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Javier Santiso, Director of the OECD Development Centre, presented in the most recent Emerging Market Network meeting an overview of Latin America based on the recently published Latin American Economic Outlook 2009.
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Latin America Based on Latin American Economic Outlook 2009
Paris
5 December 2008
EmNet Quarterly Meeting
Javier Santiso
Director and Chief Economist
OECD Development Centre
The financial crisis: Should Latin America be worried?
Historically speaking, yes: when the U.S. sneezes, Latin America catches cold
Effect of US Recessions on Latin American growth
(Median for Region)
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
1974-75 1980 1982 1991 2001 All
RecessionsSource: IM F , 2007
United States
Latin America
Export Exposure to the US
(change in average output gap during recessions)
-3
-2,5
-2
-1,5
-1
-0,5
0
Least exposed Most exposed Least exposed Most exposed
Industrial Countries Emerging Markets
Source: Lane and M ilesi-Ferreti, 2006
The financial crisis: Should Latin America be worried?
Current account channel: trade and remittances
-5
0
5
10
15
20
25
2004 2005 2006 2007 2008
El Salvador Guatemala
Mexico Latin America
Remittances (%, annual growth)
Source: OECD Development Centre based on World Bank, November 2008
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
19
88
19
89
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
China EU US Rest of World
Latin American Exports (by destination)
Source: OECD Development Centre based on WITS data, 2008
65%
The financial crisis: Should Latin America be worried?
Financial channel: foreign banks in local markets
Structure of Mexican banks (% of total assets)
Source: OECD Development Centre based on World Bank, November 2008
Market share of Foreign Banks in local banking systems (% of total assets)
Source: OECD Development Centre based on WITS data, 2008
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Mexic
o
Chile
Venezuela
Bra
zil
Arg
entina
Colo
mbia
Peru
Source: OECD Development Centre based on National Sources and Credit Suisse, 2008
20%
24%
15%
20%
11%
5%5%Mexican Banks
BBVA
Santander
Citibank
HSBC
Scotiabank
Other Foreign
Source: OECD Development Centre based on National Sources and Credit Suisse, 2008
Initial impact is limited, thanks to credible economic policies and high internal demand
Source: OECD Development Centre, based on IMF (WEO October 2008)
-5
-4
-3
-2
-1
0
1
2
3
4
5
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Advanced countries Emerging countries
Latin America
-2
-1
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008
Advanced countries Latin America
Output gap (%) GDP (% annual growth)
Source: OECD Development Centre, based on IMF (WEO October 2008)
But risks remain, depending on sensitivity to international economic conditions and inflation
Inflation (% y-o-y) Industrial production (% annual growth)
Source: OECD Development Centre, based on Thomson Datastream, 2008Source: OECD Development Centre, based on Thomson Datastream, 2008
-6
-4
-2
0
2
4
6
8
10
jan-06 jul-06 jan-07 jul-07 jan-08 jul-08
Chile Brazil United States Mexico
1
2
3
4
5
6
7
8
9
10
jan-06 jul-06 jan-07 jul-07 jan-08 jul-08
Brazil Chile Mexico
GDP growth forecasts are on the downside, but still close to potential
Slowdown is not necessarily recession
GDP forecasts for 2009 (% annual growth)
Source: OECD Development Centre, based on Consensus Forecasts, 2008Source: OECD Development Centre, based on IMF (WEO), 2008
-0,5
0
0,5
1
1,5
2
2,5
3
3,5
4
2009 (April08) 2009 (July08) 2009 (Oct.08) 2009 (Nov.08)
Latin America Advanced economies
GDP forecasts for 2009 in Latam(% annual growth)
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
5
Argentina M exico Venezuela Chile Colombia Brazil Latam
September 08 October 08 November 08
Latin America remains highly vulnerable to international capital markets’ volatility …
Nominal exchange rate (US$, basis 100 = Nov.07) Equity market (basis 100 = Nov.07)
Source: OECD Development Centre based on Thomson Datastream, 2008Source: OECD Development Centre based on Thomson Datastream, 2008
35
45
55
65
75
85
95
105
115
125
nov.-07 jan.-08 mar-08 may-08 jul.-08 sept.-08 nov.-08
Argentina Brazil Chile S&P500 Mexico
80
90
100
110
120
130
140
nov.-07 feb.-08 may-08 aug-08 nov.-08
Brazil Chile Mexico
…but at least for the public sector, the sensibility has been reduced
Sovereign bond spreads and “global risk aversion”
Source: OECD Development Centre based on Thomson Datastream, 2008
E MB I G loba l L a tAm vs. VIX (2005-2008)
EMBI Latam = 7,9978xVIX + 146,8
R2 = 0,5261
0
200
400
600
800
1 000
1 200
1 400
1 600
5 15 25 35 45 55 65 75
VIX indexE
MB
I Glo
ba
l La
tAm
(b
p)
average
today
E MB I G loba l L a tAm vs. VIX (1998-2004)
EM BI Latam = 27,57xVIX + 117,06
R2 = 0,603
0
200
400
600
800
1 000
1 200
1 400
1 600
5 15 25 35 45 55 65 75
VIX index
EM
BI G
lob
al L
atA
m (
bp
)
average
Spreads are now much less sensitive to external shocks
The VIX index (CBOE Volatility Index) is the implied volatility of S&P500 index options.
