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LAC-7 MACROECONOMIC OUTLOOK

LAC-7 MACROECONOMIC OUTLOOK. Ernesto Talvi. CERES. April 20 th , 2006. Prepared for Presentation at the XXIII Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington DC. OUTLINE. External Factors Macroeconomic Outcomes in LAC

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LAC-7 MACROECONOMIC OUTLOOK

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  1. LAC-7 MACROECONOMIC OUTLOOK Ernesto Talvi CERES April 20th, 2006 Prepared for Presentation at the XXIII Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington DC

  2. OUTLINE • External Factors • Macroeconomic Outcomes in LAC • III. On LAC’s Current Account Surplus

  3. OUTLINE • External Factors • Macroeconomic Outcomes in LAC • III. On LAC’s Current Account Surplus

  4. World Output & Demand

  5. World Output (G-12 World Output Index*,annual variation of industrial production, weighted by PPP adjusted GDP) 8% EM-4 World Output 12% 7% 10% 6% 8% 5% 6% Average: 4.6% 4% 4% 3% 2% G-8 2% 0% 1% -2% Correlation: 61% 0% -4% 2005 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 G-8 includes Canada, France, Germany, Italy, Japan, Spain, UK and US. EM-4 includes China, India, Korea and Russia. The countries included in the G-12 World Output Index (G-12 WOI) represent 68% of world output. *excluding Brazil and Mexico

  6. World Demand: Imports (G-12 Import Demand Index*, annual variation of imports, weighted by PPP adjusted GDP) 40% 35% EM-4 35% 30% 30% World Demand 25% 25% 20% 20% Average: 13.0% 15% 15% 10% 10% 5% 5% 0% 0% -5% -5% Correlation: 62% G-8 -10% -10% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 G-8 includes Canada, France, Germany, Italy, Japan, Spain, UK and US. EM-4 includes China, India, Korea and Russia. The countries included in the G-12 World Imports Index represent 68% of world output. *excluding Brazil and Mexico

  7. 8% 60% 50% 6% 40% 4% 30% 20% 2% 10% 0% 0% -10% -2% -20% -4% -30% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 World Demand: Investment (Investment Index* annual variation, weighted by PPP adjusted GDP) Investment Gross Foreign Direct Investment Average: 3.2% Average: 9.9% * includes Canada, France, Germany, Italy, Japan, Spain, UK and US.

  8. Growth Forecasts for World Output (GDP, annual growth) World Output Ranking (PPP adjusted GDP) China Cumulative Share Share India 20.8% 21% US Russia 12.7% 34% China Korea 6.7% 40% Japan US 6.0% 46% India Canada 4.2% 50% Germany Japan 2006 3.3% 54% UK Spain 2007 3.1% 57% France UK 2.9% 60% Italy Germany 2.5% 62% Russia France 1.9% 64% Spain Italy 1.8% 66% Canada 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1.8% 68% Korea G-12 WOI 2007: 4.6% G-12 WOI 2006: 4.8% *Source of GDP growth forecasts: JP Morgan

  9. Commodity Prices & Terms of Trade

  10. 200 340 153% 120 180 290 110 160 240 Avg 90-97 140 100 190 120 Avg 90-97 90 140 229% 100 Avg 90-97 90 80 80 35% 40 60 70 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Commodity Prices & Terms of Trade Commodity Prices Metals Foods Oil Terms of Trade By Country(from I-2002 to IV-2005) LAC-7 130 38.5% 120 Venezuela 122% Chile 110 Peru 100 Argentina 90 21.3% * Colombia 80 Mexico 70 Brazil 1998.I 2001.I 2004.I 1997.II 2000.II 2003.II 1999.III 2002.III 2005.III 1998.IV 2001.IV 2004.IV -10% 0% 10% 20% 30% 40% 50% 60% 70% *excluding Venezuela

