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LatinMacroWatch Special Analysis

LatinMacroWatch Special Analysis

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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. Latin America: The Year Ahead April 9th, 2003 Prepared for presentation at the XVIII Meeting of the Latin American Network of Central Banks and Finance Ministries, Washington DC

  3. Summary and Conclusions • The external environment appears to be improving for LAC. • The global economy is predicted to perform better in 2003 and 2004 than in 2002. • Non-oil commodity prices are rising. • Financial conditions, as measured by the EMBI+, are improving. • The risks stemming from the Iraqi war have not yet materialized. • In particular, oil prices have risen less than in the Gulf war and future prices imply steep declines.

  4. Summary and Conclusions • LAC has already gone through a sharp macroeconomic adjustment (in response to the collapse in capital flows) and there are signs this adjustment might be at its final stages. • As a result of this adjustment, a few countries will have gone through debt restructuring processes that the market appears to be handling in creative ways, even in the absence of statutory approaches (such as the SDRM).

  5. Summary and Conclusions • The situation in systemically important countries is improving. • More favorable external financial conditions and Lula’s policy initiatives have so far gone a long way in defusing the possibility of a financial crisis in Brazil. • Argentina is slowly recovering and gradually cleaning its financial mess although a few hurdles still remain, namely, debt restructuring, fiscal sustainability and bank solvency.

  6. OUTLINE I. The External Environment G-3 Economic Activity Commodity Prices & Terms of Trade Financial Conditions for Emerging Markets Risks Ahead: The Iraqi War II. Capital Flows & Macroeconomic Adjustment in LAC Real Exchange Rate & Current Account Adjustment Domestic Demand, Economic Activity & Employment Growth Forecasts

  7. OUTLINE I. The External Environment G-3 Economic Activity Commodity Prices & Terms of Trade Financial Conditions for Emerging Markets Risks Ahead: The Iraqi War II. Capital Flows & Macroeconomic Adjustment in LAC Real Exchange Rate & Current Account Adjustment Domestic Demand, Economic Activity & Employment Growth Forecasts

  8. OUTLINE I. The External Environment G-3 Economic Activity Commodity Prices & Terms of Trade Financial Conditions for Emerging Markets Risks Ahead: The Iraqi War II. Capital Flows & Macroeconomic Adjustment in LAC Real Exchange Rate & Current Account Adjustment Domestic Demand, Economic Activity & Employment Growth Forecasts

  9. Selected Growth Forecasts (GDP, variation in %) Consensus Forecasts World Economic Outlook Asia (ex. Asia (ex. Japan) Japan) USA USA Euro Area Euro Area Japan Japan 2002 2003 2004 2002 2003 2004 -2 0 2 4 6 -2 0 2 4 6 8 Source: LatinFocus Consensus Forecasts & IMF

  10. OUTLINE I. The External Environment G-3 Economic Activity Commodity Prices & Terms of Trade Financial Conditions for Emerging Markets Risks Ahead: The Iraqi War II. Capital Flows & Macroeconomic Adjustment in LAC Real Exchange Rate & Current Account Adjustment Domestic Demand, Economic Activity & Employment Growth Forecasts

  11. 100 95 90 85 80 75 70 65 Jul-00 Jul-01 Jul-02 Oct-00 Abr-01 Oct-01 Abr-02 Apr-00 Jul - 98 Jul - 99 Oct - 97 Oct - 98 Oct - 99 Ene-01 Ene-02 Apr - 98 Apr - 99 Jan - 98 Jan - 99 Jan - 00 Non-oil Commodity Prices (1997.II=100) Food Non oil primary commodities Non-oil primary Commodities & Food Oct-02 Ene-03 Source: IMF

  12. Non-oil Commodity Prices (1997.II=100) 100 1,25 Food 1,20 95 US$ vs Euro 1,15 90 1,10 Non oil primary commodities 85 1,05 Non-oil primary Commodities & Food US$ vs Euro 1,00 80 0,95 75 0,90 70 0,85 65 0,80 Jul-00 Jul-01 Jul-02 Oct-00 Abr-01 Oct-01 Abr-02 Oct-02 Apr-00 Jul - 98 Jul - 99 Oct - 97 Oct - 98 Oct - 99 Ene-01 Ene-02 Ene-03 Apr - 98 Apr - 99 Jan - 00 Jan - 98 Jan - 99 Source: IMF

  13. Commodity Prices and Terms of Trade (1997.II=100) 100 100 Non fuel primary commodities Terms of trade 95 90 90 80 Non Fuel Primary Commodities Terms of Ttrade 85 70 80 60 1997.II 1999.II 2000.II 1998.II 2001.II 2002.II 1999.IV 2000.IV 2002.IV 1997.IV 1998.IV 2001.IV Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru.

