LAC-7 MACROECONOMIC LAC-7 MACROECONOMIC OUTLOOKOUTLOOK
LAC-7 MACROECONOMIC LAC-7 MACROECONOMIC OUTLOOKOUTLOOK
Ernesto TalviErnesto Talvi
Prepared for Presentation at the XXIII Meeting of the Latin American Prepared for Presentation at the XXIII Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington DCNetwork of Central Banks and Finance Ministries, IDB, Washington DC
April 20April 20thth, 2006, 2006
CERESCERES
OUTLINE
I.I. External FactorsExternal Factors
II.II. Macroeconomic Outcomes in LACMacroeconomic Outcomes in LAC
III. On LAC’s Current Account SurplusIII. On LAC’s Current Account Surplus
OUTLINE
I.I. External FactorsExternal Factors
II.II. Macroeconomic Outcomes in LACMacroeconomic Outcomes in LAC
III. On LAC’s Current Account SurplusIII. On LAC’s Current Account Surplus
World Output & DemandWorld Output & Demand
(G-12 World Output Index*,annual variation of industrial production, weighted by PPP adjusted GDP)
World Output
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
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-4%
-2%
0%
2%
4%
6%
8%
10%
12% EM-4
G-8
0%
1%
2%
3%
4%
5%
6%
7%
8%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
World Output
Average: 4.6%
Correlation: 61%
World Demand: Imports
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
EM-4
G-8-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
(G-12 Import Demand Index*, annual variation of imports, weighted by PPP adjusted GDP)
World Demand
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
Average: 13.0%
Correlation: 62%
World Demand: Investment
-4%
-2%
0%
2%
4%
6%
8%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Investment Gross Foreign Direct Investment
(Investment Index* annual variation, weighted by PPP adjusted GDP)
* includes Canada, France, Germany, Italy, Japan, Spain, UK and US.
Average: 3.2%
Average: 9.9%
(GDP, annual growth)
Growth Forecasts for World Output
*Source of GDP growth forecasts: JP Morgan
20062007
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Italy
France
Germany
UK
Spain
Japan
Canada
US
Korea
Russia
India
China
G-12 WOI 2007: 4.6% G-12 WOI 2006: 4.8%
Korea
Canada
Spain
Russia
Italy
France
UK
Germany
India
Japan
China
US
World Output Ranking(PPP adjusted GDP)
1.8%
1.8%
1.9%
2.5%
2.9%
3.1%
3.3%
4.2%
6.0%
6.7%
12.7%
20.8%
68%
66%
64%
62%
60%
57%
54%
50%
46%
40%
34%
21%
Share Cumulative Share
Commodity Prices & Commodity Prices &
Terms of TradeTerms of Trade
Commodity Prices & Terms of Trade
Terms of TradeBy Country
(from I-2002 to IV-2005)
Commodity Prices
70
80
90
100
110
120
130
1997
.II
1998
.I
1998
.IV
1999
.III
2000
.II
2001
.I
2001
.IV
2002
.III
2003
.II
2004
.I
2004
.IV
2005
.III
38.5%
21.3% *
*excluding Venezuela
LAC-7
-10% 0% 10% 20% 30% 40% 50% 60% 70%
Brazil
Mexico
Colombia
Argentina
Peru
Chile
Venezuela 122%
FoodsMetals
60
80
100
120
140
160
180
200
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
153%
Avg 90-97
Oil
40
90
140
190
240
290
340
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