  11. International Financial Conditions for EMs

  12. EMBI+ Price* Oct-97 118 Apr-06 161 % Change 36.2% External Financial Conditions for EMs (EMBI+, bp over US Treasury bonds) 1350 Greenspan’s “conundrum” testimony Fears of FED tightening ENRON Effect 1150 Yields 950 Pre-Asian Crisis EM Yields =-26.8% 750 Spreads 550 Pre-Asian Crisis EM Spreads 350 =-42.4% Beginning of improvement in international financial conditions 150 Jul-02 Jul-03 Jul-04 Jul-05 Nov-02 Nov-03 Nov-04 Nov-05 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Sep-02 Sep-03 Sep-04 Sep-05 May-02 May-03 May-04 May-05 * assuming an 11% coupon and 10-year maturity

  13. FED Tightening & EM Spreads (EMBI+, FED fund target rate and 12-month forward rate) FED Fund Forward Differential FED Tightening & EM Spreads Fears of FED tightening Greenspan’s “conundrum” testimony 1.5 Fears of FED tightening Greenspan’s “conundrum” testimony 500 5,5 FED Funds 12-Month Rate 450 4,5 400 1.0 3,5 350 EMBI spread Spread (12- Month Forward – Target) FED fund target and 12-month forward rates 300 2,5 0.5 250 Spread (12- Month Forward – Target) Spread 1,5 FED Funds Target Rate 200 150 0,5 0.0 Jul-04 Jul-05 Jul-05 Jul-04 Apr-04 Apr-05 Apr-06 Oct-04 Oct-05 Apr-04 Jan-04 Jun-04 Jan-05 Jun-05 Jan-06 Oct-04 Apr-05 Oct-05 Apr-06 Jun-04 Jan-05 Jan-04 Jun-05 Jan-06 Mar-04 Mar-05 Mar-06 Mar-04 Mar-05 Feb-04 Feb-05 Feb-06 Feb-04 Feb-05 Mar-06 Feb-06 Aug-04 Sep-04 Aug-05 Sep-05 Nov-04 Dec-04 Nov-05 Dec-05 Aug-04 Sep-04 Nov-04 Dec-04 Aug-05 Sep-05 Nov-05 Dec-05 May-04 May-05 May-04 May-05

  14. US Long Term Interest Rate & EM Spreads (EMBI+, 10-year Treasury Bonds and Fed Fund Target Rate) Greenspan’s “conundrum” testimony Fears of FED tightening 550 5,5 10-Year Treasury Bond 500 4,5 450 400 3,5 EMBI spread 10-year Treasury rate 350 2,5 300 FED Funds Target Rate 250 Emerging Markets 1,5 200 150 0,5 Jul-04 Jul-05 Apr-04 Apr-05 Apr-06 Oct-04 Oct-05 Jan-04 Jun-04 Jan-05 Jun-05 Jan-06 Feb-04 Mar-04 Feb-05 Mar-05 Feb-06 Mar-06 Aug-04 Sep-04 Nov-04 Dec-04 Aug-05 Sep-05 Nov-05 Dec-05 May-04 May-05

  15. 1.1% 4.7% 4.6% 4.5%* 4.8% 4.7% 4.7% Pre Fed Tightneing Yield Curve (Jun-04) Historic Yield Curve (1960-2006) Current Yield Curve (Mar-06) * nominal rate US Interest Rate Yield Curve (“perfect foresight” real ex-ante interest rate) 3,0% 2,5% 2,0% 1,5% 1,0% Interest Rate 0,5% 0,0% -0,5% -1,0% -1,5% 3 Month 6 Month 1 Year 3 Year 5 Year 10 Year Maturity

  16. US Interest Rate: A Long Term View (“perfect foresight” real ex-ante interest rate, 10-year US Treasury Bond, Jan-55 – Mar-06) 12 Average: 1.9 Average: 1.9 10 8 6 5.6 3.8 4 1.5 2 0 -0.3 -2 -4 -6 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

