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LatinMacroWatch Special Analysis

LatinMacroWatch Special Analysis. LMW: the Big Picture on a Small Screen A new RES feature. Between Financial Distress and Lackluster Performance: A Regional Assessment. October 24 rd , 2002.

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LatinMacroWatch Special Analysis

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  1. LatinMacroWatch Special Analysis LMW: the Big Picture on a Small Screen A new RES feature

  2. Between Financial Distress and Lackluster Performance: A Regional Assessment October 24rd, 2002 Prepared for presentation at the XVII Meeting of the Latin American Network of Central Banks and Finance Ministries, IADB, Washington DC

  3. OUTLINE I. Capital Flows to LAC: Back to the Eighties? II. Capital Flows, External Adjustment and Macroeconomic Performance: A Regional Assessment III. External Adjustment and Financial Distress: Understanding Brazil IV. Lula Effect? Look Again!

  4. LAC-7 Capital Flows (4 quarters, millions of US dollars and average in % of GDP) 6% 100000 5% % of GDP 80000 4% Millions of US dollars 3% 60000 2% 40000 1% 20000 0% 0 -1% 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

  5. LAC-7 Non-FDI Capital Flows (4 quarters, millions of US dollars and and average in % of GDP) 60000 2% 40000 1% 20000 0% Millions of US dollars 0 -1% -20000 -2% -40000 % of GDP -3% -60000 -80000 -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

  6. LAC-7 Foreign Direct Investment (4 quarters, millions of US dollars and average in % of GDP) 80000 5.0% Millions of US dollars 70000 4.5% % of GDP 60000 4.0% 50000 3.5% 40000 3.0% 30000 2.5% 20000 2.0% 10000 0 1.5% 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

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

  8. Financial Flows to LAC: Back to the Eigthies? (Billions of real US dollars of May 2002, deflated by US CPI) 80 60 40 20 0 -20 -40 -60 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

  9. Financial Flows to Emerging Asia: A Panoramic View (Billions of real US dollars of May 2002, deflated by US CPI) 80 60 40 20 0 -20 -40 -60 -80 -100 -120 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

  10. Private Capital Flows to Emerging Asia: A Panoramic View (Billions of real US dollars of May 2002, deflated by US CPI) 130 80 30 -20 -70 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

  11. Korea: Capital Flows (Total capital flows, 4 quarters) 4000 1.0% 2000 0.5% Millions of US dollars 0 0.0% -2000 -0.5% -4000 -1.0% -6000 -1.5% -8000 -2.0% % of GDP -10000 -2.5% 1996-I 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 1996-III 1997-III 1998-III 1999-III 2000-III 2001-III

  12. FDI to Emerging Europe: A Panoramic View (Billions of real US dollars of May 2002, deflated by US CPI) 30 25 20 15 10 5 0 -5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

  13. Financial Flows to Emerging Europe: A Panoramic View (Billions of real US dollars of May 2002, deflated by US CPI) 40 30 20 10 0 -10 -20 -30 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

  14. OUTLINE I. Capital Flows to LAC: Back to the Eighties? II. Capital Flows, External Adjustment and Macroeconomic Performance: A Regional Assessment III. External Adjustment and Financial Distress: Understanding Brazil IV. Lula Effect? Look Again!

  15. LAC-7 Business Cycle: 1997-2002 (s.a. GDP, annualized quarterly growth rate) Deceleration Recession Recovery Stalling Recession? 8% 6% 4% 2% 0% -2% -4% -6% 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

  16. LAC-7 Business Cycle and Capital Flows (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

  17. External Adjustment (Current account, last 4 quarters) LAC 7 Emerging Asia 0 0% 80000 10% 60000 8% -2000 -1% 40000 6% % of GDP -4000 -2% 20000 4% -6000 0 2% -3% -8000 -20000 0% Millions of US dollars -4% -40000 -2% -10000 Millions of US dollars -60000 -4% -5% -12000 % of GDP -80000 -6% -14000 -6% 1996-I 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 1996-III 1997-III 1998-III 1999-III 2000-III 2001-III 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 1997-III 1998-III 1999-III 2000-III 2001-III

  18. Current Account Adjustment by Country (4 quarters, % of GDP) LAC 7 Emerging Asia 1998.II 2002.II Change 1997.II 2002.II Change (1) (2) (2)-(1) (1) (2) (2)-(1) Argentina -4.7 2.1 6.8 -6.3 5.6 11.9 Thailand -6.6 Chile -0.9 5.7 -3.9 8.5 12.4 Philippines -6.9 Peru -1.7 5.2 -5.2 8.3 13.5 Malaysia Colombia -6.3 -1.5 4.8 -2.7 4.1 6.8 Venezuela -2.1 2.0 4.1 Indonesia Brasil -4.1 -3.5 0.6 -4.6 1.3 5.9 Korea -3.0 Mexico -2.6 0.4 Average -4.9 -0.9 4.0 Average -4.5 5.6 10.1

