Talvi L Ac Macro Watch October 2002

LatinMacroWatch

Special Analysis

LatinMacroWatch

Special Analysis

LMW: the Big Picture on a Small Screen

A new RES feature

October 23October 23rdrd, 2002, 2002

Between Financial Distress and Lackluster Performance:

A Regional Assessment

Between Financial Distress and Lackluster Performance:

A Regional Assessment

Prepared for presentation at The World Bank, Prepared for presentation at The World Bank, WashingtonWashington, DC, DC

OUTLINE

I. Capital Flight in LAC: Back to the Eighties?I. Capital Flight in LAC: Back to the Eighties?

II.II. LAC in the Aftermath of External Adjustment: LAC in the Aftermath of External Adjustment: A Triple “Whammy”A Triple “Whammy”

IV.IV. External Adjustment and Financial Distress: External Adjustment and Financial Distress: The Case of BrazilThe Case of Brazil

V.V. Argentina’s Public Debt: Yet Another Argentina’s Public Debt: Yet Another Restructuring?Restructuring?

III.III. External Adjustment, Financial Distress and External Adjustment, Financial Distress and Outuput Collapses: The Debt ConnectionOutuput Collapses: The Debt Connection

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

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

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

-1%

0%

1%

2%

3%

4%

5%

6%

Millions of US dollars

% of GDP

LAC-7 Foreign Direct Investment(4 quarters, millions of US dollars and average in % of GDP)


0

10000

20000

30000

40000

50000

60000

70000

8000019

97-I

1997

-III

1998

-I

1998

-III

1999

-I

1999

-III

2000

-I

2000

-III

2001

-I

2001

-III

2002

-I

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%


% of GDP

LAC-7 Foreign Direct Investment(Annual FDI flows, 2002.II)

Others16%

Brazil40%

Mexico44%

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


-80000

-60000

-40000

-20000

0

20000

40000

6000019

97-I

1997

-III

1998

-I

1998

-III

1999

-I

1999

-III

2000

-I

2000

-III

2001

-I

2001

-III

2002

-I

-4%

-3%

-2%

-1%

0%

1%

2%


% of GDP

Financial Flows to LAC: Back to the Eigthies?(Billions of real US dollars of May 2002, deflated by US CPI)

-60

-40

-20

0

20

40

60

80

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

0

5000

10000

15000

20000

25000

3000019

97-I

1997

-III

1998

-I

1998

-III

1999

-I

1999

-III

2000

-I

2000

-III

2001

-I

2001

-III

2002

-I

Total Capital Flows (4 quarters, millions of US dollars)

Financial Flows to Emerging Asia:A Panoramic View(Billions of real US dollars of May 2002, deflated by US CPI)

-120

-100

-80

-60

-40

-20

0

20

40

60

80

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Private Capital Flows to Emerging Asia: A Panoramic View(Billions of real US dollars of May 2002, deflated by US CPI)

-70

-20

30

80

130

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

FDI to Emerging Asia: A Panoramic View(Billions of real US dollars of May 2002, deflated by US CPI)

-10

0

10

20

30

40

50

60

70

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Korea: Capital Flows (Total capital flows, 4 quarters)

-10000

-8000

-6000

-4000

-2000

0

2000

40001

99

6-I

19

96

-III

19

97

-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

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%


% of GDP

FDI to Emerging Europe: A Panoramic View

(Billions of real US dollars of May 2002, deflated by US CPI)

-5

0

5

10

15

20

25

30

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Financial Flows to Emerging Europe: A Panoramic View (Billions of real US dollars of May 2002, deflated by US CPI)

-30

-20

-10

0

10

20

30

40

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

OUTLINE






LAC-7 Business Cycle: 1997-2002(s.a. GDP, mean annualized quarterly growth rate)

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

Deceleration Recession Recovery Recession?

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%1

997

.I

199

7.II

I

199

8.I

199

8.II

I

199

9.I

199

9.II

I

200

0.I

200

0.II

I

200

1. I

200

1.II

I

200

2.I

Business Cycle: 1997-2002(s.a. GDP, mean annualized quarterly growth rate, excluding Argentina)

Deceleration Recession Recovery Recession?

