0,15
0,16
0,17
0,18
1990
1992
1994
1996
1998
2000
2002
2004
2006
Investment to GDP Ratio(Private investment, constant prices, in %)
Investment in Latin America
Investment: 90’s vs. 00’s Expansion(Private investment, LAC-7, Year 0 = 100)
* Deflated by capital price indexes. The current expansion year 0 is 2002 and the 90s expansion year 0 is 1990.
95
105
115
125
135
145
155
165
175
0 1 2 3 4
Current Expansion
90s Expansion
16.5%
17.0%
‘This Time Is Different’ ‘All That Glitters May Not Be Gold’
90s Expansion
Current Expansion
Productivity in Latin America‘This Time Is Different’ ‘All That Glitters May Not Be Gold’
90’s Boom Russian Crisis Current Boom
Productivity: 90’s vs. 00’s Expansion(Total Factor Productivity, LAC-7, Year 0 = 100*)
99
101
103
105
107
109
111
113
0 1 2 3 4
*The current expansion year 0 is 2002 and the 90s expansion year 0 is 1990.
Annual Variation
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Total Factor Productivity Index
Total Factor Productivity(1990=100 and annual variation in %)
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
1990
1992
1994
1996
1998
2000
2002
2004
2006
98
102
106
110
114
118
122
126
Pro
duct
ivity
Gro
wth
Pro
duct
ivity
Ind
ex
90-06 Average Growth: 1.0%
Productivity in Latin America‘This Time Is Different’ ‘All That Glitters May Not Be Gold’
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Productivity Growth by Region(Total Factor Productivity, 1990-2006; annual rate)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Emerging Asia EmergingRegions*
AdvancedEconomies
LAC-7
* Excluding LAC and China
3.0%
1.8%
1.0%1.0%
90’s Boom Russian Crisis Current Boom
Annual Variation
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Total Factor Productivity Index
Total Factor Productivity(1990=100 and annual variation in %)
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
1990
1992
1994
1996
1998
2000
2002
2004
2006
98
102
106
110
114
118
122
126
Pro
duct
ivity
Gro
wth
Pro
duct
ivity
Ind
ex
90-06 Average Growth: 1.0%
QUESTIONS FOR DISCUSSION: GROWTH PERFORMANCE
From your country’s perspective, do you consider that From your country’s perspective, do you consider that external external factorsfactors play an important role in explaining current growth play an important role in explaining current growth performance?performance?
Our evidence suggest that even if the favorable external Our evidence suggest that even if the favorable external environment persists, the effect on growth will probably environment persists, the effect on growth will probably dissipate. Do you think that external conditions have a dissipate. Do you think that external conditions have a level or level or growth effectgrowth effect on economic activity? on economic activity?
Has the trend growth rate in your country increased above its Has the trend growth rate in your country increased above its historical average?historical average? If so, can If so, can the dynamics of the dynamics of investment and investment and productivityproductivity during the current expansion support higher trend during the current expansion support higher trend growth rates in your country? growth rates in your country?
From a growth perspective, does your country fit the From a growth perspective, does your country fit the regional regional patternpattern? Why yes or why not?? Why yes or why not?
Fiscal PolicyFiscal Policy
Observed and Structural Fiscal Balances*
-4%
Chile(% of GDP)
-2%
0%
2%
4%
6%
8%
10%
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
Beginning of Current Boom
Russian Crisis
(Structural balances computed by applying the “Chilean Fiscal Rule” to other LAC-7 countries)
Structural
Observed
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Fiscal balances include: Public Sector (Mexico), Non-Financial Public Sector (Argentina, Colombia, Peru), General Government (Brazil), Central Government (Chile, Venezuela).