Capital markets are differentiating between countries and with respect to past sovereign debt crises
Markets do not appear to be anticipating a crisis for ‘credible’ countries
EMBI sovereign bond spreads (bp)
Source: OECD Development Centre based on Thomson Datastream, 2008
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
1,6
1,8
0 100 200 300 400 500 600 700 800 900
Bond s pre ad (bas is points )
Un
de
rwri
tin
g s
pre
ad
(%
) Argentina (T-3)Argentina (T-2)
Argentina(T-1)
Brazil (T-2)
Brazil (T-1)
Russia (T-2)
Russia (T-1)
Turkey (T-3)
Turkey (T-2)
Turkey (T-1)
Source: OECD Development Centre based on Latin American Economic Outlook, 2008
today
Fees and Sovereign bond spreads (Primary market)
0
200
400
600
800
1000
1200
1400
1600
1800
2000
nov.-07 jan.-08 mar-08 may-08 jul.-08 sep.-08 nov.-08
Argentina Brazil Chile Mexico Venezuela
Why such confidence? Public debt management has improved
5
10
15
20
25
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
30
40
50
60
70
80
External Public Bonds over GNP External Public Bonds over Exports (right axis)
Source: OECD Development Centre calculations based on World Bank, Global Development Finance database (2008).
0,0
0,2
0,4
0,6
0,8
1,0
2002 2003 2004 2005 2006 2007 - June
2008
Brazil Colombia Peru Uruguay
“Original Sin Index”External Public Bonds in Latin America
Source: OECD Development Centre calculations based on World Bank, Global Development Finance database (2008).
External debt is falling and countries can increasingly borrow abroad in localcurrency
Revenues and expenditures
Fiscal policy volatility
Latin America’s fiscal performance has much improved over recent years
Fiscal policy measures
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1990-2006 1990 -1994 1995 -1999 2000 - 2006
Latin America
Total revenue Total expenditureFiscal balance
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1990-2006 1990 -1994 1995 -1999 2000 - 2006
Total revenue Total expenditureFiscal balancec
OECD
-5
0
5
10
15
20
25
30
35
40
45
50
1990-2006 1990-1994 1995-1999 2000-2006
Latin America
Fiscal balance Total revenue Total expenditure
-5
0
5
10
15
20
25
30
35
40
45
50
1990-2006 1990-1994 1995-1999 2000-2006
OECD
Fiscal balancec Total revenue Total expenditure
Source: OECD Development Centre calculations based on the ECLAC ILPES Public Finance database for Latin America, and OECD
General Government Accounts data for OECD countries .
Source: OECD Development Centre calculations based on the ECLAC ILPES Public Finance database for Latin America, and OECD
General Government Accounts data for OECD countries .
Gini coefficients of income inequality, before and after taxes and transfers
0
10
20
30
40
50
60
Arg
enti
na
Bra
zil
Ch
ile
Co
lom
bia
Mex
ico
Peru
Au
stri
a
Bel
giu
m
Den
mar
k
Fin
lan
d
Fran
ce
Ger
man
y
Gre
ece
Irel
and
Ital
y
Luxe
mb
ou
rg
Net
her
lan
ds
Pola
nd
Port
uga
l
Spai
n
Swed
en
Un
ited
…
Inequality before taxes and transfers
While taxes and transfers reduce the inequality by 19
Gini points in Europe, the difference is less than two
Gini points in Latin America
However, fiscal policy does little to reduce inequality in Latin America
Source: OECD Development Centre (2008), based on Euromod (2008) for OECD countries and Goñi et al. (2008) for Latin America.
Democratic Consolidation in Latin America: Experts’ and Citizens’ Views
Sources: BTI Index (2008) and Latinobarómetro (2007).
Political context: democratic consolidation…
0
1
2
3
4
5
6
7
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: OECD Development Centre based on Nieto Parra and Santiso (2008)
Number of presidential elections in Latin America
The Latin American countries covered are Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. For elections with a second (run-off) round, the date of the final round is used.
This time around, the political cycle is favourable to Latin America
Source: OECD Latin American Economic Outlook, based on Nieto Parra and Santiso (2008),
The political cycle and capital markets
Investment-Bank recommendations around elections
Real Exchange Rates around Elections
99,0
99,5
100,0
100,5
101,0
101,5
102,0
102,5
103,0
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
0 = e le c tion m onth
Ind
ex
(ele
cto
ral m
on
th =
10
0)
An
inc
rea
se
re
pre
se
nts
a d
ep
rec
iatio
n-0,4
-0,3
-0,2
-0,1
0,0
0,1
0,2
0,3
0,4
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
0 = e le c tion m onth
un
de
rwe
igh
t
ov
erw
eig
ht
Latin America Based on Latin American Economic Outlook 2009
Paris
5 December 2008
EmNet Quarterly Meeting
Javier Santiso
Director and Chief Economist
OECD Development Centre
www.oecd.org/dev/leo