  17. US UK FRANCE GERMANY ITALY CANADA JAPAN G-7 Interest Rates: A Long Term View (“perfect foresight” real ex-ante rates for long term instruments) 6,0 Average Rate 5.1 5,0 4.0 4,0 3,0 Excluding Japan 2.3 2.3 2,0 1.4* 1,0 0,0 -0.3 -1,0 -2,0 Standard deviation* Standard deviation Standard deviation -3,0 Standard deviation Standard deviation 2.3 1.7 0.4 1.2 0.6 -4,0 Standard Deviation 5,0 4,0 3.0 3,0 2.4 2,0 1.6 1.3 Excluding Japan 1.2 1,0 0.9 0,0 60s 70s 80s 90s 00s *weighted by PPP adjusted GDP

  18. Global Current Account Adjustment 1997-2005(in % of US Current Account Adjustment) Middle East 32% Asia (excl. Jap) 28% Latin America 14% Eastern Europe 13% Africa 6% Stat. Discrepancy 4% Industrialized 2% USA -100% -100% -30% -20% -10% 0% 10% 20% 30% 40% Source: WEO Sep-05

  19. OUTLINE • External Factors • Macroeconomic Outcomes in LAC • III. On LAC’s Current Account Surplus

  20. Asset Prices in LAC-7 (Stocks & Bonds, Oct-02=100) Fears of Fed Tightening Geenspan’s “conundrum” testimony Beginning of easing in external financial conditions Stock Prices in US$ 495 Variation Oct-02 – Apr-06 445 429% Stock prices in US$ Stock prices in domestic currency 336% 395 Bond prices* 97% 345 295 Stock Prices in domestic currency 245 Bond Prices 195 145 95 Jul-03 Jul-04 Jul-05 Jan-03 Jan-04 Jan-05 Jan-06 Mar-03 Mar-04 Mar-05 Mar-06 Sep-02 Nov-02 Sep-03 Nov-03 Sep-04 Nov-04 Sep-05 Nov-05 May-03 May-04 May-05 *assuming an 11% coupon and 10-year maturity

  21. Stock Prices in LAC-7 (stock indices in US$, Oct 02 = 100) 1150 Greenspan’s “conundrum” testimony % Change Oct 02 – Mar 06 1050 Colombia 887% Brazil 644% Colombia 950 Peru 482% LAC-7 429% 850 Argentina 417% Chile 205% Mexico 201% 750 Brasil Venezuela 170% Fears of FED tightening due to stream of positive US economic data 650 Beginning of easing in external financial conditions Peru 550 Argentina 450 350 Chile Mexico 250 Venezuela 150 50 Jun-03 Jun-04 Jun-05 Oct-02 Oct-03 Oct-04 Oct-05 Apr-03 Apr-04 Apr-05 Apr-06 Dec-02 Aug-03 Dec-03 Aug-04 Dec-04 Aug-05 Dec-05 Feb-03 Feb-04 Feb-05 Feb-06

  22. Bond Prices in LAC-7 (LAC-7, Oct-02 = 100) % Change Oct 02 – Apr 06 Annual Return Greenspan’s “conundrum” testimony Fears of FED tightening Brazil 202% 37% Venezuela 113% 24% Brazil 290 LAC-7 88% 20% 20% Colombia 87% EMBI 83% 19% Argentina 79% 18% Peru 78% 18% Mexico 36% 9% 240 Chile 20% 6% UST10 10% 3% Venezuela Beginning of easing in external financial conditions LAC-7 190 Colombia EMBI Argentina Peru 140 Mexico Chile 90 Jun-03 Jun-04 Jun-05 Apr-03 Apr-04 Apr-05 Apr-06 Oct-02 Oct-03 Oct-04 Oct-05 Dec-02 Aug-03 Dec-03 Aug-04 Dec-04 Aug-05 Dec-05 Feb-03 Feb-04 Feb-05 Feb-06