Latin America(LAC-7, % of GDP)
Beginning of Current Boom
Russian Crisis
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
**Izquierdo, Ottonello and Talvi (forthcoming). Izquierdo, Ottonello and Talvi (forthcoming).
-4.1%
‘All That Glitters May Not Be Gold’
(Structural)
1.0%
(Observed)
‘This Time Is Different’
Structural Fiscal Balance
0,0%
Fiscal Balances by Country(Dec-06, in % of GDP)
LAC-7
Observed
1,1%
0,6%Argentina 1,8% -2,2%
-3,3%Brazil -3,0% -4,9%
6,1%Chile 7,7% 1,0%
-1,2%Colombia -0,5% -0,1%
-0,5%Mexico 0,1% -4,5%
0,6%Peru 2,1% -1,8%
-2,0%Venezuela -0,2% -16,0%
Traditional HP Filter* “Chilean” Fiscal Rule**Fiscal Balance
-4,1%
LAC-6 is the simple average of Argentina, Brazil, Colombia, Mexico, Peru and Venezuela. LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. Fiscal balances include: Public Sector (Mexico), Non-Financial Public Sector (Argentina, Colombia, Peru), General Government (Brazil), Central Government (Chile, Venezuela).
*HP = Hodrick Prescott; lambda = 1600 (quarterly data). **Izquierdo, Ottonello and Talvi (forthcoming).
-1,0%LAC-6 0,0% -4,9%
Fiscal Revenues and Expenditures*
Beginning of Current Boom
Russian Crisis Beginning of Current Boom
Russian Crisis
Fiscal Expenditures
Fiscal Revenues
Adjusted Revenues
Adjusted Revenues
Fiscal Expenditures
Fiscal Revenues
Chile
85
135
185
235
285
335
1991
1993
1995
1997
1999
2001
2003
2005
(Fiscal Revenues, Mar-91 = 100)
Latin America (LAC-7, Fiscal Revenues, Mar-91 = 100)
85
135
185
235
285
335
1991
1993
1995
1997
1999
2001
2003
2005
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Fiscal balances include: Public Sector (Mexico), Non-Financial Public Sector (Argentina, Colombia, Peru), General Government (Brazil), Central Government (Chile, Venezuela).
**Izquierdo, Ottonello and Talvi (forthcoming). Izquierdo, Ottonello and Talvi (forthcoming).
(Adjusted revenues computed by applying the “Chilean Fiscal Rule” to other LAC-7 countries)
Beginning of Current Boom
Russian Crisis
85
135
185
235
285
335
1991
1993
1995
1997
1999
2001
2003
2005
Fiscal Expenditures
Fiscal Revenues
Adjusted Revenues
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Fiscal balances include: Public Sector (Mexico), Non-Financial Public Sector (Argentina, Colombia, Peru), General Government (Brazil), Central Government (Chile, Venezuela).
**Izquierdo, Ottonello and Talvi (forthcoming). Izquierdo, Ottonello and Talvi (forthcoming).
Increase in Public Expenditures (in % of increase in fiscal revenues, 2003-2006)
0% 20% 40% 60% 80% 100%
Chile
Argentina
Peru
Colombia
Mexico
Brazil
Venezuela
LAC-7: 77%
(LAC-7, Fiscal Revenues, Mar-91 = 100; Adjusted Revenues following the “Chilean Fiscal Rule”)
Fiscal Revenues and Expenditures*
Revenue Bonanza and Government Expenditure in Latin America
Revenue Bonanza and Government Expenditure in Latin America
Public Investment Expenditure
17.2%
13.1%
14.0%
10%
11%
12%
13%
14%
15%
16%
17%
18%
1998 2002 2007
(LAC-7, in % of Primary Expenditure)
Beginning of Current Boom
Russian Crisis
85
135
185
235
285
335
1991
1993
1995
1997
1999
2001
2003
2005
Fiscal Expenditures
Fiscal Revenues
Adjusted Revenues
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
*Fiscal balances include: Public Sector (Mexico), Non-Financial Public Sector (Argentina, Colombia, Peru), General Government (Brazil), Central Government (Chile, Venezuela).