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%1

997

.I

199

7.II

I

199

8.I

199

8.II

I

199

9.I

199

9.II

I

200

0.I

200

0.II

I

200

1. I

200

1.II

I

200

2.I

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

LAC-7 Business Cycle and Capital Flows (GDP and Non FDI Capital Flows, last four quarters)

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

Ma

r-9

6

Se

p-9

6

Ma

r-9

7

Se

p-9

7

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

GD

P (

yoy

% c

han

ge)

-4%

-3%

-2%

-1%

0%

1%

2%

No

n F

DI C

apit

al F

low

s (%

GD

P)

GDP

Non FDI Capital Flows

-14000

-12000

-10000

-8000

-6000

-4000

-2000

019

97-I

1997

-III

1998

-I

1998

-III

1999

-I

1999

-III

2000

-I

2000

-III

2001

-I

2001

-III

2002

-I

-6%

-5%

-4%

-3%

-2%

-1%

0%

LAC 7: Current Account (4 quarters)

Mill

ions

of U

S d

olla

rs

% o

f GD

P (

ave

rage

)


% of GDP

4.8

1998.II 2002.II Change(1) (2) (2)-(1)

Venezuela 2.0 4.1-2.1

Chile -0.9 5.7-6.6

Colombia -1.5-6.3Peru -1.7 5.2-6.9

Argentina 2.1 6.8-4.7

Mexico -2.6 0.4-3.0

Brasil -4.1 -3.5 0.6

Average -4.9 -0.9 4.0

Current Account Balance by Country(4 quarters, % of GDP)

Current Account Adjustment by Country(in percentage of annual imports of 1998.II)

-10% 0% 10% 20% 30% 40% 50%

Mexico

Venezuela

Chile

Brazil

Colombia

Peru

Argentina

average

Real Exchange Rate by Country(vis-à-vis the US dollar, August 2002 vs. June 1998)

25%

37%

49%

54%

130%

198%

-15%

-20% 30% 80% 130% 180%

México

Perú

Venezuela

Chile

Colombia

Brazil

Argentina

75

80

85

90

95

100

1051

99

7.I

19

97

.II

19

97

.III

19

97

.IV

19

98

.I

19

98

.II

19

98

.III

19

98

.IV

19

99

.I

19

99

.II

19

99

.III

19

99

.IV

20

00

.I

20

00

.II

20

00

.III

20

00

.IV

20

01

.I

20

01

.II

20

01

.III

20

01

.IV

20

02

.I

20

02

.II

-1%

0%

1%

2%

3%

4%

5%

6%

External Adjustment and Investment (S.a. investment and annual capital flows)

Investment

Total Capital Flows

Inve

stm

en

t (1

99

8.I

I =

10

0)

To

tal

Ca

pita

l Flo

ws

(% G

DP

)

70

80

90

100

110

120

130

19

98

.II

19

98

.III

19

98

.IV

19

99

.I

19

99

.II

19

99

.III

19

99

.IV

20

00

.I

20

00

.II

20

00

.III

20

00

.IV

20

01

. I

20

01

.II

20

01

.III

20

01

.IV

20

02

.I

20

02

.II

Exports

Consumption

Investment

Recession StallingRecovery

LAC-7 Components of Demand(1998.II = 100)

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

Recession?

LAC 7 Investment (1998.II =100)

38

48

58

68

78

88

98

108

118

128

1998

.II

1998

.III

1998

.IV

1999

.I

1999

.II

1999

.III

1999

.IV

2000

.I

2000

.II

2000

.III

2000

.IV

2001

.I

2001

.II

2001

.III

2001

.IV

2002

.I

2002

.II

Brazil Chile Argentina Colombia Mexico Peru

LAC-7 Trend Growth(annualized quarterly growth rate, 1998.II=100)


25

35

45

55

65

75

85

95

1998.II 1999.II 2000.II 2001.II 2002.II

Emerging Asia: Current Account (4 quarters)

Includes: Malaysia, Philippines, Thailand, Indonesia and Korea

-80000

-60000

-40000

-20000

0

20000

40000

60000

8000019

96-I

1996

-III

1997

-I

1997

-III

1998

-I

1998

-III

1999

-I

1999

-III

2000

-I

2000

-III

2001

-I

2001

-III

2002

-I

Mill

ions

of U

S d

olla

rs

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

% o

f GD

P (

ave

rage

)