229%Avg 90-97
70
80
90
100
110
120
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
35%
Avg 90-97
International Financial International Financial
Conditions for EMsConditions for EMs
150
350
550
750
950
1150
1350
Jan-
02
Mar
-02
May
-02
Jul-0
2
Sep
-02
Nov
-02
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep
-03
Nov
-03
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep
-04
Nov
-04
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep
-05
Nov
-05
Jan-
06
Mar
-06
(EMBI+, bp over US Treasury bonds)External Financial Conditions for EMs
Greenspan’s “conundrum”
testimony
Fears of FED tightening
ENRON Effect
Beginning of improvement in international financial conditions
Pre-Asian Crisis EM Spreads
* assuming an 11% coupon and 10-year maturity
Spreads
Yields
Pre-Asian Crisis EM Yields
=-42.4%
=-26.8%
EMBI+ Price*
118
161
36.2%% Change
Apr-06
Oct-97
FED Tightening & EM Spreads(EMBI+, FED fund target rate and 12-month forward rate)
EM
BI
spre
ad
FE
D f
und
targ
et a
nd 1
2-m
onth
for
war
d ra
tes
Spread
FED Funds Target Rate
Greenspan’s “conundrum”
testimony FED Funds 12-Month Rate
Fears of FED tightening
150
200
250
300
350
400
450
500
0,5
1,5
2,5
3,5
4,5
5,5
Jan-
04F
eb-0
4M
ar-0
4
Apr
-04
May
-04
Jun-
04Ju
l-04
Aug
-04
Sep
-04
Oct
-04
Nov
-04
Dec
-04
Jan-
05
Feb
-05
Mar
-05
Apr
-05
May
-05
Jun-
05Ju
l-05
Aug
-05
Sep
-05
Oct
-05
Nov
-05
Dec
-05
Jan-
06F
eb-0
6M
ar-0
6
Apr
-06
0.0
0.5
1.0
1.5
Jan-
04F
eb-0
4M
ar-0
4A
pr-0
4M
ay-0
4Ju
n-04
Jul-0
4A
ug-0
4S
ep-0
4O
ct-0
4N
ov-0
4D
ec-0
4Ja
n-05
Feb
-05
Mar
-05
Apr
-05
May
-05
Jun-
05Ju
l-05
Aug
-05
Sep
-05
Oct
-05
Nov
-05
Dec
-05
Jan-
06F
eb-0
6M
ar-0
6A
pr-0
6
Spr
ead
(12-
Mon
th F
orw
ard
– T
arge
t)
Greenspan’s “conundrum” testimony
Fears of FED tightening
Spread
(12- Month Forward – Target)
FED Tightening & EM Spreads FED Fund Forward Differential
US Long Term Interest Rate & EM Spreads(EMBI+, 10-year Treasury Bonds and Fed Fund Target Rate)
10-y
ear
Tre
asur
y ra
te
EM
BI s
prea
d
10-Year Treasury Bond
FED Funds Target Rate
Emerging Markets
Fears of FED tightening
Greenspan’s “conundrum”
testimony
150
200
250
300
350
400
450
500
550
Jan
-04
Fe
b-0
4
Ma
r-0
4
Ap
r-0
4
Ma
y-0
4
Jun
-04
Jul-0
4
Au
g-0
4
Se
p-0
4
Oct
-04
No
v-0
4
De
c-0
4
Jan
-05
Fe
b-0
5
Ma
r-0
5
Ap
r-0
5
Ma
y-0
5
Jun
-05
Jul-0
5
Au
g-0
5
Se
p-0
5
Oct
-05
No
v-0
5
De
c-0
5
Jan
-06
Fe
b-0
6
Ma
r-0
6
Ap
r-0
6
0,5
1,5
2,5
3,5
4,5
5,5
US Interest Rate Yield CurveIn
tere
st
Ra
te
-1,5%
-1,0%
-0,5%
0,0%
0,5%
1,0%
1,5%
2,0%
2,5%
3,0%
3 Month 6 Month 1 Year 3 Year 5 Year 10 Year
Historic Yield Curve (1960-2006)
Pre Fed Tightneing Yield Curve (Jun-04)
Maturity
1.1%
(“perfect foresight” real ex-ante interest rate)
Current Yield Curve (Mar-06)
4.5%*4.6%
4.8% 4.7%
4.7%
4.7%
* nominal rate
US Interest Rate: A Long Term View
-6
-4
-2
0
2
4
6
8
10
12
19
55
19
57
19
59
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
Average: 1.9 Average: 1.9
1.5
(“perfect foresight” real ex-ante interest rate, 10-year US Treasury Bond, Jan-55 – Mar-06)