  23. LAC-7: Domestic Bank Credit (Real credit to the private sector, Jun-98=100 and yoy variation) 21.1% 108 105 18% 102 13% 99 real bank credit 96 8% 93 yoy variation 90 Real Bank Credit 3% 87 84 -2% 81 78 -7% yoy variation 75 72 -12% Jan-03 Jan-04 Jan-05 Jan-06 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 May-98 May-99 May-00 May-01 May-02 May-03 May-04 May-05 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02

  24. Domestic Bank Credit in LAC’s G-3 (real credit to the private sector, yoy variation) Argentina Brazil Mexico 32% 18.4% 20% 18.8% 26.4% 27% 17% 10% 22% 12% 17% 0% 7% 12% 2% 7% -10% 2% -3% -20% -3% -8% -8% -30% -13% -13% -18% -40% -18% Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

  25. Domestic Bank Credit in the Rest of LAC-7 (real credit to the private sector, yoy variation) Chile Colombia 12.3% 14% 12.4% 12% 7% 10% 2% 8% -3% 6% 4% -8% 2% -13% 0% -2% -18% Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Venezuela Peru 70% 20% 60% 49.8% 50% 15% 40% 9.4% 10% 30% 20% 5% 10% 0% 0% -10% -5% -20% -10% -30% Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

  26. LAC-7: Investment (s.a. FKF, 1990.I=100) Annualized growth rate 2002.IV-2005.IV: 13.1% 2005-2006 Forecasts Russian Crisis 220 210 200 Annualized growth rate 1990.I-1998.II: 7.7% 190 180 170 160 150 2005 140 2006 Annualized growth rate 1998.II-2002.IV: -4.6% 130 120 Average: 16.3% 110 Average: 10.0% 100 90 1990.I 1992.I 1993.I 1994.I 1995.I 1996.I 1997.I 1998.I 1999.I 2000.I 2001.I 2002.I 2003.I 2004.I 2005.I 1991.I Source: Latin Focus

  27. Venezuela Argentina Peru Chile 2005 Colombia 2006 Mexico Average: 6.0% Brazil Average: 5.0% 2% 3% 4% 5% 6% 7% 8% 9% 10% LAC-7: Economic Activity (s.a. GDP, 1990.I=100) Annualized growth rate 2002.IV-2005.IV: 5.7% 2005-2006 Forecasts Russian Crisis 178 168 Annualized growth rate 1998.II-2002.IV: 0.4% 158 148 Annualized growth rate 1990.I-1998.II: 4.4% 138 128 118 108 98 1990.I 1991.I 1992.I 1993.I 1994.I 1995.I 1996.I 1997.I 1998.I 1999.I 2000.I 2002.I 2003.I 2004.I 2005.I 2001. I Source: Latin Focus

  28. Estimates of the impact of the change of WEO oil price assumptions in the LAC Region 2005 2006 0.2% Net oil Exporters South America Central America The Caribbean Latin America and the Caribbean 0.0% 61.75 -0.2% 54.23 -0.4% -0.6% -0.8% -1.0% September 2005 September 2005 Oil Price Impact on Economic Activity (LAC, in % ) WEO Oil Price Estimates Average spot price of U.K. Brent, Dubai, and West Texas Intermediate, US dollars per barrel 2005 2006 65 60 55 50 46.50 45 43.75 40 35 30 April 2005 April 2005 Current Average Oil Price: 67.3 Note: The Fund’s September 2005 World Economic Outlook (WEO) envisages world oil prices averaging US$54.2/bbl in 2005 and US$61.8/bbl in 2006, some 17 percent and 40 percent higher, respectively, than projected in the April 2005 WEO. Source: Singh, Anoop. Global Context and Regional Outolook for Latin America and the Caribbean. IMF. October 2005.