  14. Oil Prices (Brent Oil, US$/bbl ) Beginning of tensions with Iraq Gulf War 37 30.4 36.2 32 Brent Oil price 27 22 17 17.9 12 15.1 9.8 7 Ene-02 Ene-03 Ene-90 Ene-91 Ene-92 Ene-93 Ene-94 Ene-95 Ene-96 Ene-97 Ene-98 Ene-99 Ene-00 Ene-01

  15. Brent Oil price Real Oil Prices (Brent Oil, US$/bbl, deflated by US CPI, June 1990=100) Beginning of tensions with Iraq Gulf War 230 180 130 80 30 Ene-92 Ene-93 Ene-94 Ene-98 Ene-99 Ene-00 Ene-90 Ene-91 Ene-95 Ene-96 Ene-97 Ene-01 Ene-02 Ene-03

  16. 01-Apr-02 31-Jan-03 07-Mar-03 03-Apr-03 Oil Future Prices (WTI Oil future prices) 38 36 34 32 30 28 26 24 22 20 1 M 3 M 6 M 12 M

  17. OUTLINE I. The External Environment G-3 Economic Activity Commodity Prices & Terms of Trade Financial Conditions for Emerging Markets Risks Ahead: The Iraqi War II. Capital Flows & Macroeconomic Adjustment in LAC Real Exchange Rate & Current Account Adjustment Domestic Demand, Economic Activity & Employment Growth Forecasts

  18. External Financial Conditions for Emerging Markets (EMBI+ adjusted for Argentina, bps) 960 910 860 810 760 EMBI+ Adjusted for Argentina 710 660 610 560 510 460 Jul-01 Jul-02 Dic-01 Dic-02 Nov-01 Nov-02 Abr-02 Jun-02 Abr-03 Oct-01 Feb-02 Mar-02 Oct-02 Feb-03 Mar-03 Ago-01 Sep-01 Ene-02 Ago-02 Sep-02 Ene-03 May-02

  19. “ENRON” Effect & US High Yield Bond Market (US HY corporate bonds, bps over US Treasuries) 1100 “ENRON” Effect 1050 1000 950 900 850 High Yield Bonds 800 750 700 650 600 Jul-01 Jul-02 Dic-01 Dic-02 Jun-02 Ene-02 Ene-03 Oct-02 Oct-01 Feb-02 Mar-02 Feb-03 Mar-03 Sep-01 Nov-02 Nov-01 Sep-02 Abr-02 Abr-03 May-02 Ago-01 Ago-02

  20. “ENRON” Effect & Emerging Markets (US HY corporate bonds, bps over US Treasuries, and EMBI+ adjusted for Argentina) 1100 950 Beginning of rise in US High Yield spreads EMBI+ (adjusted for Argentina) 1050 900 1000 850 950 800 900 750 EMBI+ Adjusted for Argentina 850 700 High Yield Bonds 800 650 750 600 700 550 US HY Corporate spread 650 500 600 450 Jul-01 Jul-02 Dic-01 Dic-02 Jun-02 Ene-02 Ene-03 Oct-02 Oct-01 Mar-03 Mar-02 Feb-02 Feb-03 Nov-01 Nov-02 Sep-01 Sep-02 Abr-03 Abr-02 May-02 Ago-01 Ago-02

  21. ENRON Effect & Brazil (Brazil EMBI+, and US HY corporate bonds, bps over US Treasuries) Lula is elected President Lula rises in the polls 1100 2950 1050 US HY Corporate spread 1000 2450 950 900 1950 High Yield Bonds 850 EMBI+Brazil 800 1450 750 700 950 650 Brazil 600 450 Jul-01 Jul-02 Dic-01 Dic-02 Jun-02 Ene-02 Ene-03 Oct-01 Oct-02 Feb-02 Mar-03 Mar-02 Feb-03 Sep-01 Nov-01 Sep-02 Nov-02 Abr-02 Abr-03 May-02 Ago-01 Ago-02