-0.3
5.6
3.8
G-7 Interest Rates: A Long Term View (“perfect foresight” real ex-ante rates for long term instruments)
-4,0
-3,0
-2,0
-1,0
0,0
1,0
2,0
3,0
4,0
5,0
6,0
US UK FRANCE GERMANY ITALY CANADA JAPAN
0,0
1,0
2,0
3,0
4,0
5,0
60s 70s 80s 90s 00s
Average Rate
Standard Deviation
1.4*
-0.3
5.1
4.0
2.3
*weighted by PPP adjusted GDP
1.7Standard deviation
2.3Standard deviation* 0.6Standard
deviation 1.2Standard deviation
0.4Standard deviation
Excluding Japan 2.3
1.6
3.0
2.4
1.3
0.9
Excluding Japan 1.2
Global Current Account Adjustment 1997-2005 (in % of US Current Account Adjustment)
2%
4%
6%
13%
14%
28%
32%
-100%
-100% -30% -20% -10% 0% 10% 20% 30% 40%
USA
Industrialized
Stat. Discrepancy
Africa
Eastern Europe
Latin America
Asia (excl. Jap)
Middle East
Source: WEO Sep-05
OUTLINE
I.I. External FactorsExternal Factors
II.II. Macroeconomic Outcomes in LACMacroeconomic Outcomes in LAC
III. On LAC’s Current Account SurplusIII. On LAC’s Current Account Surplus
95
145
195
245
295
345
395
445
495
Sep
-02
Nov
-02
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep
-03
Nov
-03
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep
-04
Nov
-04
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep
-05
Nov
-05
Jan-
06
Mar
-06
Asset Prices in LAC-7 (Stocks & Bonds, Oct-02=100)
Bond Prices
Stock Prices in US$
Stock Prices in domestic
currency
Geenspan’s “conundrum”
testimony
Beginning of easing in external financial conditions
Fears of Fed Tightening
Variation
Stock prices in domestic currency 336%
Stock prices in US$ 429%
Oct-02 – Apr-06
Bond prices* 97%
*assuming an 11% coupon and 10-year maturity
50
150
250
350
450
550
650
750
850
950
1050
1150
Oct
-02
Dec
-02
Feb
-03
Apr
-03
Jun-
03
Aug
-03
Oct
-03
Dec
-03
Feb
-04
Apr
-04
Jun-
04
Aug
-04
Oct
-04
Dec
-04
Feb
-05
Apr
-05
Jun-
05
Aug
-05
Oct
-05
Dec
-05
Feb
-06
Apr
-06
Stock Prices in LAC-7 (stock indices in US$, Oct 02 = 100)
Colombia
Peru
Argentina
Chile
Mexico
Venezuela
Brazil
887%
644%
482%
417%
205%201%
170%
% Change Oct 02 – Mar 06
Fears of FED tightening due to
stream of positive US economic dataBeginning of easing in
external financial conditions
Greenspan’s “conundrum”
testimony
Colombia
Peru
Argentina
ChileMexico
Venezuela
Brasil
LAC-7 429%
90
140
190
240
290
Oct
-02
Dec
-02
Feb
-03
Apr
-03
Jun-
03
Aug
-03
Oct
-03
Dec
-03
Feb
-04
Apr
-04
Jun-
04
Aug
-04
Oct
-04
Dec
-04
Feb
-05
Apr
-05
Jun-
05
Aug
-05
Oct
-05
Dec
-05
Feb
-06
Apr
-06
Colombia
Peru
Chile
Mexico
Brazil
Venezuela
LAC-7
ArgentinaEMBI
Bond Prices in LAC-7(LAC-7, Oct-02 = 100)
Beginning of easing in external financial conditions
Fears of FED tightening
Greenspan’s “conundrum”
testimony
Colombia
Peru
Chile
Mexico
Brazil
87%
202%
78%
20%36%
% Change Oct 02 – Apr 06
Venezuela 113%
LAC-7 88%
Argentina 79%
EMBI 83%
20%
37%
18%
6%9%
24%
20%
18%
19%
Annual Return
UST10 10% 3%
72
75
78
81
84
87
90
93
96
99
102
105
108
Jan
-98
Ma
y-9
8
Se
p-9
8
Jan
-99
Ma
y-9
9
Se
p-9
9
Jan
-00
Ma
y-0
0
Se
p-0
0