  19. Current Account Adjustment by Country (in percentage of annual imports of 1998.II for LAC7 and 1997:II for EA) LAC 7 Emerging Asia average average Argentina Thailand Peru Philippines Colombia Indonesia Brazil Chile Korea Venezuela Malaysia Mexico 0% 5% 10% 15% 20% 25% -10% 0% 10% 20% 30% 40% 50%

  20. Real Exchange Rate by Country (vis-à-vis the US dollar) LAC 7 August 2002 vs June 1998 Emerging Asia August 2002 vs June 1997 average average Argentina 198% Indonesia 36.2% Brazil 130% Philippines 34.1% Colombia 54% Korea 24.4% Chile 49% Venezuela 37% Thailand 21.6% Perú 25% Malaysia 17.1% México -15% -20% 30% 80% 130% 180% 10% 15% 20% 25% 30% 35% 40%

  21. External Adjustment and Investment (S.a. investment and annual capital flows) LAC 7 Emerging Asia 105 6% 120 8% 6% 5% 100 110 4% 4% Investment 95 100 2% Total Capital Flows 3% 90 0% 90 Total Capital Flows 2% -2% 80 85 1% -4% Investment 70 80 0% -6% 60 -8% 75 -1% Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 1997.I 1998.I 1999.I 2000.I 2001.I 2002.I 1997.II 1998.II 1999.II 2000.II 2001.II 2002.II 1997.III 1998.III 1999.III 2000.III 2001.III 1997.IV 1998.IV 1999.IV 2000.IV 2001.IV Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01

  22. Components of Aggregate Demand LAC 7 1998.II = 100 Emerging Asia 1997.II = 100 130 150 Exports Exports 120 130 Consumption 110 Consumption 110 100 Investment 90 Investment 90 70 80 50 70 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Dic-97 Dic-98 Dic-99 Dic-00 Dic-01 1999.I 2000.I 2002.I 1998.II 1999.II 2000.II 2001. I 2001.II 2002.II 1998.III 1999.III 2000.III 2001.III 1998.IV 1999.IV 2000.IV 2001.IV Includes Korea, Philippines, Malaysia, Thailand and Indonesia Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru

  23. Investment Behavior LAC 7 1998.II = 100 Emerging Asia 1997.II = 100 128 120 118 Korea Malaysia Philippines Thailand Indonesia 110 108 100 98 90 88 80 78 70 68 60 58 50 48 Brazil Chile Argentina Colombia Mexico Peru 40 38 Jun-97 Jun-99 Jun-01 Jun-98 Jun-00 Jun-02 Mar-98 Mar-00 Mar-02 Mar-99 Mar-01 Dic-97 Dic-98 Dic-99 Dic-00 Dic-01 Sep-98 Sep-00 Sep-97 Sep-99 Sep-01 1999.I 2000.I 2001.I 2002.I 1998.II 1999.II 2000.II 2001.II 2002.II 1998.III 1999.III 2000.III 2001.III 1998.IV 1999.IV 2000.IV 2001.IV

  24. Trend Growth (annualized quarterly growth rate) LAC 7 Emerging Asia 100 95 85 80 75 60 65 55 40 45 20 35 0 25 1996.II 1997.II 1998.II 1999.II 2000.II 2001.II 2002.II 1998.II 1999.II 2000.II 2001.II 2002.II Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela Includes Indonesia, Korea, Philippines, Thailand, Malaysia

  25. In summary, the reduction of capital inflows to LAC was a triple “whammy” since it was associated with: • A rise in the cost of credit • A substantial depreciation of the real exchange rate • A decline of investment and slower growth

  26. OUTLINE I. Capital Flows to LAC: Back to the Eighties? II. Capital Flows, External Adjustment and Macroeconomic Performance: A Regional Assessment III. External Adjustment and Financial Distress: Understanding Brazil IV. Lula Effect? Look Again!

