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Financial Resilience Strategies for Latin America: Post-Russian Crisis Perspectives

Explore the impact of the Russian crisis on Latin American growth and financial flows, challenging the effectiveness of past reforms. Learn about capital flows, current account adjustments, and deleveraging trends post-crisis. Understand the role of domestic bank credit, interest rates, and investment cycles in shaping the region's economic outlook. Discover upcoming growth forecasts and strategies to enhance financial resilience through reform, trade openness, and monetary arrangements. Dive into the complex interplay of external factors and regional dynamics shaping Latin America's financial landscape.

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Financial Resilience Strategies for Latin America: Post-Russian Crisis Perspectives

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  1. ROUNDTABLE POLICYMAKER DISCUSSION: The Financial Angle Guillermo A. Calvo IADB, University of Maryland and NBER October 24, 2003

  2. OVERVIEW OF PRESENTATION • The last five years have witnessed a marked slowdown in LAC growth • which has led to questioning the effectiveness of Reforms that took place in the 1990s. • However, the debate tends to abstract from factors that are external to the region. • In particular, the debate seems to ignore the serious turmoil in the Bond Market for EMs brought about by the Russian 1998 crisis, • and which may lie behind poor growth performance.

  3. CAPITAL FLOWS AFTER THE RUSSIAN CRISIS

  4. LAC-7: Business Cycle and Financial Flows (GDP and financial flows, last four quarters) Financial Flows GDP Financial Flows (% GDP) GDP (yoy % change)

  5. LAC-7 Capital Flows (4 quarters, millions of US dollars) Russian Crisis 100000 80000 60000 40000 20000 0 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 2003-I 1997-III 1998-III 1999-III 2000-III 2001-III 2002-III 2003-III Institute of International Finance Forecasts Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

  6. LAC-7: Current Account Adjustment (4 quarters, millions of US dollars) 1000 -1000 -3000 -5000 -7000 % GDP -9000 -11000 Russian Crisis -13000 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 2003-I 1997-III 1998-III 1999-III 2000-III 2001-III 2002-III Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela

  7. 200 150 100 50 0 Ene-90 Ene-91 Deleveraging in LAC-7 (Financial flows in billions of real US dollars, cumulative since 1990) Russian Crisis Ene-92 Ene-93 Ene-94 Ene-95 Ene-96 Ene-97 Ene-98 Ene-99 Ene-00 Ene-01 Ene-02 Ene-03

  8. LAC-7: Capital Flows & Bank Credit (Cumulative financial flows in billions of real US dollars since 1990 & real bank credit, Set-98=10) Russian Crisis 230 100 210 Domestic bank credit 190 95 170 Real Domestic Bank Credit (set 98=100) Cummulative financial flows 90 150 Cumulative Financial Flows 85 130 80 110 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Mar-99 Mar-00 Mar-98 Mar-01 Mar-02 Mar-03 Nov-99 Nov-00 Nov-01 Nov-02 Nov-98

  9. 230 210 190 ENRON effect 170 150 130 110 Dic-97 Dic-98 Dic-99 Dic-00 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Deleveraging in LAC-7 (Cumulative financial flows in billions of real US dollars since 1990 and EMBI+ adj. for Argentina) 1500 Russian Crisis Cumulative financial flows 1300 1100 900 Cummulative financial flows EMBI+ adj. for Argentina 700 EMBI+ 500 300 Dic-01 Dic-02 Jun-02 Jun-03

  10. LAC-7: Spreads & Domestic Interest Rates (EMBI+ adj. for Argentina and domestic lending rates) 1700 155 Russian Crisis 1500 135 Spread 1300 115 1100 95 Domestic lending rates (June 1998=100) EMBI+ adj. for Argentina 900 75 700 Interest Rates 55 500 300 35 Dic-97 Dic-98 Dic-99 Dic-00 Dic-01 Dic-02 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Includes: Brazil, Chile, Colombia, Mexico, Peru & Venezuela

  11. THE REAL SIDE

  12. LAC-7 Business Cycle: 1997-2003 (s.a. GDP, annualized quarterly growth rate, Venezuela excluded) Recession Recovery Recovery Stalling 7% 5% 3% 1% -1% -3% -5% 1997.I 1998.I 1999.I 2000.I 2002.I 2003.I 1997.III 1998.III 1999.III 2000.III 2001.III 2002.III 2001. I

  13. LAC-7: Labour Market (s.a. unemployment, simple average, excluding Venezuela) 11.5 Recession Recovery Stalling Recovery 11.0 10.5 10.0 9.5 9.0 8.5 8.0 Dic-97 Dic-98 Dic-99 Dic-00 Dic-01 Dic-02 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Includes: Argentina, Brazil, Chile, Colombia and Mexico

  14. LAC-7 Investment Cycle: 1997-2003 (s.a. investment, annualized quarterly growth rate, Venezuela excluded) Recession Recovery Recovery Stalling 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 1997.I 1998.I 1999.I 2000.I 2002.I 2003.I 2001. I 1997.III 1998.III 1999.III 2000.III 2001.III 2002.III Includes: Argentina, Brazil, Chile, Colombia, Mexico and Peru

  15. LAC-7 Growth Forecasts (GDP yoy variation in %) 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 2002 2003 2004 Source: Latin Focus Consensus Forecasts

  16. OUTLOOK • The capital market looks much more favorable for EMs. • Delevaraging and large real depreciation should help LAC to take advantage of improved capital market conditions. • This positive phase should be utilized to lessen financial vulnerabilities by: • financial reform • trade opening • monetary arrangements, e.g., currency unions.

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