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Capital Flows to Emerging Economies:. Global Dimensions and Implications for LAC. Ernesto Talvi. CERES. October 20 th , 2005. Prepared for Presentation at the XXII Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington DC. OUTLINE.

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Capital flows to emerging economies

Capital Flows to Emerging Economies:

Global Dimensions and Implications for LAC

Ernesto Talvi

CERES

October 20th, 2005

Prepared for Presentation at the XXII Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington DC


Outline

OUTLINE

  • Capital Flight from EMs, 1997-2002: Global Repercussions

  • Revival of Capital Inflows to EMs, 2003-2005:

    • A Latin American Perspective

    • A Global Perspective

  • Unwinding of Global Imbalances and Latin America


Outline1

OUTLINE

  • Capital Flight from EMs, 1997-2002: Global Repercussions

  • Revival of Capital Inflows to EMs, 2003-2005:

    • A Latin American Perspective

    • A Global Perspective

  • Unwinding of Global Imbalances and Latin America


Capital flows to emerging economies

250

200

150

100

50

0

-50

-100

50

0

-50

-100

-150

-200

-250

190

150

110

70

30

-10

-50

-90

-130

-170

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Private Capital Flows: A Global Perspective

(billions of US dollars)

“Neoclassic” Period

USA

Industrialized Countries

Emerging Countries

Source: WEO


Capital flows to emerging economies

The Asian and Russian Crisis: An Inflection Point

Capital Flows

International Financial Conditions

(in billions of US dollars)

(EMBI spread*, bp over US Treasury bonds)

“Neoclassic” Period

Crisis in EMs

187

190

1650

150

1450

110

70

1250

30

1050

-10

850

-50

650

-90

450

-130

250

-170

-164

Jun-97

Jun-98

Jun-99

Mar-97

Mar-98

Mar-99

Dec-96

Sep-97

Dec-97

Sep-98

Dec-98

Sep-99

1996

1995

1997

1992

1994

1999

2000

2001

2002

1993

1998

Source: WEO

*adjusted by Argentina


Capital flows to emerging economies

Crisis in EMs

Private Capital Flows: A Global Perspective

(billions of US dollars)

“Neoclassic” Period

225

250

USA

200

150

 = + 233

100

50

0

-8

-50

-100

50

-179

Industrialized Countries

0

-50

 = + 41

-100

-150

-138

-200

-250

187

190

150

110

70

Emerging Countries

30

-10

-50

 = -274

-90

-87

-130

-170

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Source: WEO


Capital flows to emerging economies

Interest Rate (i)

Supply of External Financing from the Rest of World to the US

Increase in Supply of External Financing to USA

i1

External Financing (q)

q1

Capital Flight From EMs From the US Perspective:

A Graphical Analysis

Supply Hypothesis

i0

Demand of External Financing from the US

q0


Capital flows to emerging economies

 = - 23,0%

Capital Flight from EMs from the US Perspective

Appreciation of the Dollar

Decline in Interest Rates

(RXR vis-a-vis the Euro and REXR, annual avg,1996 = 100)

(real interest rate, 10-year Treasury bond, annual avg)

5.0%

4,7%

97

4.5%

92

4.0%

87

3.5%

82

3.0%

77

72

2.5%

2,1%

67

2.0%

1997

2001

2002

1996

1998

1999

2000

1996

2000

1999

1997

1998

2001

2002

Boom in Asset Prices

Deterioration of the Current Account

(Housing Price Index, Dec-1996 = 100)

(in billions of US dollars and in % of GDP)

0

0.0%

147

 = + 43.8%

-50

-0.5%

142

120

-100

-1.0%

137

-150

-1.5%

132

-200

-2.0%

127

-250

-2.5%

122

-300

-3.0%

117

billions of US dollars

-350

-3.5%

112

474

-400

-4.0%

107

% of GDP

-450

-4.5%

102

-500

-5.0%

97

1996

1997

1998

1999

2000

2001

2002

1996

2002

2000

1997

1998

1999

2001


Capital flows to emerging economies

Crisis in EMs

“Neoclassic” Period

0

-100

-136

-200

-300

USA

-400

-500

-474

-600

-700

220

250

196

200

Industrialized Countries

150

100

50

0

400

278

300

Emerging Countries

200

100

-84

0

-100

1992

1993

1996

1998

1999

2000

2001

2002

2004

1994

1995

1997

2003

Global Imbalances

(Current Account, billions of US dollars)