Jan
-01
Ma
y-0
1
Se
p-0
1
Jan
-02
Ma
y-0
2
Se
p-0
2
Jan
-03
Ma
y-0
3
Se
p-0
3
Jan
-04
Ma
y-0
4
Se
p-0
4
Jan
-05
Ma
y-0
5
Se
p-0
5
Jan
-06
-12%
-7%
-2%
3%
8%
13%
18%
LAC-7: Domestic Bank Credit(Real credit to the private sector, Jun-98=100 and yoy variation)
yoy
varia
tion
Rea
l Ban
k C
redi
t
real bank credit
yoy variation
21.1%
-18%
-13%
-8%
-3%
2%
7%
12%
17%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
-18%
-13%
-8%
-3%
2%
7%
12%
17%
22%
27%
32%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
-40%
-30%
-20%
-10%
0%
10%
20%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Argentina Brazil
Domestic Bank Credit in LAC’s G-3
Mexico
(real credit to the private sector, yoy variation)
18.4% 18.8%26.4%
-10%
-5%
0%
5%
10%
15%
20%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
-18%
-13%
-8%
-3%
2%
7%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
-30%
-20%
-10%0%
10%
20%
30%
40%50%
60%
70%
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Chile
Domestic Bank Credit in the Rest of LAC-7(real credit to the private sector, yoy variation)
Colombia
VenezuelaPeru
12.4%
12.3%
9.4%
49.8%
LAC-7: Investment(s.a. FKF, 1990.I=100)
2005-2006 Forecasts
Source: Latin Focus
0% 3% 6% 9% 12% 15% 18% 21% 24%
Brazil
Mexico
Peru
Colombia
Argentina
Chile
Venezuela
2005
2006
Average: 16.3%
Average: 10.0%
90
100
110
120
130
140
150
160
170
180
190
200
210
220
19
90.I
19
91.I
19
92.I
19
93.I
19
94.I
19
95.I
19
96.I
19
97.I
19
98.I
19
99.I
20
00.I
20
01.I
20
02.I
20
03.I
20
04.I
20
05.I
Russian Crisis
Annualized growth rate
1990.I-1998.II: 7.7%
Annualized growth rate 1998.II-2002.IV:
-4.6%
Annualized growth rate 2002.IV-2005.IV: 13.1%
LAC-7: Economic Activity(s.a. GDP, 1990.I=100)
Source: Latin Focus
2005-2006 Forecasts
98
108
118
128
138
148
158
168
178
1990
.I
1991
.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
Annualized growth rate
1990.I-1998.II: 4.4%
Annualized growth rate 1998.II-2002.IV:
0.4%
Annualized growth rate 2002.IV-2005.IV: 5.7%
Russian Crisis
2% 3% 4% 5% 6% 7% 8% 9% 10%
Brazil
Mexico
Colombia
Chile
Peru
Argentina
Venezuela
2005
2006
Average: 6.0%
Average: 5.0%
54.23
61.75
September 2005
September 2005
46.50
43.75
30
35
40
45
50
55
60
652005 2006
Note: The Fund’s September 2005 World Economic Outlook (WEO) envisages world oil prices averaging US$54.2/bbl in 2005 and US$61.8/bbl in 2006, some 17 percent and 40 percent higher, respectively, than projected in the April 2005 WEO.
Source: Singh, Anoop. Global Context and Regional Outolook for Latin America and the Caribbean. IMF. October 2005.
Oil Price Impact on Economic Activity (LAC, in % )
Estimates of the impact of the change of WEO oil price assumptions in the LAC Region
0.0%
-0.8%
-1.0%
-0.6%
-0.4%
-0.2%
0.2%2005 2006
Net oil Exporters
South America
Central America
The Caribbean
Latin America and the Caribbean
WEO Oil Price Estimates
April 2005
April 2005
Average spot price of U.K. Brent, Dubai, and West Texas Intermediate, US dollars per barrel