  27. External Adjustment & Financial Distress: The Debt Connection Argentina Uruguay Brazil 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

  28. Sudden Stop in Argentina and Chile (Capital flows, last 4 quarters, % of GDP) 4.0% 8% 3.5% 7% 3.0% 6% 2.5% 5% Argentina 2.0% 4% Chile Chile 1.5% Argentina 3% 1.0% 2% 0.5% 1% 0.0% 0% -0.5% -1.0% -1% I 98 I 99 I 00 III 98 III 99 III 00 II 98 II 99 II 00 IV 98 IV 99 IV 00

  29. External Adjustment (Current Account, 4 quarters, %GDP) 1% -1.0% 0% -1.5% -1% -2.0% Chile -2% -2.5% -3% -3.0% Chile Argentina -4% -3.5% -5% -4.0% -6% -4.5% Argentina -7% -5.0% -8% -5.5%

  30. Contraction and Recovery: GDP and Investment (s.a., 1998.II=100) GDP Investment 110 95 Chile Chile 105 85 100 75 Argentina 95 65 Argentina 90 55 85 45 Beginning of bank run in Argentina 80 35 1998.II 1999.II 2000.II 2001.II 2002.II 1998.IV 1999.IV 2000.IV 2001.IV 1998.II 1999.II 2000.II 2001.II 2002.II 1998.IV 1999.IV 2000.IV 2001.IV

  31. Sudden Stop and the Real Exchange Rate Relative Openness, 1998 (External Debt to Exports Ratio) Required % change in RER to eliminate the CAD 450 60 400 55 379 350 50 46.2 300 45 250 40 32.4 200 35 178 150 30 25 100 Argentina Chile Chile Argentina Source: Calvo, Izquierdo, Talvi (2002)

  32. Fiscal Sustainability in Argentina after the Sudden Stop in 1998 Debt to GDP ratio (%) Req. Prim. Surplus Adjust. Debt Reduction(%) (a) Baseline 36.5 0.3 25.6 (b) Change in Relative Prices to close the CA deficit (RER depreciation of 46,2%) 0.7 45.4 49.7 (c): (b) + 200 BPS Increase in Real Interest Rate 49.7 1.7 66.0 (d): (c) + 1% Reduction in GDP growth 49.7 2.2 71.7 (e): (d) + Contingent Liabilities 58.6 2.7 75.9 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

  33. Argentina’s Collapse in a Nutshell • RER depreciation: revaluation of public sector debt relative to GDP + deterioration of corporate balance sheets (contingent liabilities). The proposed fiscal adjustments were clearly insufficient for a substantially higher RER. • Deterioration of public and private sector balance sheets: Worsened quality of bank assets and run on banks due to the fear that losses might be partially financed by confiscating depositors. • The run against banks was accommodated by credit expansion of the CB, leading to a collapse in international reserves and an acceleration of the run on banks.

  34. Capital Flows: A Panoramic View (Excluding IMF disbursements, last 4 quarters) 50000 8% 40000 6% % GDP 30000 4% 20000 2% 10000 0% 0 -2% -10000 -4% -20000 millions of US dollars -30000 -6% 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 1997-III 1998-III 1999-III 2000-III 2001-III

  35. Non FDI Capital Flows: A Panoramic View (Excluding IMF disbursements, last 4 quarters) 6.0% 40000 30000 4.0% % GDP 20000 2.0% 10000 0.0% 0 -2.0% -10000 -20000 -4.0% -30000 -6.0% -40000 -8.0% millions of US dollars -50000 -10.0% -60000 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 1997-II 1998-II 1999-II 2000-II 2001-II 2002-II 1997-III 1998-III 1999-III 2000-III 2001-III 1997-IV 1998-IV 1999-IV 2000-IV 2001-IV

  36. Capital Flows: Recent Developments (Excluding IMF disbursements, last 4 quarters) 45000 8.0% millions of US dollars 40000 7.0% % GDP 35000 6.0% 30000 5.0% 25000 4.0% 20000 3.0% 15000 2.0% 10000 5000 1.0% 2000-I 2001-I 2002-I 2000-II 2001-II 2002-II 2000-III 2001-III 2000-IV 2001-IV

  37. Non FDI Capital Flows: Recent Developments (Excluding IMF disbursements, last 4 quarters) 15000 2.5% 2.0% 10000 % GDP 1.5% 1.0% 5000 0.5% 0 0.0% -0.5% -5000 -1.0% -1.5% -10000 millions of US dollars -2.0% -15000 -2.5% 2000-I 2001-I 2002-I 2000-II 2001-II 2002-II 2000-III 2001-III 2000-IV 2001-IV

  38. Trade Credit Lines (Outstanding, in millions of US$) 16 500 15 500 14 500 13 500 12 500 11 500 10 500 9 500 Sep Jul-01 Jul-02 May-01 May-02 Mar-01 Mar-02 Nov-01 Sep-01 Ene-01 Ene-02