 = -338

 = -24

 = + 362


Capital flows to emerging economies

160

150

140

130

120

110

100

90

Capital Flight from EMs From a LAC-7 Perspective

Depreciation of LAC-7 Currencies

Increase in Interest Rates

Collapse in Asset Prices

(LAC-7, RXR vis-a-vis the Dollar, Euro and REXR, 1996 = 100)

(EMBI spread*, bp over US Treasury bonds)

(LAC-7, stock prices indices in dollars, 1996.I=100)

160

1600

150

140

1400

130

1200

120

1000

110

100

800

90

600

80

400

70

60

200

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Mar-96

Mar-97

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

*adjusted for Argentina


Outline2

OUTLINE

  • Capital Flight from EMs, 1997-2002: Global Repercussions

  • Revival of Capital Inflows to EMs, 2003-2005:

    • A Latin American Perspective

    • A Global Perspective

  • Unwinding of Global Imbalances and Latin America


Capital flows to emerging economies

Reflow of Private Capital to EMs

225

250

200

150

100

50

0

-50

-100

50

0

-50

-100

-150

-138

-200

-250

190

150

110

70

30

-10

-50

-90

-87

-130

-170

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Private Capital Flows: A Global Perspective

(billions of US dollars)

“Neoclassic” Period

Crisis in EMs

USA

 = -239

-14

Industrialized Countries

 = + 53

-85

99

Emerging Countries

 = + 186

2003

2004

Source: WEO


Capital flows to emerging economies

Crisis in EMs

Reflow of Private Capital to EMs

Capital Flows

150

(in billions of US dollars)

70

-10

-90

-170

1650

EMBI Spreads

1450

(bp over US Treasury bonds)

1250

1050

850

650

Pre-Asian Crises EM Spreads

450

360

250

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Capital Flows to Emerging Countries & EM Bond Spreads

“Neoclassic” Period

1650

1040

390


Capital flows to emerging economies

480

430

380

EMBI spread

330

280

Emerging Markets

230

Greenspan’s “Conundrum” & EM Spreads

(EMBI+ , 30-year Treasury Bonds and Fed Fund Target Rate)

Fears of FED tightening

5,70

Greenspan’s “conundrum” testimony

3,75

Beginning of FEDtightening

5,50

5,30

30-Year Treasury Bond

5,10

4,90

30-year Treasury rate

4,70

4,50

1,0

4,30

FED Funds Target Rate

4,10

jul-04

jul-05

jun-05

jun-04

dic-04

abr-04

abr-05

oct-04

oct-05

feb-04

feb-05

nov-04

mar-05

mar-04

ene-05

ago-05

ene-04

ago-04

sep-04

sep-05

may-04

may-05


Capital flows to emerging economies

Crisis in EMs

Reflow of Private Capital to EMs

Capital Flows

150

(in billions of US dollars)

70

-10

-90

-170

595

Asset Prices

(LAC-7, stock prices in US dollars, 1991.I=100)

495

395

295

195

 = + 368%

 = - 50%

 = + 174%

95

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Capital Flows to Emerging Countries & Asset Prices in LAC-7

“Neoclassic” Period


Capital flows to emerging economies

Boom in Asset Prices

(local stock indices in units of domestic currency, 09 Oct 02 = 100)

% Change

Greenspan’s “conundrum” testimony

Fears of FED tightening due to stream of positive US economic data

Oct 02– Sep 05

LAC - 7

345

+242.5%

LAC - 7

+100.4%

Emerging Asia

325

+89.8%

Nasdaq

+56.1%

S&P500

305

+55.9%

Nikkei

+55.7%

EU500

285

265

245

Beginning of easing in external financial conditions

225

Emerging Asia

205

Nasdaq

185

S&P500

165

EU500

145

Nikkei

125

105

85

jul-02

jul-03

jul-04

jul-05

nov-02

nov-03

nov-04

ene-02

ene-03

ene-04

ene-05

mar-02

sep-02

mar-03

sep-03

mar-04

sep-04

mar-05

sep-05

may-02

may-03

may-04

may-05


Capital flows to emerging economies

Crisis in EMs

Reflow of Private Capital to EMs

150

Capital Flows

(in billions of US dollars)

70

-10

-90

-170

185

Bank Credit

(LAC-7, real credit to private sector, 1991.I=100)

170

155

140

125

Average annual growth

Dec-02 – Dec-04: +5.8%

Average annual growth Jan-91 - Dec-97: +8.2%

Average annual growth Dec-97 – Dec-02: -2.8%

110

95

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2002

2003

2004

2001

Financial and Capital Flows to Emerging Markets and Bank Credit in LAC-7

“Neoclassic” Period


Capital flows to emerging economies

Revival of Domestic Bank Credit

(LAC-7, real credit to the private sector, Jun-98=100 and yoy variation)

