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LatinMacroWatch Special Analysis. LMW: the Big Picture on a Small Screen A new RES feature. 8-7-02. LAC-7 Outlook: The Specter of Capital Flight. August 7, 2002. Prepared for Presentation at IADB Board of Directors, Washington , DC. KEY QUESTIONS.

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LatinMacroWatch

Special Analysis

LMW: the Big Picture on a Small Screen

A new RES feature

8-7-02


LAC-7 Outlook: The Specter of Capital Flight

August 7, 2002

Prepared for Presentation at IADB Board of Directors, Washington, DC


Key questions
KEY QUESTIONS Flight

  • What’s behind the current sharp growth slowdown in the region? Is there evidence of Contagion? What kind?

  • Are the G-7 shooting in the right direction? Should Moral Hazard be their main concern?

  • How likely is it for the region to enter a new “lost decade”?

  • What is likely to happen in Brazil?

  • What should IDB do?


Outline

OUTLINE Flight

I. Capital Flight and Macroeconomic Performance

II. The Specter of Capital Flight

III. Vulnerabilities to Capital Flight: Recent Experiences of Argentina, Uruguay and Brazil

IV. Summary and the Role of the IADB


LAC-7 Business Cycle: 1997-2002 Flight

(s.a. GDP, mean annualized quarterly growth rate)

9%

Deceleration

Recession

Recovery

Stalling

7%

5%

3%

1%

-1%

-3%

-5%

-7%

1997.I

1998.I

1999.I

2000.I

2002.I

1997.III

1998.III

1999.III

2000.III

2001.III

2001. I

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


LAC-7 Components of Demand Flight

(1998.II = 100)

Recession

Stalling

Recovery

130

Exports

120

Consumption

110

100

Investment

90

80

70

1999.I

2000.I

2002.I

1998.II

1999.II

2000.II

2001. I

2001.II

1998.III

1999.III

2000.III

2001.III

1998.IV

1999.IV

2000.IV

2001.IV

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


LAC-7 Capital Flows Flight

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

120000

6%

100000

5%

% of GDP

80000

4%

Millions of US dollars

60000

3%

40000

2%

20000

1%

0

0%

1997-I

1998-I

1999-I

2000-I

2001-I

2002-I

1997-III

1998-III

1999-III

2000-III

2001-III

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


LAC-7 Non-FDI Capital Flows Flight

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

60000

2%

% of GDP

1%

40000

20000

0%

Millions of US dollars

-1%

0

-20000

-2%

-3%

-40000

-60000

-4%

1997-I

1998-I

1999-I

2000-I

2001-I

2002-I

1997-III

1998-III

1999-III

2000-III

2001-III

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


LAC-7 Business Cycle and Capital Flows Flight

(GDP and Non FDI Capital Flows, last four quarters)

7%

2%

6%

1%

5%

Non FDI Capital Flows

4%

0%

3%

Non FDI Capital Flows (% GDP)

GDP (yoy % change)

-1%

2%

1%

GDP

-2%

0%

-1%

-3%

-2%

-3%

-4%

Sep-96

Sep-97

Sep-98

Sep-99

Sep-00

Sep-01

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02


Outline1

OUTLINE Flight

I. Capital Flight and Macroeconomic Performance

II. The Specter of Capital Flight

III. Vulnerabilities to Capital Flight: Recent Experiences of Argentina, Uruguay and Brazil

IV. Summary and the Role of the IADB


Net Private Capital Flows to LAC Flight

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

100

80

60

40

20

0

-20

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Source: WEO, IMF


Net Direct Investment to LAC Flight

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

70

60

50

40

30

20

10

0

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Source: WEO, IMF


Financial Flows to LAC Flight

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

100

80

60

40

20

0

-20

-40

-60

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Financial Flows= Net Portfolio Investment + Othe Ner Investment

Source: WEO, IMF


Cumulative Total Private Capital Flows to LAC Flight(Billions of real US dollars of May 2002, deflated by US CPI)

1974-1981

1982-1989

80

500

450

60

400

40

350

300

20

250

0

200

150

-20

100

-40

50

0

-60

Total Private Flows

Financial Flows

FDI

Total Private Flows

Financial Flows

FDI

Source: WEO, IMF


Cumulative Total Private Capital Flows to LAC Flight(Billions of real US dollars of May 2002, deflated by US CPI)