  22. ENRON Effect & Chile (Chile Sov. Spread 10 yr bond and US HY corporate bonds, bps over US Treasuries) 1100 450 Beginning of rise in US High Yield spreads 1050 430 Chile 1000 410 950 390 900 370 High Yield Bonds Chile 850 350 800 330 750 310 700 290 650 270 US HY Corporate spread 600 250 Jul-01 Jul-02 Dic-01 Abr-02 Dic-02 Oct-01 Oct-02 Jun-02 Ago-01 Ago-02 Feb-02 Mar-02 Feb-03 Mar-03 Sep-01 Nov-01 Ene-02 Sep-02 Nov-02 Ene-03 May-02

  23. ENRON Effect & Colombia (Colombia EMBI+, and US HY corporate bonds, bps over US Treasuries) 1100 1170 Beginning of rise in US High Yield spreads 1050 1070 US HY Corporate spread 1000 970 950 900 870 Colombia EMBI+ 850 High Yield Bonds 770 800 750 670 700 Colombia 570 650 600 470 Jul-01 Jul-02 Dic-01 Dic-02 Jun-02 Nov-01 Nov-02 Abr-02 Abr-03 Feb-02 Mar-02 Feb-03 Mar-03 Oct-01 Oct-02 Ago-01 Sep-01 Ene-02 Ago-02 Sep-02 Ene-03 May-02

  24. ENRON Effect & Mexico (Mexico EMBI+, and US HY corporate bonds, bps over US Treasuries) Beginning of rise in US High Yield spreads 1100 1050 470 Mexico 1000 420 950 900 370 850 Mexico EMBI+ High Yield Bonds 800 320 750 700 US HY Corporate spread 270 650 600 220 Jul-01 Jul-02 Dic-01 Dic-02 Oct-01 Oct-02 Abr-02 Abr-03 Jun-02 Nov-01 Ene-02 Nov-02 Ene-03 Feb-02 Mar-02 Feb-03 Mar-03 Ago-01 Ago-02 Sep-01 Sep-02 May-02

  25. ENRON Effect & Peru (Peru EMBI+, and US HY corporate bonds, bps over US Treasuries) 1100 Beginning of rise in US High Yield spreads 900 1050 US HY Corporate spread 1000 800 950 900 700 Peru EMBI+ 850 High Yield Bonds 800 600 750 700 500 Peru 650 600 400 Jul-01 Jul-02 Mar-02 Mar-03 Nov-01 Nov-02 May-02 Sep-01 Ene-02 Sep-02 Ene-03

  26. ENRON Effect & Venezuela (Venezuela EMBI+, and US HY corporate bonds, bps over US Treasuries) General Strike Beginning of rise in High Yield spreads 1100 1480 1050 1380 US HY Corporate spread 1000 1280 950 1180 900 Venezuela EMBI+ High Yield Bonds 850 1080 800 980 750 880 700 Venezuela 780 650 600 680 Jul-01 Jul-02 Jun-02 Nov-01 Dic-01 Nov-02 Dic-02 Abr-02 Feb-02 Mar-02 Feb-03 Mar-03 Oct-01 Oct-02 Ago-01 Sep-01 Ene-02 Ago-02 Sep-02 Ene-03 May-02

  27. ENRON Effect & EU High Yield Bond Market (US HY corporate bonds, bps over US Treasuries and EU HY Option Adjusted Spread, bps) Beginning of rise in US High Yield spreads 1100 1800 EU HY Corporate spread 1050 1600 1000 950 1400 900 EU High Yield Bonds 850 1200 US High Yield Bonds 800 1000 750 US HY Corporate spread 700 800 650 600 600 Jul-01 Jul-02 Dic-01 Dic-02 Ene-02 Feb-02 Mar-02 Ene-03 Feb-03 Mar-03 Jun-01 Oct-01 Jun-02 Oct-02 Sep-01 Nov-01 Sep-02 Nov-02 Abr-02 May-02 Ago-01 Ago-02

  28. OUTLINE I. The External Environment G-3 Economic Activity Commodity Prices & Terms of Trade Financial Conditions for Emerging Markets Risks Ahead: The Iraqi War II. Capital Flows & Macroeconomic Adjustment in LAC Real Exchange Rate & Current Account Adjustment Domestic Demand, Economic Activity & Employment Growth Forecasts