18%

100

96

13%

real bank credit

92

8%

yoy variation

88

3%

Real Bank Credit

84

-2%

80

-7%

76

yoy variation

72

-12%

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Sep-98

Sep-99

Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

May-98

May-99

May-00

May-01

May-02

May-03

May-04

May-05


Capital flows to emerging economies

Domestic Bank Credit in LAC’s G-3

(real credit to the private sector, yoy variation)

Argentina

Brazil

Mexico

20%

12%

27%

22%

10%

7%

17%

0%

2%

12%

7%

-10%

-3%

2%

-20%

-8%

-3%

-8%

-13%

-30%

-13%

-18%

-18%

-40%

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05


Capital flows to emerging economies

Domestic Bank Credit in Other LAC-7 Countries

(real credit to the private sector, yoy variation)

Colombia

Chile

Venezuela

15%

80%

14%

10%

12%

60%

10%

5%

40%

8%

0%

20%

6%

-5%

4%

0%

-10%

2%

-20%

-15%

0%

-2%

-20%

-40%

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05


Capital flows to emerging economies

Crisis in EMs

Reflow of Private Capital to EMs

104.6

102,5

82,6

Capital Flows to Emerging Countries & Commodity Prices

“Neoclassic” Period

190

Capital Flows

150

(in billion of UD dollars)

110

70

30

-10

-50

-90

-130

-170

110

Commodity Prices

(Non-oil primary commodity prices index, annual average, Jan-1991 = 100)

105

100

95

90

85

80

75

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004


Capital flows to emerging economies

Commodity Prices

Petroleum

Metals

Foods

120

340

149

100%

115

139

290

110

129

105

240

119

100

Avg 90-97

95

190

109

90

99

Avg 90-97

140

85

234%

Avg 90-97

89

80

90

79

75

23%

40

70

69

1990

1992

1994

1996

1998

2000

2002

2004

1990

1992

1994

1996

1998

2000

2002

2004

1990

1992

1994

1996

1998

2000

2002

2004


Capital flows to emerging economies

Focus on Venezuela:

Oil Prices and Public Finances


Capital flows to emerging economies

150

140

Expenditure

+39.5%

130

120

Expenditure

6.6%

110

- 4,4%

100

90

Mar-02 Oil Price

80

70

Oil Prices and Public Finances

Oil Prices and Expenditure

Adjusted Fiscal Balance

(s.a real expenditures and US dollars per barrel, Mar-02=100)

(central government balance, % GDP)

3.0%

232

Mar-02 Jun-05

2,2%

Chavez Inauguration

Oil Prices

+129.1%

207

1.0%

182

Chavez Inauguration

-1.0%

157

Oil

Oil Price

-3.0%

132

107

-5.0%

Observed

82

-7.0%

Expenditure

57

Beginning of rise in commodity prices

Beginning of rise in oil prices

-9.0%

32

Mar-98

Mar-99

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Sep-04

Sep-98

Sep-99

Sep-00

Sep-01

Sep-02

Sep-03

Jul-98

Jul-99

Jul-00

Jul-01

Jul-02

Jul-03

Jul-04

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05


Capital flows to emerging economies

Crisis in EMs

Reflow of private Capital to EMs

190

Capital Flows

150

(in billions of US dollars)

110

70

30

-10

-50

-90

-130

-170

average annual growth 1991.I-1998.II: 8.6%

185

Investment

175

(s.a. GFKF*, 1991.I=100 )

165

155

145

average annual growth 2002.IV-2004.IV: 11.9%

135

125

average annual growth 1998.II-2002.IV: -4.1%

115

105

95

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Capital Flows to Emerging Countries & Investment in LAC-7

“Neoclassic” Period

*Gross Fixed Capital Formation


Capital flows to emerging economies

Capital Flows to Emerging Countries & Investment in Brazil

“Neoclassic” Period

Crisis in EMs

Reflow of private Capital to EMs

150

Capital Flows

(in billions of US dollars)

70

-10

-90

-170

average annual growth: 1991.I-1998.II: 5.2%

145

Investment

135

(s.a. GFKF*, 1991.I=100)

125

average annual growth: 1998.II-2003.II: -3.0%

average annual growth: 2003.II-2004.IV: 9.1%

115

105

95

I-1991

I-1992

I-1993

I-1994

I-1995

I-1996

I-1997

I-1998

I-1999

I-2000

I-2001

I-2002

I-2003

I-2004

*Gross Fixed Capital Formation


Capital flows to emerging economies

Investment in Chile and Peru

(s.a. GFKF*, 1991.I=100 )