% of GDP

60

70

80

90

100

110

120

Mar

-96

Jul-9

6

Nov

-96

Mar

-97

Jul-9

7

Nov

-97

Mar

-98

Jul-9

8

Nov

-98

Mar

-99

Jul-9

9

Nov

-99

Mar

-00

Jul-0

0

Nov

-00

Mar

-01

Jul-0

1

Nov

-01

Mar

-02

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Emerging Asia: External Adjustment and Investment (S.a. investment and annual capital flows)

Investment

Total Capital Flows

Inve

stm

en

t (1

99

7.I

V =

10

0)

To

tal

Ca

pita

l Flo

ws

(% G

DP

)

50

70

90

110

130

150

Jun

-97

Se

p-9

7

Dic

-97

Ma

r-9

8

Jun

-98

Se

p-9

8

Dic

-98

Ma

r-9

9

Jun

-99

Se

p-9

9

Dic

-99

Ma

r-0

0

Jun

-00

Se

p-0

0

Dic

-00

Ma

r-0

1

Jun

-01

Se

p-0

1

Dic

-01

Ma

r-0

2

Jun

-02

Emerging Asia: Components of Demand (1997.II =100)

Exports

Consumption

Investment

Includes Korea, Philippines, Malaysia, Thailand and Indonesia

Emerging Asia: Trend Growth(annualized quarterly growth rate, 1996.II=100)

Includes Indonesia, Korea, Philippines, Thailand, Malaysia

1998.II 1999.II 2000.II 2001.II 2002.II1997.II1996.II

0

20

40

60

80

100

In In ssummaryummary,, the reduction of capital inflows the reduction of capital inflows to LAC to LAC was a triple was a triple ““whammywhammy” since it was associated with:” since it was associated with:

A rise in the cost of creditA rise in the cost of credit

A substantial depreciation of the real A substantial depreciation of the real exchange rateexchange rate

A decline of investment and slower growthA decline of investment and slower growth

OUTLINE






External Adjustment & Financial Distress: The Debt Connection

Brazil ChileArgentina Uruguay

Financial Mismatches of the Private Sector

= High vulnerability

= Medium vulnerability

= Low vulnerability

Financial mismatches of the Public Sector

Public Debt to GDP

Banking System Exposure to the Public Sector

Sudden Stop in Argentina and Chile(Capital flows, last 4 quarters, % of GDP)

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%I

98

II 9

8

III

98

IV 9

8

I 99

II 9

9

III

99

IV 9

9

I 00

II 0

0

III

00

IV 0

0

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Arg

enti

na

Ch

ile

Argentina

Chile

External Adjustment(Current Account, 4 quarters, %GDP)

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

Chi

le

-5.5%

-5.0%

-4.5%

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

Arg

entin

a

Argentina

Chile

Contraction and Recovery: GDP and Investment(s.a., 1998.II=100)

GDP Investment

80

85

90

95

100

105

110

199

8.II

199

8.IV

199

9.II

199

9.IV

200

0.II

200

0.IV

200

1.II

200

1.IV

200

2.II 35

45

55

65

75

85

95

1998

.II

1998

.IV

1999

.II

1999

.IV

2000

.II

2000

.IV

2001

.II

2001

.IV

2002

.II

Beginning of bankrun in Argentina

Chile

Argentina

Chile

Argentina

Sudden Stop and the Real Exchange Rate

Required % change in RERto eliminate the CAD

25

30

35

40

45

50

55

60

Chile Argentina

Source: Calvo, Izquierdo, Talvi (2002)

32.4

46.2

379

178

100

150

200

250

300

350

400

450

ChileArgentina

Relative Openness, 1998(External Debt to Exports Ratio)

Fiscal Sustainability in Argentina after the Sudden Stop in 1998

Debt toGDPratio(%)

Req. Prim.SurplusAdjust.

(a) Baseline 36.5 0.3

(b) Change in Relative Prices to close the CA deficit (RER depreciation of 46,2%)

49.7 0.7

(c): (b) + 200 BPS Increase in Real Interest Rate

49.7 1.7

(d): (c) + 1% Reduction in GDP growth 49.7 2.2

(e): (d) + Contingent Liabilities 58.6 2.7

Source: Calvo, Izquierdo, Talvi (2002)

Note: The observed primary surplus for 1998 was 0.9 percent of GDP. The baseline scenario assumes a long run rate of growth of 3,8% and a 7,1% interest rate

25.6

45.4

66.0

71.7

75.9

Debt Reductio

n(%)

ArgentinaArgentina’s Collapse in a Nutshell’s Collapse in a Nutshell

RER depreciation:RER depreciation: revaluation of public sector debt revaluation of public sector debt relative to GDP + deterioration of corporate balance relative to GDP + deterioration of corporate balance sheets (contingent liabilities). The proposed fiscal sheets (contingent liabilities). The proposed fiscal adjustments were clearly insufficient for a substantially adjustments were clearly insufficient for a substantially higher RER.higher RER.