**Izquierdo, Ottonello and Talvi (forthcoming). Izquierdo, Ottonello and Talvi (forthcoming).
(LAC-7, Fiscal Revenues, Mar-91 = 100; Adjusted Revenues following the “Chilean Fiscal Rule”)
Fiscal Revenues and Expenditures*
Observed and Structural Public DebtObserved and Structural Public Debt**
(LAC-7, in % of GDP)
30%
35%
40%
45%
50%
55%1
99
0
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
20
05
20
06
Current Boom90s Boom Russian Crisis
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
52%
37%
33%
50%
(Observed Debt)
‘This Time Is Different’
**Izquierdo, Ottonello and Talvi (forthcoming). Izquierdo, Ottonello and Talvi (forthcoming).
47%
44%(Structural Debt)
‘All That Glitters May Not Be Gold’
QUESTIONS FOR DISCUSSION: FISCAL POLICY (I)
Do you think having Do you think having explicit structural fiscal balance explicit structural fiscal balance targetstargets à la Chile could be useful for your country? à la Chile could be useful for your country? If so, If so, what are the difficulties in implementing such a rule?what are the difficulties in implementing such a rule?
From a fiscal policy perspective, does your country fit the From a fiscal policy perspective, does your country fit the regional patternregional pattern? Why yes or why not?? Why yes or why not?
Do you consider the Do you consider the structural fiscal balancestructural fiscal balance a relevant a relevant concept for evaluating the stance of fiscal policy? If so, is concept for evaluating the stance of fiscal policy? If so, is a a ‘Chilean-Style’ smoothing‘Chilean-Style’ smoothing (i.e. saving the boom to a (i.e. saving the boom to a large extent) relevant for your own country? large extent) relevant for your own country?
QUESTIONS FOR DISCUSSION: FISCAL POLICY (II)
Should structural fiscal balance targets be established Should structural fiscal balance targets be established taking into account the target levels of taking into account the target levels of structural public structural public debtdebt? How should these target levels be determined? Is ? How should these target levels be determined? Is the 20% of GDP rule of thumb a valid one for your the 20% of GDP rule of thumb a valid one for your country?country?
Assuming that we are in the presence of a permanent Assuming that we are in the presence of a permanent improvement in the external environment, which is the improvement in the external environment, which is the optimal way of assigning the increase in fiscal optimal way of assigning the increase in fiscal revenuesrevenues in your country: increase current in your country: increase current expenditure, increase capital expenditure, debt expenditure, increase capital expenditure, debt reduction or reduction in tax rates?reduction or reduction in tax rates?
Public Debt ManagementPublic Debt Management
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Debt Riskiness(LAC-7, Risky Debt in % of Total Domestic Debt*)
50
55
60
65
70
75
80
1991
1993
1995
1997
1999
2001
2003
2005
Mutation in Debt Riskiness: Two Revealing Examples
(Risky Debt in % of Total Domestic Debt**)
**For Mexico, risky debt is computed by taking the ratio of Tesobonos (denominated in US dollars) to total domestic public debt. The latter includes Cetes, Bondes Ajusta Bonos and Tesobonos. For Brazil, risky debt is constructed by taking the ratio of the sum of domestic public debt indexed to the Selic plus exchange-rate-indexed debt over total domestic public debt.
5%
28%
67%
90%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec-93 Nov-94Mexico
Aug-97 Dec-98Brazil
*Risky debt includes foreign-currency debt, short-term debt and variable interest rate debt. LAC-7 excludes Peru.
Debt Composition in Latin America‘This Time Is Different’ ‘All That Glitters May Not Be Gold’
QUESTIONS FOR DISCUSSION: PUBLIC DEBT MANAGEMENT
From a risk perspective, do you believe that changes in From a risk perspective, do you believe that changes in debt composition are a reasonable debt composition are a reasonable substitutesubstitute for the for the reduction in debt levels? reduction in debt levels?
Form a public debt management perspective, does your Form a public debt management perspective, does your country fit the country fit the regional patternregional pattern? Why yes or why not?? Why yes or why not?
How much of the change in debt composition is How much of the change in debt composition is structuralstructural and how much due to and how much due to favorable international favorable international conditionsconditions??
If so, how should If so, how should debt composition targetsdebt composition targets be be determined? determined?
External PositionExternal Position
Capital Flows to Latin America*
Russian Crisis
-20
0
20
40
60
80
100
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
(LAC-7, Billions of US Dollars)Net Capital Flows
LAC-7 is the sum of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
* Calvo and Talvi (2007).