Reflow of private Capital to EMs

Crisis in EMs

“Neoclassic” Period

299

Chile

Average annual growth 1991.I-1998.II: 14.3%

249

Average annual growth 2002.IV-2004.IV: 12.6%

199

Average annual growth 1998.II-2002.IV: -2.3%

149

99

1991.I

1994.I

1995.I

1999.I

2000.I

2003.I

2004.I

1992.I

1993.I

1996.I

1997.I

1998.I

2001.I

2002.I

219

Peru

Average annual growth 1991.I-1998.II: 12.1%

199

179

Average annual growth 2002.IV-2004.IV: 8.5%

159

Average annual growth 1998.II-2002.IV: -5.8%

139

119

99

1994.I

1995.I

1999.I

2000.I

2001.I

2004.I

1991.I

1992.I

1993.I

1996.I

1997.I

1998.I

2002.I

2003.I

*Gross Fixed Capital Formation


Capital flows to emerging economies

Investment in Colombia and Venezuela

(s.a. GFKF*, 1991.I=100 )

“Neoclassic” Period

Crisis in EMs

Colombia

Reflow of private Capital to EMs

190

180

Average annual growth 1998.II-2002.IV: -5,8%

170

160

150

140

130

Average annual growth 1991.I-1998.II: 6.0%

Average annual growth 2002.IV-2004.IV: 13.8%

120

110

100

90

1991.I

1992.I

1993.I

1994.I

1995.I

1996.I

1997.I

1998.I

1999.I

2000.I

2002.I

2003.I

2004.I

2001. I

Venezuela

150

140

Average annual growth 2002.IV-2004.IV: 10.1%

130

120

110

100

90

Average annual growth 1991.I-1998.II: 2.2%

Average annual growth 1991.I-1998.II: -4.0%

80

70

60

1991.I

1992.I

1993.I

1994.I

1995.I

1996.I

1997.I

1998.I

1999.I

2000.I

2001.I

2002.I

2003.I

2004.I

*Gross Fixed Capital Formation


Capital flows to emerging economies

Investment en Argentina y Uruguay

(s.a. GFKF*, 1991.I=100 )

Reflow of private Capital to EMs

Crisis in EMs

“Neoclassic” Period

Average annual growth 2002.IV-2004.IV: 35.1%

Argentina

232

Average annual growth 1991.I-1998.II: 12.8%

212

192

172

152

Average annual growth 1998.II-2002.IV: -16.0%

132

112

92

1991.I

1992.I

1993.I

1994.I

1995.I

1996.I

1997.I

1998.I

1999.I

2000.I

2001.I

2002.I

2003.I

2004.I

Uruguay

185

165

Average annual growth 2002.IV-2004.IV: 29.3%

145

125

Average annual growth 1991.I-1998.III: 9.1%

Average annual growth 1998.III-2002.IV: -20.8%

105

85

65

1991.I

1994.I

1996.I

1999.I

2001.I

2003.I

2004.I

1992.I

1993.I

1995.I

1997.I

1998.I

2000.I

2002.I

*Gross Fixed Capital Formation


Capital flows to emerging economies

Reflow of Private Capital to EMs

 = -24,0%

 = + 52,3%

 = - 14,4%

Capital Flows to Emerging Countries & The Real Exchange Rate in LAC-7

Crisis in EMs

“Neoclassic” Period

Capital Flows

150

(in billions of US dollars)

70

-10

-90

-170

120

Real Exchange Rate

(LAC-7, bilateral RER, quarterly average, Mar-1991 = 100)

110

100

90

80

70

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004


Capital flows to emerging economies

Crisis in EMs

Reflow of Private Capital to EMs

2005Forecasts

Argentina

6.8%

Brazil

3.2%

Chile

5.9%

Colombia

3.7%

Mexico

3.4%

average annual growth 1991.I-1998.II: 4.6%

Peru

5.0%

Venezuela

6.3%

average annual growth 2002.IV-2004.IV: 4.9%

LAC-7

4.9%

average annual growth 1998.II-2002.IV: 0.5%

Capital Flows to Emerging Countries & Economic Activity in LAC-7

“Neoclassic” Period

190

Capital Flows

150

(in billions of US dollars)

110

70

30

-10

-50

-90

-130

-170

Economic Activity

148

138

(s.a. GDP, 1991.I =100 )

128

118

108

98

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2002

2003

2004

2001


Capital flows to emerging economies

Capital Flows to Emerging Countries & Economic Activity in Brazil

“Neoclassic” Period

Crisis in EMs

Reflow of private Capital to EMs

150

Capital Flows

(in billions of US dollars)