  29. US$ 99 100 90 80 70 US$ 58* 60 US$ 49 50 40 30 20 10 US$ 12 0 Jan-06 Jan-86 Jan-92 Jan-98 Jan-00 Jan-02 Jan-70 Jan-76 Jan-78 Jan-84 Jan-90 Jan-96 Jan-72 Jan-74 Jan-80 Jan-82 Jan-88 Jan-94 Jan-04 * March-06 Oil Prices A Historical Perspective Oil Future Prices (USD per barrel in 2004 prices, average of U.K. Brent, Dubai, and WTI) (WTI) 75 72.0 72.0 71.2 70.3 11-Apr-2006 69.5 69.2 70 69.9 67.7 69.1 69.2 01-Sep-2005 65 60 59.0 58.8 58.5 57.8 21-Jul-2005 54.9 55 50.6 50.4 50.1 49.4 50 19-May-2005 46.9 45 Spot 1 Month 3 Months 6 Months 1 year

  30. LAC-7: Unemployment (Unemployment rate) By Country (2005) 12,4% 12,5 12,0 11,5 Colombia 11,0 Argentina 10,5 Venezuela 10,0 Brazil Peru 9,5 Pre-Russian Crises Levels 9,3% Chile 9,0 Average: 9.3% Mexico 8,5 2% 4% 6% 8% 10% 12% 8,0 jun-97 jun-98 jun-99 jun-00 jun-01 jun-02 jun-03 jun-04 jun-05 dic-97 dic-98 dic-99 dic-00 dic-01 dic-02 dic-03 dic-04 dic-05 Source: Latin Focus

  31. Chile* Argentina* Venezuela* México Peru* Colombia Brasil -4% -2% 0% 2% 4% 6% LAC-7: Fiscal Balance (SPNF, in % of GDP) By Country (2005) +0.3% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% -3.0*% -3.5% -4.0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 *Central Government Source: Latin Focus

  32. LAC-7: Inflation (CPI annual variation) 2006 Forecasts 45% 40% Venezuela 35% Argentina 30% Brazil 25% Colombia 20% 2005 Chile 2006 15% Mexico 10% Average: 6.5% 4.9% Average: 6.3% 5% Peru 0% 0% 3% 6% 9% 12% 15% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Latin Focus Median

  33. LAC-7: Real Exchange Rate (Oct-02 = 100) LAC-7 By Country (variation Oct-02 - Mar-06) 105 115 -29% Mexico (1.6%) 100 105 Peru (-6,5%) 95 95 90 Venezuela (-9,5%) 85 Argentina (-25,9%) 85 75 Chile (-27,4%) 80 65 Colombia (-29,0%) 75 55 70 Brazil (-53,9%) 65 45 oct-02 dic-02 oct-03 dic-03 oct-04 dic-04 oct-05 dic-05 feb-03 feb-04 feb-05 feb-06 jun-03 jun-04 jun-05 abr-03 abr-04 abr-05 ago-03 ago-04 ago-05 jun-98 jun-99 jun-00 jun-01 jun-02 jun-03 jun-04 jun-05 dic-98 dic-99 dic-00 dic-01 dic-02 dic-03 dic-04 dic-05

  34. 1.3 LAC-7 Chile 1.0 LAC-7: International Reserves (millions of US$) In % of Jun-98 Mexico 2.3 255000 1.9 Venezuela Russian Crisis Colombia 1.7 Peru 1.3 225000 Argentina 0.9* 195000 Brazil 0.8* 165000 135000 105000 75000 45000 15000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 * after IMF Repayment