  39. FDI Flows: Recent Developments (4 quarters, millions of US dollars and % of GDP) 35000 6.0% Millions of US dollars % GDP 5.5% 30000 Official Projections 5.0% 25000 4.5% 4.0% 20000 3.5% 15000 3.0% 10000 2.5% 2000-I 2001-I 2002-I 2000-II 2001-II 2002-II 2000-III 2001-III 2002-III 2000-IV 2001-IV 2002-IV

  40. Current Account Adjustment (4 quarters, millions of US dollars and % of GDP) -10000 -3.4% -12000 -3.6% -14000 -3.8% -16000 -4.0% -18000 -4.2% -20000 -4.4% -22000 -4.6% -24000 -4.8% -26000 -5.0% % of GDP Millions of US dollars -28000 -5.2% 2000-I 2001-I 2002-I 2000-II 2001-II 2002-II 2000-III 2001-III 2000-IV 2001-IV

  41. Trade Balance Adjustment (Last 12 months, in millions of US dollars) imports 61000 10000 balance 59000 8000 57000 6000 55000 4000 exports Balance Exp. / Imp. 53000 2000 51000 0 49000 -2000 47000 45000 -4000 Jul-00 Jul-01 Jul-02 Oct-00 Oct-01 Abr-00 Abr-01 Abr-02 Ene-00 Ene-01 Ene-02

  42. Economic Activity and Capital Flows industrial production (3 mth. m.a. yoy) & annual capital flows excl. IMF disbursements 50000 8% capital flows 40000 6% 30000 4% 20000 2% millions of US dollars yoy 10000 0% 0 -2% -10000 industrial production -4% -20000 -30000 -6% 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 2001-III 1997-III 1998-III 1999-III 2000-III

  43. GDP and Investment (s.a index, II.1998=100) 110 GDP 105 100 Investment 95 90 85 80 II-1998 II-1999 II-2000 II-2001 II-2002 IV-1998 IV-1999 IV-2000 IV-2001

  44. Exchange Rate and Country Risk 4.2 3000 3.7 2500 3.2 2000 exchange rate basis points R$ per dollar 2.7 1500 2.2 1000 country risk 1.7 500 15-May- 20-Jul-01 22-Jul-02 25-Mar-02 21-Sep-01 26-Nov-01 16-Sep-02 23-Ene-02 23-May-02 09-Mar-01 02-Ene-01

  45. Country Risk and Interest Rates (C-Bond Spread in b.p. and 360-day Interest Rate Swap in %) 35 interest rate 30 1800 25 1300 Interest Rate C-Bond Spread 20 800 15 C-Bond spread 300 10 02-Jul-01 02-Jul-02 02-Mar-01 02-Mar-02 02-Sep-01 02-Nov-01 02-Sep-02 02-Ene-01 02-Ene-02 02-May-01 02-May-02

  46. Interest Rates (Nominal and Real 360-day Interest Rate Swap) 23% 30% 28% 21% nominal interest rate 26% 19% 24% 17% 22% 15% 20% real nominal 13% 18% 11% 16% 9% real (ex – ante) interest rate 14% 7% 12% 5% 10% Jul-00 Jul-01 Jul-02 Oct-00 Oct-01 Ene-00 Ene-01 Ene-02 Abr-00 Abr-01 Abr-02

  47. Brazil’s Triple “Whammy” • The retrenchment of capital inflows since IIQ-2001 has been associated with: • Slowdown in economic activity • Higher interest rates on both domestic and foreign financial assets • Substantial depreciation of the real exchange rate

  48. Public Debt (% of GDP) 63 US$ 259 billion at end July XR 61 58.3% of GDP 59 57 55 53 51 49 47 45 Jul-00 Jul-01 Jul-02 Nov-00 Nov-01 Mar-00 Mar-01 Mar-02 Sep-00 Sep-01 May-00 May-01 May-02 Ene-00 Ene-01 Ene-02

  49. Public Debt Structure August 2002 Fixed Rate 6% Others 9% Indexed to the Interest Rate 42% External or FX indexed Public Debt 43%

  50. Public Debt and the Exchange Rate (Public Debt in % of GDP and XR, Reales per Dollar) 64% 4.0 62% Public Debt: 58.3% of GDP 3.5 60% 58% XR: 3.02 Reales per Dollar 3.0 56% 54% 2.5 52% 50% 2.0 48% 46% 1.5 Jul-00 Jul-01 Jul-02 Mar-00 Mar-01 Mar-02 Sep-00 Nov-00 Sep-01 Nov-01 May-00 May-01 May-02 Ene-00 Ene-01 Ene-02

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