70

-10

-90

-170

149

Economic Activity

139

(s.a. GDP, 1991.I =100 )

average annual growth: 1991.I-1998.II: 3.7%

129

average annual growth 2003.II-2004.IV: 4.6%

119

average annual growth 1998.II-2003.II: 1.4%

109

99

I-1991

I-1992

I-1993

I-1994

I-1995

I-1996

I-1997

I-1998

I-1999

I-2000

I-2001

I-2002

I-2003

I-2004


Capital flows to emerging economies

Economic Activityin Chile and Peru

(s.a. GDP, 1991=100)

Crisis in EMs

Reflow of private Capital to EMs

“Neoclassic” Period

217

Chile

197

Average annual growth 1991.I-1998.II: 8.1%

177

Average annual growth 2002.IV-2004.IV: 5.4%

157

137

Average annual growth 1998.II-2002.IV: 2,2%

117

97

1991.I

1992.I

1993.I

1994.I

1995.I

1996.I

1997.I

1998.I

1999.I

2000.I

2002.I

2003.I

2004.I

2001. I

177

Perú

167

157

average annual growth 1991.I-1998.II: 4.8%

147

average annual growth 2002.IV-2004.IV: 4.8%

137

127

Average annual growth 1998.II-2002.IV: 2.4%

117

107

97

1991.I

1992.I

1993.I

1994.I

1995.I

1996.I

1997.I

1998.I

1999.I

2000.I

2002.I

2003.I

2004.I

2001. I


Capital flows to emerging economies

Crisis in EMs

Reflow of private Capital to EMs

Economic Activityin Colombia and Venezuela

(s.a. GDP, 1991=100)

“Neoclassic” Period

Colombia

147

137

Average annual growth 1991.I-1998.II: 3.6%

Average annual growth 2002.IV-2004.IV: 4.5%

127

117

Average annual growth 1998.II-2002.IV: 0,9%

107

97

1991.I

1992.I

1993.I

1994.I

1995.I

1996.I

1997.I

1998.I

1999.I

2000.I

2002.I

2003.I

2004.I

2001. I

125

Venezuela

average annual growth 2002.IV-2004.IV: 4.5%

120

115

110

105

average annual growth 1991.I-1998.II: 3.6%

average annual growth 1998.II-2002.IV: 0,9%

100

95

1991.I

1992.I

1993.I

1994.I

1995.I

1996.I

1997.I

1998.I

1999.I

2000.I

2002.I

2003.I

2004.I

2001. I


Capital flows to emerging economies

Economic Activityin Argentina and Uruguay

(s.a. GDP, 1991=100)

Reflow of private Capital to EMs

Crisis in EMs

“Neoclassic” Period

Argentina

147

Average annual growth 1991.I-1998.II: 5.7%

142

137

132

127

122

Average annual growth 2002.IV-2004.IV: 10,2%

117

Average annual growth 1998.II-2002.IV: -4,4%

112

107

102

97

1991.I

1992.I

1993.I

1994.I

1995.I

1996.I

1997.I

1998.I

1999.I

2000.I

2002.I

2003.I

2004.I

2001. I

Uruguay

137

average annual growth 1991.I-1998.III: 4,4%

132

127

122

117

average annual growth 2002.IV-2004.IV: 12,4%

112

average annual growth 1998.III-2002.IV: -6,0%

107

102

97

1991.I

1992.I

1993.I

1994.I

1995.I

1996.I

1997.I

1998.I

1999.I

2000.I

2002.I

2003.I

2004.I

2001. I


Capital flows to emerging economies

US$ 76 (2005 US$ 80)

Oil Prices: A Historical Perspective (USD per barrel in 2004 prices)

US$ 99

100

90

80

70

60

US$ 59

US$ 49

50

40

30

20

10

US$ 12

0

Jan-70

Jan-72

Jan-74

Jan-76

Jan-78

Jan-80

Jan-82

Jan-84

Jan-86

Jan-88

Jan-90

Jan-92

Jan-94

Jan-96

Jan-98

Jan-00

Jan-02

Jan-04

Oil: average of U.K. Brent, Dubai, and West Texas Intermediate


Capital flows to emerging economies

Short Term Impact of an $80 Oil Price on Growth

(deviations from WEO GDP growth baseline projections, in percentage points)

Industrialized Countries

Emerging Market Net Oil Importing Countries

Central and Eastern Europe

Newly Industrialized Asia

Latin America

Emerging Asia

United States

Japan

Euro Area

United Kingdom

Africa

-0.6%

-0.7%

-0.4%

-0.7%

-0.8%

-0.6%

Average: -0.6%

-0.8%

Average: -0.8%

-0.9%

-0.8%

-0.9%

Source: “Oil Market Developments and Issues”, IMF, March 2005.