Current Average Oil Price: 67.3
Oil Prices
0
10
20
30
40
50
60
70
80
90
100
Jan
-70
Jan
-72
Jan
-74
Jan
-76
Jan
-78
Jan
-80
Jan
-82
Jan
-84
Jan
-86
Jan
-88
Jan
-90
Jan
-92
Jan
-94
Jan
-96
Jan
-98
Jan
-00
Jan
-02
Jan
-04
Jan
-06
US$ 99
US$ 49
US$ 58*
US$ 12
* March-06
45
50
55
60
65
70
75
Spot 1 Month 3 Months 6 Months 1 year
11-Apr-2006
01-Sep-2005
19-May-2005
21-Jul-2005
Oil Future Prices (WTI)
69.1
71.272.0 72.0
69.2
70.369.5
69.969.2
67.7
59.0
54.9
58.8 58.557.8
50.6
46.9
50.4 50.149.4
A Historical Perspective(USD per barrel in 2004 prices, average of U.K. Brent, Dubai, and WTI)
LAC-7: Unemployment (Unemployment rate)
2% 4% 6% 8% 10% 12%
Mexico
Chile
Peru
Brazil
Venezuela
Argentina
Colombia
Source: Latin Focus
By Country (2005)
Average: 9.3%
8,0
8,5
9,0
9,5
10,0
10,5
11,0
11,5
12,0
12,5
jun
-97
dic
-97
jun
-98
dic
-98
jun
-99
dic
-99
jun
-00
dic
-00
jun
-01
dic
-01
jun
-02
dic
-02
jun
-03
dic
-03
jun
-04
dic
-04
jun
-05
dic
-05
Pre-Russian Crises Levels
12,4%
9,3%
LAC-7: Fiscal Balance(SPNF, in % of GDP)
*Central Government
By Country (2005)
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-3.0*%
+0.3%
-4% -2% 0% 2% 4% 6%
Brasil
Colombia
Peru*
México
Venezuela*
Argentina*
Chile*
Source: Latin Focus
LAC-7: Inflation(CPI annual variation)
Source: Latin Focus
2006 Forecasts
Median
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
0% 3% 6% 9% 12% 15%
Peru
Mexico
Chile
Colombia
Brazil
Argentina
Venezuela
2005
2006
Average: 6.5%
Average: 6.3%4.9%
LAC-7: Real Exchange Rate (Oct-02 = 100)
(variation Oct-02 - Mar-06)
LAC-7 By Country
-29%
45
55
65
75
85
95
105
115
oct-
02di
c-02
feb-
03ab
r-03
jun-
03ag
o-03
oct-
03
dic-
03fe
b-04
abr-
04ju
n-04
ago-
04oc
t-04
dic-
04
feb-
05ab
r-05
jun-
05ag
o-05
oct-
05di
c-05
feb-
06
65
70
75
80
85
90
95
100
105
jun-
98
dic-
98
jun-
99
dic-
99
jun-
00
dic-
00
jun-
01
dic-
01
jun-
02
dic-
02
jun-
03
dic-
03
jun-
04
dic-
04
jun-
05
dic-
05
Mexico (1.6%)
Peru (-6,5%)
Venezuela (-9,5%)
Colombia (-29,0%)
Argentina (-25,9%)
Chile (-27,4%)
Brazil (-53,9%)
LAC-7: International Reserves(millions of US$)
Russian Crisis
Colombia 1.7
Brazil 0.8*
Peru 1.3
Argentina 0.9*
Chile 1.0
Mexico 2.3
Venezuela 1.9
In % of Jun-98
LAC-7 1.3
15000
45000
75000
105000
135000
165000
195000
225000
255000
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
* after IMF Repayment
20%
30%
40%
50%
60%
70%
80%
90%
Pre-Repayment Post-Repayment
Pre-Repayment Post-Repayment
Arg
en
tin
aB
raz i
lRepayment to the IMF: Argentina & Brazil
(International Reserves in % of PSBR+MB)International Reserves
-40%
5%
10%
15%
20%
25%
30%
35%
-35%
8,000
13,000
18,000
23,000
28,000
Oct
-02
Dec
-02
Feb
-03
Apr
-03
Jul-0
3
Sep
-03
Nov
-03
Feb
-04
Apr
-04
Jun-
04
Aug
-04
Nov
-04
Jan-
05
Mar
-05
Jun-
05
Aug
-05
Oct
-05
Jan-
06
Mar
-06
28,078
21,769
Pre-IMF Repayment
Post-IMF Repayment
35000
40000
45000
50000
55000
60000
65000
Oct
-02
Dec
-02
Feb
-03
Apr
-03
Jul-0
3
Sep
-03
Nov
-03
Feb
-04
Apr
-04
Jun-
04
Aug
-04
Nov
-04
Jan-
05
Mar
-05
Jun-
05
Aug
-05
Oct
-05