  29. The 1991 Gulf War: Oil prices (Brent Oil price US$/bbl) Iraq surrenders War begins Iraqi invation of Kuwait 37 32 Brent Oil price 140% 27 22 17 12 Jul-90 Jul-91 Abr-90 Oct-90 Abr-91 Dic-90 Mar-90 May-90 Mar-91 May-91 Jun-90 Jun-91 Ago-90 Nov-90 Feb-90 Feb-91 Ene-90 Sep-90 Ene-91

  30. The 1991 Gulf War: Financial Conditions (Brent Oil price and US HY corporate bonds, bps over US Treasuries) 1050 37,0 US HY Corporate spread 1000 32,0 950 US HY Corporate spread Brent Oil price 900 27,0 850 800 22,0 750 700 17,0 650 Oil 600 12,0 Jul-90 Jul-91 Jun-90 Nov-90 Jun-91 Dic-90 Abr-90 Abr-91 Feb-90 Feb-91 Oct-90 Mar-90 Mar-91 Ene-90 Ago-90 Sep-90 Ene-91 May-90 May-91

  31. The 1991 Gulf War: US Economic Activity (Brent Oil price and US Industrial production Jun-90 = 100) peak* trough* 100.5 37.0 U.S. US Industrial Production 100.0 32.0 99.5 Brent Oil price 99.0 27.0 98.5 98.0 22.0 97.5 97.0 17.0 Oil 96.5 96.0 12.0 Jul-90 Jul-91 Jun-90 Jun-91 Nov-90 Dic-90 Abr-90 Abr-91 Feb-90 Mar-90 Feb-91 Mar-91 Oct-90 Ene-90 Ago-90 Sep-90 Ene-91 May-90 May-91 * = NBER reference dates

  32. The 1991 Gulf War: US Economic Activity (NBER Business Cycle reference dates) Peak Trough Peak to Trough Amplitude July 1990 March 1991 8 months -3.5%* *measured by industrial production index

  33. The 1991 Gulf War: Oil and Commodity prices (Brent Oil price US$/bbl and Metal cmdty prices, Jun-90 = 100) Iraq surrenders War begins Iraqi invation of Kuwait 130 37 125 120 32 Metals 115 Brent Oil price Metal Prices 110 27 105 Oil 100 22 95 90 17 85 80 12 Jul-90 Jul-91 Abr-90 Oct-90 Abr-91 Dic-90 Mar-90 Mar-91 May-90 May-91 Jun-90 Jun-91 Ago-90 Nov-90 Feb-90 Feb-91 Ene-90 Sep-90 Ene-91

  34. The 1991 Gulf War: Oil and Commodity prices (Brent Oil price US$/bbl and Agricultural cmdty prices, Jun-90 = 100) War begins Iraq surrenders Iraqi invation of Kuwait 105 37 100 32 Brent Oil price Agriculture Prices Agriculture Oil 95 27 90 22 85 17 80 12 Jul-90 Jul-91 Abr-90 Oct-90 Abr-91 Dic-90 Mar-90 Mar-91 May-90 May-91 Jun-90 Jun-91 Ago-90 Nov-90 Feb-90 Feb-91 Ene-90 Sep-90 Ene-91

  35. Fiscal Impact of Higher Oil Prices on LAC Producers Source: J.P. Morgan

  36. OUTLINE I. The External Environment G-3 Economic Activity Commodity Prices & Terms of Trade Financial Conditions for Emerging Markets Risks Ahead: The Iraqi War II. Capital Flows & Macroeconomic Adjustment in LAC Real Exchange Rate & Current Account Adjustment Domestic Demand, Economic Activity & Employment Growth Forecasts

  37. LAC-7 Capital Flows (4 quarters, millions of US dollars and average in % of GDP) Russian Crisis “ENRON” Effect 100000 6% 5% 80000 % of GDP 4% 3% 60000 2% 40000 1% 0% 20000 -1% 0 -2% 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 1997-III 1998-III 1999-III 2000-III 2001-III 2002-III Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

  38. LAC-7 Non-FDI Capital Flows (4 quarters, millions of US dollars and and average in % of GDP) Russian Crisis “ENRON” Effect 60000 2% 40000 1% % of GDP 20000 0% 0 -1% -20000 -2% -40000 -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 2002-III Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