Capital flows to emerging economies

Reflow of Private Capital to EMs

 = -24,0%

 = + 52,3%

 = - 14,4%

Capital Flows to Emerging Countries & The Real Exchange Rate in LAC-7

Crisis in EMs

“Neoclassic” Period

Capital Flows

150

(in billions of US dollars)

70

-10

-90

-170

120

Real Exchange Rate

(LAC-7, bilateral RER, quarterly average, Mar-1991 = 100)

110

100

90

80

70

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004


Capital flows to emerging economies

Exchange Rate Appreciation in LAC-7

(Oct-2002 = 100)

Appreciation by country Oct-02 – Aug-05

115

Mexico (0.7%)

105

Venezuela (-6,8%)

95

Peru (-9,2%)

85

Chile (-23,4%)

75

Colombia (-27,2%)

Argentina (-27,1%)

65

55

Brazil (-50,7%)

45

jun-03

jun-04

jun-05

dic-02

dic-03

dic-04

oct-02

abr-03

oct-03

abr-04

oct-04

abr-05

feb-03

feb-04

feb-05

ago-03

ago-04

ago-05


Capital flows to emerging economies

Crisis in EMs

Reflow of Private Capital to EMs

 = + 113,1

 = - 12,2

 = + 53,4

Capital Flows to Emerging Countries & Official Reserves in LAC-7

“neoclassic” Period

Capital Flows

150

(in billions of US dollars)

70

-10

-90

-170

195

Reserves

(LAC-7, in billion of US dollars)

155

115

75

35

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004


Capital flows to emerging economies

Reflow of Private Capital to EMs

Inflation Expectations

(CPI, yoy variation)

Expected 2005

Observed 2004

Argentina

6.1%

10.7%

Brazil

7.6%

5.6%

Chile

2.4%

3.3%

Colombia

5.5%

5.2%

Mexico

5.2%

3.7%

Peru

3.5%

2.1%

Venezuela

19.2%

17.4%

Capital Flows to Emerging Countries & Inflation in LAC-7

Crisis in EMs

“Neoclassic” Period

190

Capital Flows

150

(in billions of US dollars)

110

70

30

-10

-50

-90

-130

-170

40%

Inflation

35%

(median, in %)

30%

25%

20%

15%

10%

5%

0%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004


Capital flows to emerging economies

Focus on Argentina:

Exchange Rate Intervention, Inflation and Sterilization


Capital flows to emerging economies

Nominal Exchange Rate and Intervention in the Exchange Rate Market

International Reserves

Nominal Exchange Rate

(RER vis-à-vis the US)

(Millions of US Dollars)

3.9

26,105

27,000

3.8

25,000

3.7

23,000

3.6

XR stabilizes in a 2.7-3.1 range

XR stabilizes in a 2.7-3.1 range

3.5

21,000

3.4

19,000

3.3

17,000

3.2

15,000

3.1

2.95

3.0

13,000

2.9

11,000

2.8

9,000

2.7

7,000

2.6

Jun-02

Jun-03

Jun-04

Jun-05

Oct-02

Oct-03

Oct-04

Oct-05

Jun-02

Jun-03

Jun-04

Jun-05

Feb-03

Feb-04

Feb-05

Mar-03

Mar-04

Mar-05

Sep-02

Sep-03

Sep-04

Sep-05

Dec-02

Dec-03

Dec-04


Capital flows to emerging economies

Inflation and Expectations

Observed Inflation

Inflation Expectations

(CPI, 12-month rate and annualized monthly rate of quarterly moving average)

(2005, market expectatons and BCRA target band)

11.1%

11.5%

19%

17.2%

Sharp Acceleration of Inflation

11.0%

Sharp Acceleration of Inflation

17%

10.5%

Annualized monthly rate

9.8%

15%

10.0%

9.5%

13%

9.0%

11%

8.5%

10.2%

Upper limit

8.0%

9%

2006 Expectations

7.5%

2005 Expectations

7%

Upper limit

7.0%

6.5%

5%

12-month rate

Lower limit

6.0%

3%

5.5%

Lower limit

1%

5.0%

Jul-04

Jul-05

Jul-04

Jan-04

Jan-05

Jan-04

Jan-05

Jun-05

Mar-04

Mar-05

Sep-04

Nov-04

Sep-05

Mar-04

Mar-05

Sep-04

May-04

May-05

Nov-04

May-04

May-05

Aug-05


Capital flows to emerging economies

Reserve Accumulation and Sterilization

Monetary Objectives of the BCRA

Interest Rates on BCRA Bills

(billion of pesos)