Jan-
06
Mar
-06
67,935
60,090
Pre-IMF Repayment
Post-IMF Repayment
Liquidity Ratio
Repayment:
9.5 bn
Repayment:
15.6 bn
Downward Pressures on the Real Exchange Rate
Monetary and Exchange Rate Policy Options
Current Dilemmas of Monetary & Exchange Rate Policy in LAC
No FX Intervention
Appreciation
Exchange Rate Policy & Inflation (CPI, bilateral XR and RER vis à vis the US dollar , Jun-04 = 100)
BrazilCPI
XRRER65
70
75
80
85
90
95
100
105
jun-
04
jul-0
4
ago-
04
sep-
04
oct-
04
nov-
04
dic-
04
ene-
05
feb-
05
mar
-05
abr-
05
may
-05
jun-
05
jul-0
5
ago-
05
sep-
05
oct-
05
nov-
05
dic-
05
ene-
06
feb-
06
mar
-06
Downward Pressures on the Real Exchange Rate
Monetary and Exchange Rate Policy Options
Current Dilemmas of Monetary & Exchange Rate Policy in LAC
No FX Intervention
Appreciation
FX Intervention
Inflation
Exchange Rate Policy & Inflation (CPI, bilateral XR and RER vis à vis the US dollar , Jun-04 = 100)
BrazilCPI
XRRER65
70
75
80
85
90
95
100
105
jun-
04
jul-0
4
ago-
04
sep-
04
oct-
04
nov-
04
dic-
04
ene-
05
feb-
05
mar
-05
abr-
05
may
-05
jun-
05
jul-0
5
ago-
05
sep-
05
oct-
05
nov-
05
dic-
05
ene-
06
feb-
06
mar
-06
Chile
RERXR
CPI
80
83
86
89
92
95
98
101
104
jun-
04
jul-0
4
ago-
04
sep-
04
oct-
04
nov-
04
dic-
04
ene-
05
feb-
05
mar
-05
abr-
05
may
-05
jun-
05
jul-0
5
ago-
05
sep-
05
oct-
05
nov-
05
dic-
05
ene-
06
feb-
06
mar
-06
Colombia
RER
XR
CPI
80
84
88
92
96
100
104
108
jun-
04
jul-0
4
ago-
04
sep-
04
oct-
04
nov-
04
dic-
04
ene-
05
feb-
05
mar
-05
abr-
05
may
-05
jun-
05
jul-0
5
ago-
05
sep-
05
oct-
05
nov-
05
dic-
05
ene-
06
feb-
06
mar
-06
ArgentinaCPI
XR
RER90
93
96
99
102
105
108
111
114
117
jun-
04
jul-0
4
ago-
04
sep-
04
oct-
04
nov-
04
dic-
04
ene-
05
feb-
05
mar
-05
abr-
05
may
-05
jun-
05
jul-0
5
ago-
05
sep-
05
oct-
05
nov-
05
dic-
05
ene-
06
feb-
06
mar
-06
Exchange Rate Policy & Real Exchange Rate Adjustment(Jun-04=100)
Nominal Exchange Rate
Argentina (3.9%)
Chile (-17.8%)
Brazil (-31.2%)
Colombia (-16.7%)
65
70
75
80
85
90
95
100
105
110
jun
-04
jul-
04
ag
o-0
4
sep-
04
oct
-04
no
v-0
4
dic
-04
en
e-0
5
feb
-05
ma
r-0
5
ab
r-0
5
ma
y-0
5
jun
-05
jul-
05
ag
o-0
5
sep-
05
oct
-05
no
v-0
5
dic
-05
en
e-0
6
feb
-06
ma
r-0
6 65
70
75
80
85
90
95
100
105
jun
-04
jul-
04
ag
o-0
4
sep-
04
oct
-04
no
v-0
4
dic
-04
en
e-0
5
feb
-05
ma
r-0
5
ab
r-0
5
ma
y-0
5
jun
-05
jul-
05
ag
o-0
5
sep-
05
oct
-05
no
v-0
5
dic
-05
en
e-0
6
feb
-06
ma
r-0
6
Real Exchange Rate
Chile (-17.8%)
Argentina (-7.8%)
Colombia (-18.7%)
Brazil (-33.5%)
Downward Pressures on the Real Exchange Rate
Monetary and Exchange Rate Policy Options
Current Dilemmas of Monetary & Exchange Rate Policy in LAC
No FX Intervention
Appreciation
FX Intervention
InflationDilemma
Downward Pressures on the Real Exchange Rate
Monetary and Exchange Rate Policy Options
Current Dilemmas of Monetary & Exchange Rate Policy in LAC
No FX Intervention
Appreciation
FX Intervention
InflationDilemma
Capital Controls and/or Price Controls
OUTLINE
I.I. External FactorsExternal Factors