  35. Repayment to the IMF: Argentina & Brazil Liquidity Ratio International Reserves (International Reserves in % of PSBR+MB) Pre-IMF Repayment Post-IMF Repayment 28,078 28,000 90% 80% -40% 21,769 23,000 70% Repayment: 9.5 bn Argentina 18,000 60% 50% 13,000 40% 30% 8,000 Jul-03 Apr-04 Oct-05 Oct-02 Apr-03 Mar-06 Mar-05 Jan-05 Aug-04 Aug-05 Jan-06 Jun-04 Nov-04 Nov-03 Jun-05 Feb-03 Feb-04 Dec-02 Sep-03 20% Pre-IMF Repayment Post-IMF Repayment Post-Repayment Pre-Repayment 67,935 65000 35% -35% 60,090 60000 30% 25% 55000 Brazil Repayment: 15.6 bn 20% 50000 45000 15% 40000 10% 5% 35000 Post-Repayment Pre-Repayment Jul-03 Jan-05 Jan-06 Apr-03 Apr-04 Jun-04 Jun-05 Nov-03 Nov-04 Oct-02 Oct-05 Aug-04 Aug-05 Feb-03 Feb-04 Sep-03 Dec-02 Mar-05 Mar-06

  36. No FX Intervention Appreciation Current Dilemmas of Monetary & Exchange Rate Policy in LAC Downward Pressures on the Real Exchange Rate Monetary and Exchange Rate Policy Options

  37. Brazil CPI 105 100 95 90 85 80 75 XR 70 RER 65 jul-04 jul-05 jun-04 jun-05 dic-04 dic-05 oct-04 oct-05 abr-05 mar-05 mar-06 feb-05 feb-06 ago-04 sep-04 nov-04 ene-05 ago-05 sep-05 nov-05 ene-06 may-05 Exchange Rate Policy & Inflation (CPI, bilateral XR and RER vis à vis the US dollar , Jun-04 = 100)

  38. FX Intervention No FX Intervention Inflation Appreciation Current Dilemmas of Monetary & Exchange Rate Policy in LAC Downward Pressures on the Real Exchange Rate Monetary and Exchange Rate Policy Options

  39. Argentina CPI 117 114 111 108 XR 105 102 99 96 RER 93 90 jul-05 jul-04 dic-04 dic-05 jun-04 jun-05 oct-04 oct-05 abr-05 feb-05 feb-06 mar-05 mar-06 ago-05 nov-05 ene-06 ago-04 sep-04 nov-04 ene-05 may-05 sep-05 Colombia Chile 108 104 CPI CPI 101 104 98 100 95 96 92 92 89 86 88 83 84 RER XR 80 XR RER 80 jul-04 jul-05 jun-04 dic-04 jun-05 dic-05 abr-05 oct-04 oct-05 feb-05 mar-05 feb-06 mar-06 ago-04 sep-04 nov-04 ene-05 sep-05 nov-05 ene-06 may-05 ago-05 jul-04 jul-05 jun-05 dic-05 jun-04 dic-04 oct-05 oct-04 abr-05 mar-05 feb-06 mar-06 feb-05 ago-04 ago-05 sep-05 nov-05 ene-06 sep-04 nov-04 ene-05 may-05 Exchange Rate Policy & Inflation (CPI, bilateral XR and RER vis à vis the US dollar , Jun-04 = 100) Brazil CPI 105 100 95 90 85 80 75 XR 70 RER 65 jul-04 jul-05 jun-04 jun-05 dic-04 dic-05 oct-04 oct-05 abr-05 mar-05 mar-06 feb-05 feb-06 ago-04 sep-04 nov-04 ene-05 ago-05 sep-05 nov-05 ene-06 may-05

  40. Nominal Exchange Rate Real Exchange Rate 110 105 Argentina (3.9%) 105 100 100 Argentina (-7.8%) 95 95 90 90 Colombia (-16.7%) Chile (-17.8%) 85 85 80 80 Colombia (-18.7%) Chile (-17.8%) 75 75 Brazil (-33.5%) 70 70 Brazil (-31.2%) 65 65 jul-04 jul-05 feb-05 feb-06 jun-04 nov-04 jun-05 nov-05 abr-05 dic-04 dic-05 oct-04 oct-05 ago-04 ago-05 ene-06 sep-04 ene-05 sep-05 mar-06 mar-05 may-05 jul-04 jul-05 oct-05 oct-04 dic-04 dic-05 feb-06 nov-04 feb-05 abr-05 nov-05 jun-05 jun-04 ago-04 ene-05 ago-05 ene-06 sep-05 sep-04 mar-05 may-05 mar-06 Exchange Rate Policy & Real Exchange Rate Adjustment (Jun-04=100)

