LATIN AMERICA AND THE FINANCIAL CRISIS

LATIN AMERICA AND THE FINANCIAL CRISIS

Mario I. Blejer

1

MIB

marioblejer@blejer.com

Latin America: GDP Growth

-3

-2

-1

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

percen

t

Source: ECLA

2

Amlat: Crecimiento del PIB (%)

Fuente: Institute of International Finance 3

Latin America: Larger Fall but Stronger Recovery

Source: Institute of International Finance 4

Long Term GDP Growth Prospects(% - 10 year rolling average)

Source: WEO - IMF5

Are there some areas in which particular lessons could be learned?• Pragmatism about Exchange Rate Policies

• Capital Controls and Reserve Accumulation

• Financial Stability and Banking Regulation

• Fiscal Management (Debt and Deficits)

• Social Policies to Reduce Political Conflict

6

Exchange Rate Policies

• Following the hyperinflations of the 80s the hard pegs were adopted as centerpieces of stabilization

• After the collapse of the regimes floating rates were implemented in the context of inflation targeting

• However, there is active intervention in the FX market – In practice there is a Managed Floating Regime rather than a free floating.

7

Exchange Rate Policies - Lessons

1. Futility of relying on Exchange Rates as the main stabilization instrument.

2. Importance of Flexibility. Including the flexibility to intervene and to impose restrictions. None of the extreme regimes preserves competitiveness.

3. Importance of a good level of International Reserves

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MIB

marioblejer@blejer.com

Latin America: Exports (in U$S Millions)

-

100.000

200.000

300.000

400.000

500.000

600.000

700.000

800.000

900.000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source; CEPAL

9

Latin America: Regional Terms of Trade(yearly change - %)

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MIB

marioblejer@blejer.com

Latin America: Evolution of the terms of trade

Source: ECLA (Cepal)

TotalSouth America

Central AmericaMexico

11

Strong External Accounts

Source: Institute of International Finance

CURRENT ACCOUNT DEFICIT - AMLAT

12

MIB

marioblejer@blejer.com

Net Foreing Investment Direct in Latin America -2009

26%

23%

11%9% 8%

4%

44%

14%

9%

5% 5%7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Brasil México Chile Colombia Argentina Perú

2008 2009

Source: ECLA (Cepal)

Total: U$S 65.269 M (30% less than 2008)

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14

Financial Stability• The Region Experienced Serious Banking

Crises in the Past and Learned the Lessons

• Stricter Banking Supervision and Less Use of Sophisticated Complex Instruments

• Stricter Standards for Capital, Leverage, and Liquidity Requirements

• Relatively Low Exposure to the Public Sector

15

EM: % Change in Bank Lending

16

Bank Lending: Advanced vs. EM(% change over year ago)

17

Fiscal Prudence

18

Public Debt

Source: IIF19

PUBLIC DEBT (% of GDP)

Source: IIF

113%

44%

20

Financing Needs, 2010(% of GDP)

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MIB

marioblejer@blejer.com

Latina America: Public Debt (in GDP %)

0

10

20

30

40

50

60

70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: ECLA (Cepal)

32%

22

MIB

marioblejer@blejer.com

Latin America: Fiscal Deficit (in GDP %)

-5

-4,5

-4

-3,5

-3

-2,5

-2

-1,5

-1

-0,5

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: ECLA (Cepal) 23

Brazil: Significant Progress in Poverty Reduction

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Social Programs

• Inequality continues to be a problem but social programs have reduced poverty and largely increased the middle class.

• Social programs did not cause fiscal imbalances

• Important reduction of Political Conflict and facilitated introduction of structural reforms 25

THANK YOUTHANK YOU!!

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Source:IIF 27