Latin America and the Global Crisis José De Gregorio Governor Central Bank of Chile

1. Latin America and the Global CrisisJosé De GregorioGovernorCentral Bank of Chile

2. Outline • Crisis’s Origins: Financial Regulation or Monetary Policy? • Inflation Developments • GDP Response and Prospects

3. Crisis’s Origins: Financial Regulation or Monetary Policy?

4. Fed Funds MPR (*) Chile’s MPR and US’s Fed Funds(percentage) (*) Since August 2001 correspond to a nominal interest rate. Before that date, correspond to a real interest rate. Sources: Central Bank of Chile and Federal Reserve.

5. House Prices(nominal index; 2001.Q1=100) 250 250 250 250 200 200 200 200 150 150 150 150 100 100 100 100 50 50 50 50 0 0 0 0 90 93 96 99 02 05 08 01 02 03 04 05 06 07 08 USA Case & Shiller Index Australia USA Chile Spain Canada Source: Central Bank of Chile and Bloomberg.

6. Issues on Financial Regulation and Innovation • Financial stability is insured by proper regulation and to a lesser extent by monetary policy. Low interest rates and abundant liquidity are necessary but not sufficient to generate financial instability. • The perils of securitization: what are the incentives for screening and monitoring mortgage loans? How to reap the potential benefits of risk sharing without increasing overall risk? • The extent of regulation: move beyond regulating institutions that depend on public trust and guarantees, to institutions that can threaten financial stability. • Relearn the lessons of the early 20th century, before the creation of the FED: liquidity transformation is inherently risky without some form of systemic liquidity insurance.

7. Inflation Developments

8. 14 40 12 35 10 30 8 25 6 20 4 15 2 10 0 5 -2 0 04 05 06 07 08 09 CPI Annual Inflation(percentage) Chile Argentina Brazil Venezuela Colombia Ecuador Peru Mexico Source: National Statistics Offices of each country.

9. South Africa Mexico Turkey Colombia Chile Poland Indonesia Brazil Colombia Turkey Hungary Hungary Peru Korea Brazil Peru Czech Rep. Hong Kong Malaysia Czech Rep. Israel Indonesia Mexico Sweden Korea South Africa Norway Norway United States U. Kingdom Thailand Canada Poland Euro Area U. Kingdom Israel Sweden Thailand Euro Area United States Switzerland Malaysia Canada Chile Hong Kong Switzerland Japan Japan 0 5 10 15 20 -3 -2 -1 0 1 2 3 4 CPI: Accumulated Change(percentage points) (b) Between October 2008 and March/February 2009(*). (a) Between January 2007 and October 2008. (*) Hong Kong, Malaysia, Japan, South Africa and United Kingdom as of February 2009. All other, as of March 2009. Sources: National statistics Offices of each country and Bloomberg.

10. 2007 2008 2009(f) 2010(f) Inflation Target Argentina 8.8 8.6 6.7 7.3 - Brazil 3.6 5.7 4.8 4.0 4.5 (1) Chile 4.4 8.7 2.9 3.5 3.0 Colombia 5.5 7.0 5.4 4.0 4.0/5.0 (2) Ecuador 2.3 8.4 4.0 3.0 - Mexico 4.0 5.1 4.8 3.4 3.0 Peru 1.8 5.8 4.1 2.5 2.0 Uruguay 8.1 7.9 7.0 6.7 - Venezuela 18.7 30.4 36.4 43.5 - Western Hemisphere 5.4 7.9 6.6 6.2 - Inflation Forecasts(average annual change, percentage) (f) Forecast. (1) Corresponds to 2009 IT. (2) IT is 5.0% to 2009 and 4.0% to 2010. Source: World Economic Outlook April 2009, IMF.

11. -800 -700 -600 -500 -400 -300 -200 -100 Monetary Policy MPR Level (percentage) • MPR Change • (basis points) Japan Turkey United States Chile Switzerland N. Zealand Canada U. Kingdom Israel India Hong Kong Australia U. Kingdom Sweden Sweden Israel Euro Zone Norway Chile Korea Czech Rep. Hong Kong Korea Euro Zone Malaysia Colombia Norway Canada N. Zealand South Africa Australia Switzerland Poland Poland Philippines Mexico India China China Czech Rep. Peru Indonesia Brazil Mexico Colombia United States Malaysia Indonesia Philippines South Africa Japan Hungary Peru Turkey Argentina Island Hungary Brazil Russia Russia Argentina Island 0 100 200 0 2 4 6 8 10 12 14 16 Between 09.04.08 and 04.21.09 At 04.21.09 Source: Bloomberg.

12. GDP Response and Prospects

13. GDP and Industrial Production(real annual change, percentage) China China Peru Peru India India Argentina Argentina Mexico Brazil Chile Chile Brazil Colombia United States United States U. Kingdom Euro Area Colombia U. Kingdom Euro Area Mexico Korea Korea Japan Japan -25 -20 -15 -10 -5 0 5 10 -6 -4 -2 0 2 4 6 8 (a) GDP annual change in 2008.Q4. (b) Industrial production average annual change between October 2008 and January/February 2009(*). (*) Peru, Colombia, India, Mexico and Euro Area as of January 2009. All other, as of February 2009. Sources: Central Bank of Chile, CEIC Data and The People’s Bank of China.

14. Exports and GDP in 2008.Q4(percentage) 60 HKG SGP 50 KOR 40 HUN THA DEU CZE FIN 30 Capital and Durable Consumption Goods as a Percentage of Total Exports NLD 20 CAN BEL NZL BRA 10 AUS R2 = 0.52 NOR ARG COL CHL -35 -30 -25 -20 -15 -10 -5 0 5 10 Exports Contribution to GDP on 2008.Q4 (annualized quarterly change, sa) Source: Central Bank of Chile.

15. 2007 2008 2009(f) 2010(f) World 5.2 3.2 -1.3 1.9 United States 2.0 1.1 -2.8 0.0 Euro Area 2.7 0.9 -4.2 -0.4 Japan 2.4 -0.6 -6.2 0.5 Newly Ind. Asian Economies 5.7 1.5 -5.6 0.8 Emerging and Developing Eco. 8.3 6.1 1.6 4.0 Western Hemisphere 5.7 4.2 -1.5 1.6 Argentina 8.7 7.0 -1.5 0.7 Brazil 5.7 5.1 -1.3 2.2 Chile 4.7 3.2 0.1 3.0 Colombia 7.5 2.5 0.0 1.3 Ecuador 2.5 5.3 -2.0 1.0 Mexico 3.3 1.3 -3.7 1.0 Peru 8.9 9.8 3.5 4.5 Uruguay 7.6 8.9 1.3 2.0 Venezuela 8.4 4.8 -2.2 -0.5 GDP Forecasts(at PPP, real annual change, percentage) (f) Forecast. Source: World Economic Outlook April 2009, IMF.

16. World Growth at PPP (*)(annual real change, percentage) 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 60 65 70 75 80 85 90 95 00 05 10(f) Advanced Economies Emerging and Developing Economies World (*) Categories corresponds to IMF definition. (f) Forecast. Source: Central Bank of Chile and IMF (WEO, April 2009).

17. 10 10 5 5 0 0 -5 -5 -10 -10 -15 -15 80 85 90 95 00 05 10 (f) Argentina Brazil Peru Chile Mexico Colombia Current Account Balance(percentage of GDP) (f) Forecast. Source: World Economic Outlook April 2009, IMF.

18. Latin America and the Global CrisisJosé De GregorioGovernorCentral Bank of Chile