Deterioration of public and private sector balance sheetsDeterioration of public and private sector balance sheets: : Worsened quality of bank assets and run on banks due Worsened quality of bank assets and run on banks due to the fear that losses might be partially financed by to the fear that losses might be partially financed by confiscating depositors.confiscating depositors.

The run against banks was accommodated by The run against banks was accommodated by credit credit expansion of the CBexpansion of the CB, leading to a collapse in , leading to a collapse in international reserves and an acceleration of the run on international reserves and an acceleration of the run on banks.banks.

OUTLINE






-30000

-20000

-10000

0

10000

20000

30000

40000

500001

997

-I

199

7-I

II

199

8-I

199

8-I

II

199

9-I

199

9-I

II

200

0-I

200

0-I

II

200

1-I

200

1-I

II

200

2-I

-6%

-4%

-2%

0%

2%

4%

6%

8%

% GDP

millions of US dollars

Capital Flows: A Panoramic View (Excluding IMF disbursements, last 4 quarters)

Non FDI Capital Flows: A Panoramic View (Excluding IMF disbursements, last 4 quarters)

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

1997

-I

1997

-II

1997

-III

1997

-IV

1998

-I

1998

-II

1998

-III

1998

-IV

1999

-I

1999

-II

1999

-III

1999

-IV

2000

-I

2000

-II

2000

-III

2000

-IV

2001

-I

2001

-II

2001

-III

2001

-IV

2002

-I

2002

-II -60000

-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

% GDP


5000

10000

15000

20000

25000

30000

35000

40000

450002

000

-I

200

0-I

I

200

0-I

II

200

0-I

V

200

1-I

200

1-I

I

200

1-I

II

200

1-I

V

200

2-I

200

2-I

I

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

% GDP


Capital Flows: Recent Developments (Excluding IMF disbursements, last 4 quarters)

-15000

-10000

-5000

0

5000

10000

1500020

00-I

2000

-II

2000

-III

2000

-IV

2001

-I

2001

-II

2001

-III

2001

-IV

2002

-I

2002

-II -2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

% GDP


Non FDI Capital Flows: Recent Developments (Excluding IMF disbursements, last 4 quarters)

Trade Credit Lines (Outstanding, in millions of US$)

9 500

10 500

11 500

12 500

13 500

14 500

15 500

16 500E

ne-

01

Ma

r-0

1

Ma

y-0

1

Jul-

01

Se

p-0

1

No

v-01

En

e-0

2

Ma

r-0

2

Ma

y-0

2

Jul-

02

Se

p

Jan-Aug 2001 Jan-Aug 2002

Disbursements

Notes and Commercial Papers 5,535 1,798

Direct Loans 4,058 1,468

Amortizations

Notes and Commercial Papers 6,147 4,371

Direct Loans 2,113 2,409

Rollover Rate

Notes and Commercial Papers 90% 41%

Direct Loans 192% 61%

Medium and Long Term External Financing (Private Sector, in millions of US$)

FDI Flows: Recent Developments (4 quarters, millions of US dollars and % of GDP)

10000

15000

20000

25000

30000

3500020

00-I

2000

-II

2000

-III

2000

-IV

2001

-I

2001

-II

2001

-III

2001

-IV

2002

-I

2002

-II

2002

-III

2002

-IV

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

% GDPMillions of US dollars

Official Projections

-28000

-26000

-24000

-22000

-20000

-18000

-16000

-14000

-12000

-100002

000

-I

200

0-I

I

200

0-I

II

200

0-I

V

200

1-I

200

1-I

I

200

1-I

II

200

1-I

V

200

2-I

200

2-I

I -5.2%

-5.0%

-4.8%

-4.6%

-4.4%

-4.2%

-4.0%

-3.8%

-3.6%

-3.4%

% of GDPMillions of US dollars

Current Account Adjustment(4 quarters, millions of US dollars and % of GDP)

Trade Balance Adjustment(Last 12 months, in millions of US dollars)

45000

47000

49000

51000

53000

55000

57000

59000

61000

Ene

-00

Abr

-00

Jul-0

0

Oct

-00

Ene

-01

Abr

-01

Jul-0

1

Oct

-01

Ene

-02

Abr

-02

Jul-0

2

Exp

. /

Imp.