1990-1998

1999-2001

600

250

200

500

150

400

100

300

50

200

0

100

-50

0

-100

Total Private Flows

Financial Flows

FDI

Total Private Flows

Financial Flows

FDI

Source: WEO, IMF


Cumulative Total Private Capital Flows to LAC: 1990-2001 Flight

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

700

600

500

400

300

200

100

0

FDI

Total Private Flows

Financial Flows

Source: WEO, IMF


Cumulative Total Private Capital Flows to Asia Flight(Billions of real US dollars of May 2002, deflated by US CPI)

1989-1997

1998-1999

600

150

100

500

50

400

0

300

-50

200

-100

100

-150

0

-200

Total Private Flows

Financial Flows

FDI

Total Private Flows

Financial Flows

FDI

Source: WEO, IMF


Outline2

OUTLINE Flight

I. Capital Flight and Macroeconomic Performance

II. The Specter of Capital Flight

III. Vulnerabilities to Capital Flight: Recent Experiences of Argentina, Uruguay and Brazil

IV. Summary and the Role of the IADB


Exposure of the Public Sector to Capital Flight Flight

(Public Debt in % of GDP)

65%

In US$

55%

In domestic currency

45%

35%

25%

15%

5%

Uruguay

Argentina

Brazil

Chile

Pre- Capital Flight levels

Current levels


Exposure of the Private Sector to Capital Flight Flight

(Share of foreign currency loans to the non financial private sector)

80%

70%

60%

50%

40%

30%

20%

10%

0%

Argentina

Uruguay

Brazil

Chile

Pre- Capital Flight levels

Current levels


Exposure of the Financial System to the Public Sector Flight

Credit to the public sector in % of total assets

30%

25%

20%

15%

10%

5%

0%

Brazil

Argentina

Uruguay

Chile

Pre- Capital Flight level

Current level

Current level


Vulnerability to Capital Flight: A Summary Flight

Argentina

Brazil

Uruguay

Chile

Public Debt to GDP

Financial mismatches of the Public Sector

Financial Mismatches of the Private Sector

Banking System Exposure to the Public Sector

= Low vulnerability

= High vulnerability

= Medium vulnerability


BRAZIL Flight


Exchange Rate and Country Risk Flight

2400

3.1

2200

nominal exchange rate

2000

2.9

1800

2.7

1600

R$ per dollar

basis points

2.5

1400

1200

2.3

1000

2.1

800

EMBI+ spread

600

1.9

1/2/01

3/2/01

5/2/01

7/2/01

9/2/01

1/2/02

3/2/02

5/2/02

7/2/02

11/2/01


Public Debt Flight

(% of GDP)

61

Level: US$ 263.8 billion (58.6% of GDP)

59

57

55

53

51

49

47

45

Jul-00

Jul-01

Mar-00

Nov-00

Mar-01

Nov-01

Mar-02

May-00

May-01

May-02

Ene-00

Sep-00

Ene-01

Sep-01

Ene-02


Public Debt Structure Flight

June 2002

Fixed

Rate

7%

Others

9%

External or FX indexed Public Debt

44%

Indexed to the Interest Rate

40%


Banks’ Exposure to the Public Sector Flight

Public Bond Holdings

350%

300%

250%

200%

150%

100%

50%

0%

In % of Banks’ Assets

In % of Banks’ Net Worth


Fiscal FlightSustainability

April 2002

Primary Balance

Public Debt

(% of GDP)

Required Observed

Growth Rate

Interest Rate

54.5%

10.9%

3.5%

3.9%

3.4%

Adjustment = 0.5%


10.9% Flight

3.5%

10% real depreciation

+0.2%

57.2%

Public Debt Dynamics

Public Debt (% of GDP)

Interest Rate

Growth Rate

Primary Balance that stabilizes Debt

April 2002

10.9%

3.5%

3.9%

54.5%

Fiscal Impact of:


Growth Rate Flight

Interest Rate

Public Debt (% of GDP)