  39. LAC-7 Foreign Direct Investment (4 quarters, millions of US dollars and average in % of GDP) Russian Crisis “ENRON” Effect 80000 5.5% 70000 5.0% % of GDP 60000 4.5% 50000 4.0% 40000 3.5% 30000 3.0% 20000 2.5% 10000 2.0% 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 2002-III Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

  40. OUTLINE I. The External Environment G-3 Economic Activity Commodity Prices & Terms of Trade Financial Conditions for Emerging Markets Risks Ahead: The Iraqi War II. Capital Flows & Macroeconomic Adjustment in LAC Real Exchange Rate & Current Account Adjustment Domestic Demand, Economic Activity & Employment Growth Forecasts

  41. Real Exchange Rate Adjustment (vis-à-vis US dollar, June 1998 =100) 180 LAC-7 170 160 150 140 130 120 LAC-7 (exc. Argentina) 110 100 90 Dic-98 Dic-99 Dic-02 Dic-00 Dic-01 Mar-02 Mar-99 Mar-00 Mar-01 Jun-00 Jun-01 Jun-98 Jun-99 Jun-02 Sep-99 Sep-00 Sep-98 Sep-01 Sep-02

  42. Real Exchange Rate Adjustment by Country (vis-à-vis the US dollar, February 2003 vs. June. 1998) Average: 68% Argentina 154% Brazil 142% Colombia 67% Chile 57% Venezuela 39% Peru 22% -7% Mexico -20% 30% 80% 130% 180%

  43. Country Risk & Nominal Exchange Rate for LAC-7 (EMBI Plus Sovereign Spread, b.p. and average nominal Fx for LAC-7, April 2002=100) 130 950 Nominal Exchange Rate EMBI+ 900 125 850 120 800 Nominal Exchange Rate 750 Embi+ (b.p.) 115 700 110 650 600 105 550 100 500 95 450 01/04/02 01/05/02 01/06/02 01/07/02 01/08/02 01/09/02 01/10/02 01/11/02 01/12/02 01/01/03 01/02/03 01/03/03

  44. Current Account Adjustment (4 quarters, millions of US dollars and average in % of GDP) 0 1% -2000 -1% -4000 -2% -6000 -3% -8000 -4% -10000 -5% -12000 % of GDP -14000 -6% 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 1997-III 1998-III 1999-III 2000-III 2001-III 2002-III Includes: Argentina, Brazil, Chile,Colombia, Mexico, Peru and Venezuela

  45. Current Account Adjustment by Country (% of annual imports to 1998.II) average Argentina Peru Colombia Brazil Chile Venezuela Mexico -10% 0% 10% 20% 30% 40% 50%

  46. OUTLINE I. The External Environment G-3 Economic Activity Commodity Prices & Terms of Trade Financial Conditions for Emerging Markets Risks Ahead: The Iraqi War II. Capital Flows & Macroeconomic Adjustment in LAC Real Exchange Rate & Current Account Adjustment Domestic Demand, Economic Activity & Employment Growth Forecasts

  47. External Adjustment and Components of Demand (1998.II = 100) Recession Recovery Stalling 130 Exports 120 Consumption 110 100 Investment 90 80 70 1998.II 1999.I 1999.II 2000.I 2000.II 2001.II 2002.I 2002.II 1998.III 1999.III 2000.III 2001.III 2002.III 2001. I 1998.IV 1999.IV 2000.IV 2001.IV Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru

  48. External Adjustment and Investment Performance (s.a. investment, June 1998=100) 135 Brazil Chile Argentina Colombia Mexico Peru 125 115 105 95 85 75 65 55 45 35 1998.II 1999.II 2000.II 2001.II 2002.II 2001.I 2002.I 1999.I 2000.I 1998.III 1999.III 2000.III 2001.III 2002.III 1998.IV 1999.IV 2000.IV 2001.IV

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

  50. LAC-6 Investment Cycle: 1997-2002 (s.a. investment, annualized quarterly growth rate, Argentina excluded) 25% Recovery? Deceleration Recession Recovery Stalling 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 1997.I 1998.I 1999.I 2000.I 2002.I 1997.III 1998.III 1999.III 2000.III 2001.III 2002.III 2001. I Includes: Brazil, Chile, Colombia, Mexico and Peru