-4000

-2000

0

2000

4000

6000

8000

10000

Bal

ance

imports

exports

balance

-30000

-20000

-10000

0

10000

20000

30000

40000

5000019

97-I

1997

-III

1998

-I

1998

-III

1999

-I

1999

-III

2000

-I

2000

-III

2001

-I

2001

-III

2002

-I

mill

ions

of U

S d

olla

rs

-6%

-4%

-2%

0%

2%

4%

6%

8%

yoy

Economic Activity and Capital Flowsindustrial production (3 mth. m.a. yoy) & annual capital flows excl. IMF disbursements

industrial production

capital flows

GDP and Investment (s.a index, II.1998=100)

80

85

90

95

100

105

110

II-1

998

IV-1

998

II-1

999

IV-1

999

II-2

000

IV-2

000

II-2

001

IV-2

001

II-2

002

GDP

Investment

Exchange Rate and Country Risk

1.7

2.2

2.7

3.2

3.7

4.2

02-

En

e-0

1

09-

Ma

r-01

15-

Ma

y-

20-

Jul-0

1

21-

Se

p-0

1

26-

Nov

-01

23-

En

e-0

2

25-

Ma

r-02

23-

Ma

y-0

2

22-

Jul-0

2

16-

Se

p-0

2

500

1000

1500

2000

2500

3000

R$

per

dolla

r

basi

s po

ints

exchange rate

country risk

Country Risk and Interest Rates(C-Bond Spread in b.p. and 360-day Interest Rate Swap in %)

300

800

1300

1800

02-E

ne-0

1

02-M

ar-0

1

02-M

ay-0

1

02-J

ul-0

1

02-S

ep-0

1

02-N

ov-0

1

02-E

ne-0

2

02-M

ar-0

2

02-M

ay-0

2

02-J

ul-0

2

02-S

ep-0

2

10

15

20

25

30

35

C-B

on

d S

pre

ad

Inte

res

t R

ate

interest rate

C-Bond spread

5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

En

e-0

0

Ab

r-00

Jul-

00

Oct

-00

En

e-0

1

Ab

r-01

Jul-

01

Oct

-01

En

e-0

2

Ab

r-02

Jul-

02

10%

12%

14%16%

18%

20%

22%

24%26%

28%

30%

nominal interest rate

real (ex – ante) interest rate

Interest Rates(Nominal and Real 360-day Interest Rate Swap)

no

min

al

rea

l

In Summary...In Summary...

The capital inflows slowdown since IIQ-2001 has The capital inflows slowdown since IIQ-2001 has been associated with:been associated with:

Slowdown in economic activitySlowdown in economic activity

Higher interest rates on both domestic and Higher interest rates on both domestic and foreign financial assetsforeign financial assets

Substantial depreciation of the real exchange rateSubstantial depreciation of the real exchange rate

Public Debt(% of GDP)

45

47

49

51

53

55

57

59

61

63E

ne-

00

Ma

r-0

0

Ma

y-0

0

Jul-

00

Se

p-0

0

No

v-00

En

e-0

1

Ma

r-0

1

Ma

y-0

1

Jul-

01

Se

p-0

1

No

v-01

En

e-0

2

Ma

r-0

2

Ma

y-0

2

Jul-

02

58.3% of GDP

US$ 259 billion at end July XR

Public Debt StructureAugust 2002

Fixed

Rate 6%

Others

9%

External or FX indexed Public Debt

43%

Indexed to the Interest Rate

42%

Public Debt and the Exchange Rate (Public Debt in % of GDP and XR,

Reales per Dollar)

46%

48%

50%

52%

54%

56%

58%

60%

62%

64%E

ne-0

0

Mar

-00

May

-00

Jul-0

0

Sep

-00

Nov

-00

Ene

-01

Mar

-01

May

-01

Jul-0

1

Sep

-01

Nov

-01

Ene

-02

Mar

-02

May

-02

Jul-0

2

1.5

2.0

2.5

3.0

3.5

4.0

XR: 3.02 Reales per Dollar

Public Debt: 58.3% of GDP

Public Debt Dynamics

April 2002

Fiscal Impact of:

54.5% 10.9% 3.5% 3.9%

Public Debt (% of GDP)

Interest Rate

Growth Rate

Primary Balance that stabilizes Debt

10% real depreciation

57.2% 10.9% 3.5% +0.2%


57.2% 10.9% 3.5% +0.2%


April 2002

Fiscal Impact of:

54.5% 10.9% 3.5% 3.9%


Interest Rate

Growth Rate


1% increase in the domestic interest rate

54.5% 11.4% 3.5% +0.3%


57.2% 10.9% 3.5% +0.2%

1% increase in the domestic interest rate

54.5% 11.4% 3.5% +0.3%

April 2002

Fiscal Impact of:

54.5% 10.9% 3.5% 3.9%


Interest Rate

Growth Rate


1% reduction in the growth rate

54.5% 10.9% 2.5% +0.6%


Calculates default probabilities based on a Structural Model

Assumes risk neutrality

Setup: Consider a bond with:

Principal equal to $1

Expires T periods from now

The conditional (survival) probability that the bond does not default at time s given it has not defaulted as of time s – 1 is p.

At each coupon payment date, s {1,2, …, T}, there are two possible outcomes:

• No Default (with probability p) The bond-holder gets paid the coupon c (plus the principal $1 if s = T)

• Default (with probability 1-p) The bond-holder receives a payment stream with a present value of R (i.e the recovery value)

BBPM: Binomial Bond Pricing Model

Default Case:Recovery Rate (R)

No Default Case:Coupon (c)

Market Price V2

p

1-p

Default Case:Recovery Rate (R)

No Default Case:Coupon plus Ppal (1+c)

p

1-p

BBPM: Two Period Example

V2: Market Price of a Risky Bond payable two periods from now.

p • c + ( 1p) • R1+i

V2 p2• (1+c) + p • (1p) • R

(1+i) 2

Yield Curve of Default Probabilities implied by BBPM

0%

5%

10%

15%

20%

25%

30%

2004 2008 2020 2030

Apr. 2002

Sep.2002

Brazil

Global Bond

Def

ault

Pro

bab

ilit

y (1

-p)

(Recovery value: 25%)

Expected Loss (EL) : Calculation

VM VF • (1-EL)

where:

VM is the market value of a risky bond

VF is the discounted present value of the risky bond assuming both coupon and principal are fully paid

where i is the risk free interest rate.

Definition:

Example: Bond which pays constant coupon payments c until its maturity at time T:

VM

c

(1+i)s

s=1 (1+i)T

1EL 1 1

VM

VF

0%

10%

20%

30%

40%

50%

60%

70%

80%

2004 2008 2020 2030

Apr. 2002

Sep.2002

Yield Curve of EL’s on Brazilian Bonds

Global Bond

Exp

ecte

d L

oss

Net Public Debt Composition(in % of total, August 2002)

Domestic76%

External24%

Public Debt Securities by Holder (30th August, % of total)

Banks37%

Investment Funds32%

Other5%

Reserve Requirements

19 %

Non-financial private sector

7%

Banks’ Exposure to the Public Sector Public Bond Holdings

0%

50%

100%

150%

200%

250%

300%

350%

In % of Banks’ Assets In % of Banks’ Net Worth

Average Maturity of Outstanding Domestic Debt (issued at auction, in months)

17

19

21

23

25

27

Ene

-01

Mar

-01

May

-01

Jul-0

1

Sep

-01

Nov

-01

Ene

-02

Mar

-02

May

-02

Jul-0

2

117000

120000

123000

126000

129000

132000

135000

02

-En

e-0

2

02

-Fe

b-0

2

02

-Ma

r-0

2

02

-Ab

r-0

2

02

-Ma

y-0

2

02

-Ju

n-0

2

02

-Ju

l-0

2

02

-Ag

o-0

2

-25000

-20000

-15000

-10000

-5000

0

5000

10000

Ene

-02

Feb

-02

Mar

-02

Abr

-02

May

-02

Jun-

02

Jul-0

2

Unt

il 28

Aug

.