Primary Balance that stabilizes Debt

April 2002

10.9%

3.5%

3.9%

54.5%

Fiscal Impact of:

10.9%

3.5%

10% real depreciation

+0.2%

57.2%

1% increase in the domestic interest rate

11.4%

3.5%

+0.3%

54.5%

Public Debt Dynamics


Growth Rate Flight

Interest Rate

Public Debt (% of GDP)

Primary Balance that stabilizes Debt

April 2002

10.9%

3.5%

3.9%

54.5%

Fiscal Impact of:

10.9%

3.5%

10% real depreciation

+0.2%

57.2%

10.9%

2.5%

+0.6%

1% reduction in the growth rate

54.5%

Public Debt Dynamics

1% increase in the domestic interest rate

11.4%

3.5%

+0.3%

54.5%


I. FISCAL Flight DEFICIT (est.)

11,535

20,787

88,861

46,768

II. PUBLIC DEBT AMORTIZATIONS

Domestic Debt

75,282

41,005

External Debt

13,580

5,763

58,303

109,649

III. (I) + (II)

19,000

19,000

IV. MONETARY BASE

V. POTENTIAL LIQUIDITY REQUIREMENTS: (III) + (IV)

77,303

128,649

Liquidity Requirements of the Public Sector

(Millions of US dollars)

July 02- Dec 02

July 02- June 03


Liquid International Resources of the Public Sector Flight

(Millions of US dollars)

I. International Reserves (end June without IMF loan)

32,000

II. IMF Credit Line

10,000

III. Total Available Liquid Funds ( I+II)

42,000

In % of July02-Dec02 Liquidity Req.

54%

In % of July02-May03 Liquidity Req.

33%

Note: Under the IMF agreement there is an agreed floor for reserves of US$ 15 billion.


Total Gross Private External Debt Flight

In millions of US$

170000

150000

130000

110000

90000

70000

50000

1998-I

1999-I

2000-I

2001-I

1998-II

1999-II

2000-II

2001-II

1998-III

1999-III

2000-III

2001-III

1997-IV

1998-IV

1999-IV

2000-IV

2001-IV


Liquidity Requirements of the Private Sector Flight

(Millions of US dollars)

July 02- Dec 02

July 02- June 03

EXTERNAL DEBT AMORTIZATIONS

16,370

28,309

Medium and Long Term

14,957

9,694

Short Term

6,676

13,352


Capital flight and financial collapse can generate

Capital flight and financial collapse can generate: Flight

  • severe productive disruptions

  • political instability

  • social unrest

… and these conditions may validate the initial flight. Furthermore the disruptive effects of the flight of financial capital can frighten FDI and thereby multiply its effects.


Outline3

OUTLINE Flight

I. Capital Flight and Macroeconomic Performance

II. The Specter of Capital Flight

III. Vulnerabilities to Capital Flight: Recent Experiences of Argentina, Uruguay and Brazil

IV. Summary and the Role of the IADB


Summary
SUMMARY Flight

  • There are clear signs of Capital Flight since the 1998 Russian Crisis.

  • Economic Contagion is not obvious, although the whole region is suffering from higher spreads.

  • The depth and spread of crises in region may be rooted in

    • G-7 Pontious Pilate approach to financial crisis in EMs, caused by fear of a Moral Hazard epidemic.

    • Political cycle and backward-looking politicians who fail to see the enormous rebound potential of the region.

    • Financial vulnerabilities


Role of the iadb
ROLE OF THE IADB Flight

  • Help to convey the regional view about the cause of, and remedies for, the current crises--partly to counteract the Moral Hazard obsession:

    • it is time for the IADB to move forward from the end of the line, and make its voice heard and heeded at the planning stage!

  • Design social programs that help prevent social unrest, a serious deterrent for FDI (the main source of international finance in the region).

  • Design social programs to ameliorate the impact of crises on poverty.

  • Enhance competitiveness programs and support of FTAA negotiations.


LAC-7 Outlook: The Specter of Capital Flight

August 7, 2002

Prepared for Presentation at IADB Board of Directors, Washington, DC


LatinMacroWatch Flight

Special Analysis

LMW: the Big Picture on a Small Screen

A new RES feature

8-7-02


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