(180 day LEBACS in pesos)

67

88

Reserve Accumulation Financing

7.5

65

Average Maturity

180-d rates

Monetary Base

29%

90-d rates

84

Repos + Lebacs

71%

62

May-04

1.1%

243

2.5%

80

Sep-05

6.9%

158

7.5%

Repos + Lebacs

60

Sharp Acceleration of Inflation

76

57

72

55

Monetary Base

Augmented Monetary Base plus LEBACS

Augmented Monetary plus LEBACS*

68

52

64

50

60

47

Monetary Base

Sharp Acceleration of Inflation

45

56

2.6

42

52

Jul-04

Jul-05

Jan-04

Jan-05

Mar-04

Mar-05

Sep-04

Nov-04

Sep-05

May-04

May-05

*Augmented Monetary Base = Monetariy Base + Repos


Capital flows to emerging economies

10.2%

Sharp Acceleration of Inflation

10,5%

10,0%

Nominal Exchange Rate

9,5%

9,0%

2.9

12-month Inflation

8,5%

8,0%

7,5%

Real Exchange Rate

7,0%

2.7

6,5%

Domestic Inflation

6,0%

5,5%

5,0%

Exchange Rate and Inflation

(TCR vis á vis the US dollar, ago-04 = NER)

3,05

3,00

2,95

2,90

Exchange Rate

2,85

2,80

2,75

2,70

2,65

2,60

2,55

jul-05

jun-05

oct-04

dic-04

feb-05

nov-04

abr-05

ene-05

sep-04

mar-05

sep-05

ago-04

may-05

ago-05


Capital flows to emerging economies

Crisis in EMs

Reflow of Private Capitals to EMs

Capital Flows

(in billions of US dollars)

190

150

110

70

30

-10

-50

-90

-130

-170

Fiscal Result

1%

(% of GDP)

0%

-1%

-2%

Average 2002-2004: -1.4%

Average 1991-1997: -1.1%

-3%

Average 1998-2002: -3.0%

-4%

-5%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Capital Flows to Emerging Countries & Fiscal Performance in LAC-7

“Neoclassic” Period


Capital flows to emerging economies

Crisis in EMs

Reflow of Private Capitals to EMs

50%

45%

40%

35%

30%

25%

20%

1991

1992

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

1993

Capital Flows to Emerging Countries & Public Debt in LAC-7

“Neoclassic” Period

Capital Flows

190

(in billions of US dollars)

150

110

70

30

-10

-50

-90

-130

-170

Public Debt*

47.6%

(% of GDP)

43.7%

40.8%

27.7%

*adjusted by Argentina’s debt reestructuring


Capital flows to emerging economies

Focus on Brazil:

The Real Exchange Rate, Interest Rates and Fiscal Performance


Capital flows to emerging economies

Interest Payments: 10.5%

Fiscal Deficit: 6.3%

Interest Payments: 7.9%

Primary Surplus: 5.1%

FiscalDeficit: 2.8%

Primary Surplus: 4.2%

Fiscal Balance (last 12 months, in % of GDP)

6.5%

11%

6.0%

10%

5.5%

9%

5.0%

8%

4.5%

7%

Fiscal Deficit

Primary Surplus & Interest Payments

4.0%

6%

3.5%

5%

3.0%

4%

2.5%

3%

2.0%

2%

Jul-01

Jul-02

Jul-03

Jul-04

Jul-05

May-02

May-03

May-04

May-05

Mar-02

Mar-03

Mar-04

Mar-05

Nov-01

Nov-02

Nov-03

Nov-04

Sep-01

Sep-02

Sep-03

Sep-04

Jan-02

Jan-03

Jan-04

Jan-05


Capital flows to emerging economies

Public Debt Level and the Exchange Rate

4.5

66%

63.6%

64%

4.0

62%

Public Debt Structure

60%

3.5

58%

Public debt/GDP

3.0

56%

Fixed

Rate

21%

54%

2.5

Others

14%

52%

Exchange Rate

50%

2.0

51.7%

Repos

4%

48%

1.5

46%

External or FX indexed Public Debt 12%

Jul-02

Indexed to the Interest Rate

49%

Apr-01

Oct-03

Jan-00

Jun-00

Jan-05

Jun-05

Feb-02

Mar-04

Nov-00

Sep-01

Dec-02

Aug-04

May-03

Interest Payments and the Interest Rate

27

10.5%

11%

25

Selic Rate

10%

23

Interest Payments

Interest Rate

21

9%

Interest

Payments

19

8%

17

7.9%

15

7%

Jul-01

Jul-02

Jul-03

Jul-04

Jul-05

Mar-02

Mar-03

Mar-04

Mar-05

Nov-01

Nov-02

Nov-03

Nov-04

Public Debt Composition


Outline3

OUTLINE

  • Capital Flight from EMs, 1997-2002: Global Repercussions

  • Revival of Capital Inflows to EMs, 2003-2005:

    • A Latin American Perspective

    • A Global Perspective

  • Unwinding of Global Imbalances and Latin America


Capital flows to emerging economies

Reflow of Private Capital to EMs

225

250

200

150

100

50

0

-50

-100

50

0

-50

-100

-150

-138

-200

-250

190

150

110

70

30

-10

-50

-90

-87

-130

-170

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Private Capital Flows: A Global Perspective

(billions of US dollars)

“Neoclassic” Period

Crisis in EMs

USA

 = -239

-14

Industrialized Countries

 = + 53

-85

99

Emerging Countries

 = + 186

2003

2004

Source: WEO


Capital flows to emerging economies

Reflow of Private Capital to EMs

-666

-14

679

US External Deficit Financing

(billions of US dollars)

“Neoclassic” Period

Crisis in EMs

0

-100

Current Account

-200

-300

-400

-500

-414

-600

-700

246

Private Financing

200

100

0

-100

800

700

600

500

Official Financing

400

167

300

200

100

0

-100

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Source: WEO


Capital flows to emerging economies

Rest of Asia*

1.000

1.000

900

 = + 439

800

700

561

600

500

400

300

200

100

10

1990

1994

1996

2000

2004

1992

1998

2002

Massive Intervention of Central Banks

(International reserves, in billions of US dollars)

Euro -Zone

China

Japan

664

834

410

710

910

400

810

610

 = + 21

710

 = + 448

 = + 438

390

510

374

610

380

410

510

396

370

410

353

310

216

360

310

210

350

210

110

340

110

10

330

1990

1992

1994

1996

1998

2000

2002

2004

1992

1994

1996

2000

1990

1998

2002

2004

1999

2000

2001

2002

2003

2004

2005

LAC-7**

211

230

200

170

140

148

110

80

 = + 63

50

20

1990

1992

1994

1996

1998

2000

2002

2004

*Includes: Korea, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, Taiwan & Thailand.

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


Capital flows to emerging economies

2,1%

1,7%

666

Official Financing and the US

Current Account

Interest Rates

(in billions of US dollars and in % of GDP)

(10-year Treasury bond real rate, annual avg)

0

0.0%

5.0%

-100

4.5%

-1.0%

-200

4.0%

-2.0%

3.5%

-300

-3.0%

3.0%

-400

billions of US dollars

-4.0%

2.5%

-500

2.0%

-5.0%

% of GDP

-600

1.5%

-700

-6.0%

1.0%

1996

1997

1998

1999

2000

2001

2002

2003

2004

1996

1997

1998

1999

2000

2001

2003

2004

2002

Real Effective Exchange Rate

Selected Bilateral Real Exchange Rates

(annual avg,1996 = 100)

(Oct-2002=100)

140

97

135

130

92

Euro

125

 = + 11,6%

 = + 23,5%

120

87

115

Japan

110

82

 = + 3,3%

105

China

77

100

 = + 2,4%

95

Dic-02

Dic-03

Dic-04

2004

Oct-02

Abr-03

Oct-03

Abr-04

Oct-04

Abr-05

Jun-03

Jun-04

Jun-05

Feb-03

Feb-04

Feb-05

Ago-03

Ago-04

Ago-05

1996

1997

1998

2000

2002

2001

1999

2003


Outline4

OUTLINE

  • Capital Flight from EMs, 1997-2002: Global Repercussions

  • Revival of Capital Inflows to EMs, 2003-2005:

    • A Latin American Perspective

    • A Global Perspective

  • Unwinding of Global Imbalances and Latin America


Capital flows to emerging economies

Will the unwinding of current global imbalances result in imminent major turmoil in capital markets?

If so, how is LAC likely to fare in that scenario?


Capital flows to emerging economies

Capital Flows to/from Emerging Economies:

Global Dimensions and Implications for LAC

Ernesto Talvi

CERES

October 20th, 2005

Prepared for Presentation at the XXII Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington DC


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