The run from Investment Funds to Saving DepositsIn millions of R$

Saving Deposits (Caderneta de Poupança)

31st May: Marking to market of IF’s bonds

Net Flows to Investment Funds

Since 31st May: R$ 15.1 billionSince 31st May: -R$ 51.9 billion

31st May: Marking to market of IF’s bonds

15

17

19

21

23

25

27

29

31

1/2/

01

3/2/

01

5/2/

01

7/2/

01

9/2/

01

11/2

/01

1/2/

02

3/2/

02

5/2/

02

7/2/

02

9/2/

02

Interest Rates(Selic benchmark CB rate, 180 and 360-day Interest Rate Swaps, in %)

180-days

360-days

Selic

60

560

1060

1560

2060

2560

3060Ju

l-01

Au

g-0

1

Sep

-01

Oct

-01

No

v-01

Dec

-01

Jan

-02

Feb

-02

Mar

-02

Ap

r-02

May

-02

Jun

-02

Jul-

02

Au

g-0

2

Sep

-02

Oct

-02

Bp

sBrazilian Country Risk(EMBI+, bps over US Treasuries)

Lula risesIn the polls

U.S. Corporate Bonds Spreads(Bps over US Treasuries)

0

20

40

60

80

100

120

140

Jan

-01

Mar

-01

May

-01

Jul-

01

Sep

-01

No

v-01

Jan

-02

Mar

-02

May

-02

Jul-

02

Sep

-02

Bp

s

60

80

100

120

140

160

180

200

220

Jan

-01

Mar

-01

May

-01

Jul-

01

Sep

-01

No

v-01

Jan

-02

Mar

-02

May

-02

Jul-

02

Sep

-02

Bp

s

160

190

220

250

280

310

340

370

Jan

-01

Mar

-01

May

-01

Jul-

01

Sep

-01

No

v-01

Jan

-02

Mar

-02

May

-02

Jul-

02

Sep

-02

Bp

s

600

650

700

750

800

850

900

950

1000

1050

1100

Jan

-01

Mar

-01

May

-01

Jul-

01

Sep

-01

No

v-01

Jan

-02

Mar

-02

May

-02

Jul-

02

Sep

-02

Bp

s

AAA

BBB

A

High Yield

9-11 9-11

9-11 9-11





600

650

700

750

800

850

900

950

1000

1050

1100

Jul-

01

Au

g-0

1

Sep

-01

Oct

-01

No

v-01

Dec

-01

Jan

-02

Feb

-02

Mar

-02

Ap

r-02

May

-02

Jun

-02

Jul-

02

Au

g-0

2

Sep

-02

Oct

-02

Bp

s

500

1000

1500

2000

2500

3000

60

70

80

90

100

110

120

130

140

150

160

Jul-

01

Au

g-0

1

Sep

-01

Oct

-01

No

v-01

Dec

-01

Jan

-02

Feb

-02

Mar

-02

Ap

r-02

May

-02

Jun

-02

Jul-

02

Au

g-0

2

Sep

-02

Oct

-02

Bp

s

500

1000

1500

2000

2500

3000

Lula Effect? Look Again(EMBI+ and US corporate bonds, bps over US Treasuries)

A

High Yield

Brazil

Brazil

9-11

9-11



OUTLINE






Federal Public Debt: Current Status(in millions of US$, June 2002)

Federal Government Debt 114,575

Multilaterals 31,702

of which IMF 14,355

World Bank 8,708

IADB 8,606

Guaranteed Loans 18,513

Bonds 50,996

June 02 Dec. 01

144,453

42,258

32,362

14,776 13,363

55,057

Other

13,952

9,673

8,704

54% of GDP

159% of GDP

Note: The reduction of the debt stock since Dec. 2001 is mainly due to the pesoification of domestic debt at 1.4 Pesos per Dollar

Federal Public Debt: Contingent Liabilities (in millions of US$, March 2002)

Federal Government Debt 114,575

June 02

Contingent Liabilities

Asymetric indexation***

Compensation to Banks

Asymetric pesoification *

Amparos***

FX insurance to depositors (Canje I and II) and private sector external debtors **

Bond for restitution of 13% salary & pension cut*

28,077

2,609

13,642

9,491

1,542

NQ

825

Federalization of Provincial Debt *

Federal Government Debt including contingencies 142,652

* = already recognized ** = partially recognized *** = not yet recognized NQ = not quantified

13,610

Federal Government Debt June 2002

Bonds 44%

Guaranteed loans

16%

Multilaterals 28%

Other* 12%

Debt Structure

In default: US$ 64 billion*

* LMW estimate

Implied Expected Loss (EL) in Bond Prices

VM VF • (1-EL)

where:

VM is the market value of a risky bond

VF is the discounted present value of the risky bond assuming both coupon and principal are fully paid

where i is the risk free interest rate.

