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The post-crisis landscape (in 3 snapshots)

The post-crisis landscape (in 3 snapshots). Eduardo Levy Yeyati UTDT & Barclays Capital. The growth outlook. Ranking recessions: Big….

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The post-crisis landscape (in 3 snapshots)

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  1. The post-crisis landscape (in 3 snapshots) Eduardo Levy Yeyati UTDT & Barclays Capital

  2. The growth outlook

  3. Ranking recessions: Big… Note: GDP gap for past crises estimated using by gap between actual GDP and GDP assuming growth at the potential rate since the beginning of the recession. EM Crisis include Argentina, Brazil, Mexico, Thailand, Korea and Singapore. Source: Haver, Barclays Capital.

  4. …synchronized… Measure of global synchronicity

  5. …short… Global IP and GDP Industrial production has turned Note: Europe includes Germany, France, Italy, Spain and UK. Source: Haver, Barclays Capital

  6. …buffered by stimulus (China and the US) Expected month of end of recession

  7. What next? • The Lehman panic has been undone by countercyclical policy • …funded by savings (China, Chile), as well as debt and money printing (US, UK) • What will be trend growth once the cyclical rebound is over? 7 7

  8. For now…not impressive 9.5 7.7 6.1 2.9 GDP growth during recoveries from crises US GDP index level after recession trough Source: BEA, Haver, Barclays Capital. Note for figure on the right: Typical recovery GDP growth is a weighted average of growth following uncertainty shocks (1/2), the ERM crisis (1/3) and EM crises (1/6). Assumes current crisis in began in 3Q09. Source of typical uncertainty shock recovery comes from Bloom, Nicholas.

  9. What next? • The Lehman panic has been undone by countercyclical policy • …funded by savings (China, Chile), as well as debt and money printing (US, UK) • What will be trend growth once the cyclical rebound is over? • The cyclical rebound surprised the market; the post-crisis trend is likely tro disappoint • When will the stimulus be switched off (and what is going to happen then)? • When will QE be mopped up and interest rates normalize? • …which bring us to… 9 9

  10. The new global balance

  11. Predictable: Rates & USD selloff Yields The recent evolution of USD

  12. Less predictable: QE and the rates-USD decoupling QE behind the summer breakdown of the recovery trade Net Supply of riskless US assets (net of Fed purchases)

  13. The CA and the savings drain The impact of the global fiscal stimulus over global imbalances – the savings “drain” CA deficit, and private and public savings (2002 – today), all as a share of GDP

  14. Cash on the sidelines There is still cash on the sidelines, but is it a good USD proxy?

  15. Why the USD may strengthen in 2010 • Undoing of QE + H2 tightening • The end of cheap funding of risky assets • Fear of asset inflation may trigger tightening before inflation shows its face • Growth disappointments down the road • Moderate risk appetite • The failure of the IMF as ILLR • Good try with the FCL • But no takers (Mexico, Poland, Colombia) and fewer users • Self insurance will continue to be the norm • UST delivered • Good hedge (even if for circular, self-fulfilling reasons)

  16. Advanced Emerging Markets

  17. Emerging markets: What’s new • Lessons from the 90s • De-dollarization • De-leverage • Liquidity hoarding • Leaning-against-the-wind exchange rate policy • Lessons from the 80s • Institutional building • Monetary and fiscal credibility • Ability to conduct countercyclical policies

  18. Leaning against the wind ER policy The path of less resistance: EM vs G10 Brazil’s Exchange Rate Policy

  19. The newborn policy autonomy Policy Rates monthly Policy Rates monthly

  20. Decoupling or growth convergence? 5 year rolling correlation between EM and G7 growth EM and G7 Growth relationship

  21. The couple moves East Decoupling and Convergence: EM growth as a function of G7 and Chinese growth (y/y quarterly data) Note: Median values from country-by-country regressions. p-values in italics. G7 growth computed as the average of individual growth rates weighed by the dollar GDP of the previous year. The EM sample includes: Argetina, Brazil, Chile, Colombia, Mexico, Peru, Honk Kong, India, Indonesia, Malaysia, Philippines, Singapur, Taiwan, Thailand, Czech Republic, Hungary, Poland, Turkey, and South Africa. Source: IMF, Barclays Capital.

  22. The high beta-high alpha pattern also in markets Developed economies and the New Emerging Markets: An index view

  23. Growth convergence in action EM Contribution to global growth

  24. Growth convergence in action (and in markets) EM’s growing Market Share EM and G7 shares of world GDP

  25. The glass half empty: Institutions… Macro Risk Institutional Indicators

  26. …and income Contagion within EM: No more Russias Growth Stats

  27. The price of risk remains above pre-Lehman levels… Risk appetite: Spreads over the cycle

  28. …but the relocation to risky assets favors EM Em Assets fed by the growing risk appetite MM vs EM Equity fund flows

  29. Advanced Emerging Markets • The EM lable is obsolete  There is a new “advanced” group of countries, halfway between EM and G10 • No mean reversion  Convergence should continue in the next five years • Solved the financial front, the agenda should move towards income and institutions. • The post-crisis landscape is bound to accelerate this process.

  30. Thank you

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