Russian Crisis
Capital Inflows and Outflows(LAC-7, Billions of US Dollars)
-20
0
20
40
60
80
100
120
140
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Outflows
Inflows
‘This Time Is Different’ ‘All That Glitters May Not Be Gold’
Russian Crisis
Jan.91-Jun.98
Variation:
271%
Jun.98-Dec.02 Variation: -
15%
Dec.02-Dec.07 Variation:
175%
International Reserves in Latin America
174
404
*LAC-7 is is computed as the sum of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
International Reserves
15
65
115
165
215
265
315
365
415
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
(LAC-7, Billions of US Dollars*)
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
International Reserves to M2 Ratios (LAC-7, in %)
Dic
-93
Dic
-94
Dic
-95
Dic
-96
Dic
-97
Dic
-98
Dic
-99
Dic
-00
Dic
-01
Dic
-02
Dic
-03
Dic
-04
Dic
-05
Dic
-06
Beginning of Current Boom
Russian Crisis
0.30
0.35
0.40
0.45
0.50
0.55
LAC-7
44%
40%
‘This Time Is Different’ ‘All That Glitters May Not Be Gold’
International Reserves in Latin America
International Reserves to M2 Ratios (LAC-7, in %)
10
15
20
25
Dic
-93
Dic
-94
Dic
-95
Dic
-96
Dic
-97
Dic
-98
Dic
-99
Dic
-00
Dic
-01
Dic
-02
Dic
-03
Dic
-04
Dic
-05
Dic
-06
LAC-7
17.0
Beginning of Current Boom
Russian Crisis
16.9
EA-5 is the simple average of Indonesia, Korea, Malaysia, Philippines and Thailand.
13.0
EA-5
22.1
*LAC-7 is is computed as the sum of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.
Russian Crisis
174
404
15
65
115
165
215
265
315
365
415
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Jan.91-Jun.98
Variation:
271%
Jun.98-Dec.02 Variation: -
15%
Dec.02-Dec.07 Variation:
175%
(LAC-7, Billions of US Dollars*)International Reserves
‘This Time Is Different’ ‘All That Glitters May Not Be Gold’
QUESTIONS FOR DISCUSSION: EXTERNAL POSITION (I)
Is there Is there information availableinformation available at the country level to at the country level to make a sectoral analysis of the capital account?make a sectoral analysis of the capital account?
Do you think that a Do you think that a sectoral perspectivesectoral perspective of the of the capital account offers a relevant angle for capital account offers a relevant angle for vulnerability analysisvulnerability analysis? ?
From a capital account perspective, does your From a capital account perspective, does your country fit the country fit the regionalregional pattern? Why yes or why pattern? Why yes or why not?not?
QUESTIONS FOR DISCUSSION: EXTERNAL POSITION (II)
Which are the effective ways of financial insurance in the Which are the effective ways of financial insurance in the absence of international risk sharing arrangements? absence of international risk sharing arrangements? Should reserves be acquired with genuine resources, i.e. Should reserves be acquired with genuine resources, i.e. fiscal surpluses that take into account an fiscal surpluses that take into account an optimal pattern optimal pattern of reserve accumulationof reserve accumulation??
Do international reserves obtained by issuing monetary Do international reserves obtained by issuing monetary liabilities (including sterilization bonds) really constitute liabilities (including sterilization bonds) really constitute an an effective insuranceeffective insurance, available in times of sudden , available in times of sudden stops? Is stops? Is reserves-to-M2 ratioreserves-to-M2 ratio a relevant indicator in a a relevant indicator in a context of flexible exchange rates? context of flexible exchange rates?