  41. FX Intervention No FX Intervention Inflation Dilemma Appreciation Current Dilemmas of Monetary & Exchange Rate Policy in LAC Downward Pressures on the Real Exchange Rate Monetary and Exchange Rate Policy Options

  42. FX Intervention No FX Intervention Inflation Dilemma Appreciation Capital Controls and/or Price Controls Current Dilemmas of Monetary & Exchange Rate Policy in LAC Downward Pressures on the Real Exchange Rate Monetary and Exchange Rate Policy Options

  43. OUTLINE • External Factors • Macroeconomic Outcomes in LAC • III. On LAC’s Current Account Surplus

  44. LAC-7: Current Account (Millions of US dollars; % GDP) 60000 4% 3% 40000 2% 20000 % GDP 1% 0 Millons of US dollars % GDP -1% -20000 -2% -40000 -3% -60000 -4% Millions of US dollars -80000 -5% -100000 -6% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

  45. The Capital Flows Puzzle (Capital Flows to LAC-7; last 4 quarters, in millions of US dollars) 100,000 80,000 60,000 40,000 20,000 Russian Crisis 0 -20,000 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05

  46. i* Supply of International Capital Flows i*0 Positive Supply Shock i*1 Demand for International Capital Flows Positive Shock to TOT q0 q1 q where: i* =International interest rate q =Volume of net international capital flows The Capital Flows Puzzle: A Graphical Analysis

  47. TOT Adjusted Capital Flows* 5.6% of GDP The Capital Flows Puzzle (Capital Flows to LAC-7; last 4 quarters, in millions of US dollars) 100,000 80,000 60,000 40,000 20,000 Russian Crisis 0 -20,000 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 *value at I.2002

  48. Inflows Outflows Gross Capital Flows (LAC-7; last 4 quarters, in millions of US dollars) 105000 120000 85000 100000 65000 80000 Net flows Inflows & Outflows 45000 60000 25000 40000 5000 20000 Net Flows 0 -15000 jun-98 jun-99 jun-00 jun-01 jun-02 jun-03 jun-04 jun-05 dic-97 dic-98 dic-99 dic-00 dic-01 dic-02 dic-03 dic-04

  49. *ΔInflows - ΔOutflows ΔInflows + ΔOutflows LAC-7: Capital Flows & Terms of Trade (Millions of US dollars and Jan-87=100) 115000 90000 Inflows Outflows 80000 95000 Net 70000 60000 75000 50000 Inflows & Outflows Net flows 55000 40000 30000 35000 20000 10000 15000 0 -5000 -10000 1991 1996 1997 1992 1993 1994 1995 1998 1999 2000 2001 2002 2003 2004 2005 Cumulative Flows Inflows Outflows Net flows Ratio* (Billions of US dollars) 74% 1991-1993 167 25 142 1990s 380 499 119 1991-1997 62% 5% 2000s 120 109 11 2003-2005

  50. ToT LAC-7: Capital Flows & Terms of Trade (Millions of US dollars and Jan-87=100) 115000 90000 Inflows Outflows 80000 95000 Net 70000 60000 75000 50000 Inflows & Outflows Net flows 55000 40000 30000 35000 20000 10000 15000 0 -5000 -10000 150 140 130 ToT (Jan-87= 100) 120 110 100 90 80 1991 1996 1997 1992 1993 1994 1995 1998 1999 2000 2001 2002 2003 2004 2005

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