II.II. Macroeconomic Outcomes in LACMacroeconomic Outcomes in LAC
III. On LAC’s Current Account SurplusIII. On LAC’s Current Account Surplus
-6%
-5%
-4%
-3%
-2%
-1%
1%
2%
3%
4%19
91
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-100000
-80000
-60000
-40000
-20000
0
20000
40000
60000
LAC-7: Current Account(Millions of US dollars; % GDP)
% G
DP
Millo
ns o
f US
do
llars
% GDP
Millions of US dollars
-20,000
0
20,000
40,000
60,000
80,000
100,000
Ma
r-9
7
Se
p-9
7
Ma
r-9
8
Se
p-9
8
Ma
r-9
9
Se
p-9
9
Ma
r-0
0
Se
p-0
0
Ma
r-0
1
Se
p-0
1
Ma
r-0
2
Se
p-0
2
Ma
r-0
3
Se
p-0
3
Ma
r-0
4
Se
p-0
4
Ma
r-0
5
Se
p-0
5
The Capital Flows Puzzle(Capital Flows to LAC-7; last 4 quarters, in millions of US dollars)
Russian Crisis
Demand for International Capital Flows
Supply of International Capital Flowsi*0
q0 q1
Positive Supply Shock
i*1
Positive Shock to TOT
i*
q
i* =International interest rate q =Volume of net international capital flows
where:
The Capital Flows Puzzle: A Graphical Analysis
-20,000
0
20,000
40,000
60,000
80,000
100,000
Ma
r-9
7
Se
p-9
7
Ma
r-9
8
Se
p-9
8
Ma
r-9
9
Se
p-9
9
Ma
r-0
0
Se
p-0
0
Ma
r-0
1
Se
p-0
1
Ma
r-0
2
Se
p-0
2
Ma
r-0
3
Se
p-0
3
Ma
r-0
4
Se
p-0
4
Ma
r-0
5
Se
p-0
5
The Capital Flows Puzzle(Capital Flows to LAC-7; last 4 quarters, in millions of US dollars)
TOT Adjusted Capital Flows*
Russian Crisis
5.6% of GDP
*value at I.2002
0
20000
40000
60000
80000
100000
120000
dic
-97
jun
-98
dic
-98
jun
-99
dic
-99
jun
-00
dic
-00
jun
-01
dic
-01
jun
-02
dic
-02
jun
-03
dic
-03
jun
-04
dic
-04
jun
-05
-15000
5000
25000
45000
65000
85000
105000
Net Flows
Inflows
Outflows
Gross Capital Flows(LAC-7; last 4 quarters, in millions of US dollars)
Inflo
ws
& O
utf
low
s
Ne
t flo
ws
LAC-7: Capital Flows & Terms of Trade(Millions of US dollars and Jan-87=100)
-5000
15000
35000
55000
75000
95000
115000
-10000
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
Outflows
Net
Inflo
ws
& O
utf
low
s
Ne
t flo
ws
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Inflows
1991-1993
Inflows
167
Outflows Net flows Ratio*
1991-1997
2003-2005
1990s
2000s
25 142 74%
499 119 380 62%
120 109 11 5%
(Billions of US dollars)
*ΔInflows - ΔOutflows
ΔInflows + ΔOutflows
Cumulative Flows
LAC-7: Capital Flows & Terms of Trade(Millions of US dollars and Jan-87=100)
-5000
15000
35000
55000
75000
95000
115000
-10000
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
Outflows
Net
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
80
90
100
110
120
130
140
150
ToT
Inflo
ws
& O
utf
low
s
Ne
t flo
ws
To
T (
Jan
-87
= 1
00
)
Inflows
LAC-7 MACROECONOMIC LAC-7 MACROECONOMIC OUTLOOKOUTLOOK
LAC-7 MACROECONOMIC LAC-7 MACROECONOMIC OUTLOOKOUTLOOK
Ernesto TalviErnesto Talvi
Prepared for Presentation at the XXIII Meeting of the Latin American Prepared for Presentation at the XXIII Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington DCNetwork of Central Banks and Finance Ministries, IDB, Washington DC
April 20April 20thth, 2006, 2006
CERESCERES