Latin America and the Latin America and the US Subprime CrisisUS Subprime Crisis
US High Yield
Bond Prices by Region(US High Yield and Latin EMBI Bond Price Equivalent, 23-Jul-07 = 100)
88
90
92
94
96
98
100
102
104
Jul-0
7
Aug
-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08
Latin America
Sep
-07
Feb
-08
Latin America 0%US High Yield -10.8%
Variation*
Bond Price (in %)
Spread (in bps)
*23 Jul-19 Feb
105
305
Latin America’s Reaction to US Subprime Crisis
Bond Prices by Region(US High Yield, Latin EMBI, Asia EMBI and Europe EMBI,
Bond Price Equivalent, 23-Jul-07 = 100)
88
90
92
94
96
98
100
102
104
Jul-0
7
Aug
-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08
Latin America
US High Yield
Sep
-07
Feb
-08
Asia
Emerging Europe
Latin America 0%US High Yield -10.8%
Variation*
1.3%Asia
2.8%Emerging Europe
Bond Price (in %)
Spread (in bps)
*23 Jul-19 Feb
105
305
90
81
Emerging Markets’ Reaction to US Subprime Crisis
Speculative Grade -0.3%US High Yield -10.8%
Variation**
3.2%Investment Grade
Bond Price (in %)
Spread (in bps)
**23 Jul-19 Feb
127
298
108
* Standard & Poor’s Credit Ratings prior to US subprime crisis.
SpeculativeGrade
AAA
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
CCC+
CCC
CCC-
CC
SD
Credit Ratings*
InvestmentGrade
Investment Grade
Speculative Grade
* A country with strong fundamentals is defined as a country that displays both a current account and a fiscal surplus and a country with weak fundamentals is a country that displays both a current account and a fiscal deficit.
Strong Fundamentals*
Weak Fundamentals*
Weak Fundamentals -1.3%US High Yield -10.8%
Variation**
-0.2%Strong Fundamentals
Bond Price (in %)
Spread (in bps)
**23 Jul-19 Feb
140
298
76
Bond Prices in Emerging Countries and Fundamentals(US High Yield and EMBI Bond Price Equivalent, 23-Jul-07 = 100)
87
90
93
96
99
102
105
108
Jul-0
7
Aug
-07
Sep
-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08
US High Yield
Emerging Markets’ Reaction to US Subprime Crisis
US
Hig
h Y
ield
and
EM
BI B
ond
Pric
e E
quiv
alen
t (2
3-Ju
l-07
= 1
00)
87
89
91
93
95
97
99
101
103
105
Jul-0
7
Aug
-07
Sep
-07
Oct
-07
Nov
-07
Dec
-07
Jan-
08
US High Yield
Investment Grade
FE
D F
unds
targ
et r
ate,
in %
2.5
3
3.5
4
4.5
5
5.5
Fed Funds RateSpeculative Grade
Bond Prices in Emerging Countries and the Fed Funds Rate
Emerging Markets’ Reaction to US Subprime Crisis and the Fed
QUESTIONS FOR DISCUSSION: THE US SUBPRIME CRISIS AND LATIN AMERICA
What is What is your interpretationyour interpretation of the apparently limited of the apparently limited reaction of Latin America to the US Subprime Crisis? reaction of Latin America to the US Subprime Crisis?
Could the US Subprime CrisisCould the US Subprime Crisis create an create an ‘Indian ‘Indian Summer’Summer’ in the region? If so, what should be the in the region? If so, what should be the policy responsepolicy response? Should monetary and fiscal policy ? Should monetary and fiscal policy be tightened?be tightened?
Should we expect a Should we expect a Volcker-jump in interest ratesVolcker-jump in interest rates once the financial crisis in the US subsides? If so, once the financial crisis in the US subsides? If so, what should our countries be doing to protect what should our countries be doing to protect themselves from that eventuality?themselves from that eventuality?
All That Glitters May Not Be Gold: All That Glitters May Not Be Gold: Debating Key IssuesDebating Key Issues
All That Glitters May Not Be Gold: All That Glitters May Not Be Gold: Debating Key IssuesDebating Key Issues
May 8May 8thth, 2008, 2008
Prepared for Presentation at the XXVII Meeting of the Latin American Network of Prepared for Presentation at the XXVII Meeting of the Latin American Network of Central Banks and Finance Ministries, IADB, Washington DC. This Presentation is Central Banks and Finance Ministries, IADB, Washington DC. This Presentation is
based on the IADB Research Department report “All That Glitters May Not Be Gold: based on the IADB Research Department report “All That Glitters May Not Be Gold: Assessing Latin America’s Recent Macroeconomic Performance”, coordinated by Assessing Latin America’s Recent Macroeconomic Performance”, coordinated by
Alejandro Izquierdo and Ernesto Talvi Alejandro Izquierdo and Ernesto Talvi