Definition:

Example: Bond which pays constant coupon payments c until its maturity at time T:

VM

c

(1+i)s

s=1 (1+i)T

1EL 1 1

VM

VF

65%

70%

75%

80%

85%

90%

2008 2010 2027

Yield Curve of EL on Argentina’s External Bonds

Global Bond

Exp

ecte

d L

oss

Weighted average

Argentina (September 2002)

Argentina’s Public Debt After a Hypothetical Restructuring(% of GDP)

127

106

80

67

0

20

40

60

80

100

120

140

3.8 3.0 2.0 1.5

Equilibrium Real Exchange Rate

Deb

t (%

)

At current real GDP

Argentina’s Interest Payments on Public Debt After a Hypothetical Restructuring(% of GDP)

8.9

7.4

5.6

4.7

0

1

2

3

4

5

6

7

8

9

10

3.8 3.0 2.0 1.5


%

At current real GDP

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%Ja

n-99

Apr

-99

Jul-9

9

Oct

-99

Jan-

00

Apr

-00

Jul-0

0

Oct

-00

Jan-

01

Apr

-01

Jul-0

1

Oct

-01

Jan-

02

Apr

-02

Primary Fiscal Deficit(Last 12 months, in % of GDP)

Financial Crisis

Assets of Argentina’s Financial SystemAugust 2002

Other net assets5%

Reserves6%

Loans32%

Claims on to the public sector

57%

Total assets: ARG$155.800 millions

4,579

-3,812-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

At Face Value At Market Prices

Net Worth of Argentina’s Financial System(August 2002, in millions of US$)

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

IV T

rim

94

IV T

rim

95

IV T

rim

96

IV T

rim

. 9

7

IV T

rim

98

IV T

rim

. 9

9

IV T

rim

. 0

0

IV T

rim

. 0

1

-35000

-30000

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

Capital Flows and Economic Activity Last 4 quarters in US$ millions, cyclical comp. of GDP

Private Sector Capital Flows

GDPRussian Crisis

Financial Crisis

Aggregate Demand and Supply Seasonally adjusted indices, II 98=100

35

50

65

80

95

110

Jun

-98

Dic

-98

Jun

-99

Dic

-99

Jun

-00

Dic

-00

Jun

-01

Dic

-01

Jun

-02

Components of Demand

Exports

Investment

Private Consumption

35

50

65

80

95

110

Jun

-98

Dic

-98

Jun

-99

Dic

-99

Jun

-00

Dic

-00

Jun

-01

Dic

-01

Jun

-02

Components of Supply

imports

GDP

Russian Crisis

Financial Crisis

Russian Crisis

Financial Crisis

Use of Installed Productive Capacity Industrial Sector, s.a. index June 1998=100

75

80

85

90

95

100

105Ju

n-9

8

Se

p-9

8

Dic

-98

Ma

r-9

9

Jun

-99

Se

p-9

9

Dic

-99

Ma

r-0

0

Jun

-00

Se

p-0

0

Dic

-00

Ma

r-0

1

Jun

-01

Se

p-0

1

Dic

-01

Ma

r-0

2

Jun

-02

Financial Crisis

Russian Crisis

Argentina’s Public Debt After a Hypothetical Restructuring(% of GDP)

127

106

80

6776 72

65 61

0

20

40

60

80

100

120

140

3.8 3.0 2.0 1.5


Deb

t (%

)

At current real GDP

At 2001 real GDP

Virtuous scenarios

Argentina’s Interest Payments on Public Debt After a Hypothetical Restructuring(% of GDP)

8.9

7.4

5.6

4.75.3 5.0

4.6 4.3

0

1

2

3

4

5

6

7

8

9

10

3.8 3.0 2.0 1.5


%

At current real GDP

At 2001 real GDP

Virtuous scenarios

Primary Surplus under Alternative Recovery Scenarios(% of GDP)

0.5

4.0

5.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

At Current RevenuesLevel

At 2001 RevenuesLevel

At 1998 RevenuesLevel

Talvi L Ac Macro Watch October 2002

Education

Transcript of Talvi L Ac Macro Watch October 2002