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Presentation by Javier Santiso on the effects of the global crisis in Latin America. Based on the Latin America & the Caribbean Economic Outlook 2009.
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Based on Latin American Economic Outlook 2009
London
February 2009
Latin America: The Fiesta is Over
Javier Santiso
Director and Chief EconomistOECD Development Centre
The financial crisis and Latin America
Historically , 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 AllRecessionsSource: IMF , 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
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
Latin American Exports (by destination)
Source: OECD Development Centre based on WITS data, 2008
65%
The financial crisis and Latin America
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
C hina E U US A R est of the World
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
C hina E U US A R est of the World
Source: OECD Development Centre based on WITS 2008.
Current account channel: Reduction of commodity prices and trade balance
Terms of trade gains from 2003 through 2008 (%)Commodities Exports (% of total exports)
The financial crisis and Latin America
Source: OECD Development Centre based on WITS 2008.
0
10
20
30
40
50
60
70
80
90
100
M
exi
co
B
razi
l
C
olo
mb
ia
A
rge
ntin
a
P
eru
E
cua
do
r
C
hile
V
en
ezu
ela
0
20
40
60
80
100
120
140
Me
xico
Bra
zil
Arg
en
tina
Co
lom
bia
Ch
ile
Pe
ru
Ecu
ad
or
Ve
ne
zue
la
Source: OECD Development Centre based on JP Morgan, 2009.Source: OECD Development Centre based on National Statistics and WITS, 2009.
95
100
105
110
115
120
125
01-0
1-20
03
01-0
7-20
03
01-0
1-20
04
01-0
7-20
04
01-0
1-20
05
01-0
7-20
05
01-0
1-20
06
01-0
7-20
06
01-0
1-20
07
01-0
7-20
07
01-0
1-20
08
01-0
7-20
08
01-0
1-20
09
Ind
ex
Industrial production Index
Current channel: Chinese trade has decreased sharply over the last months
Source: OECD Development Centre, based on national sources and Thomson, 2009
The financial crisis and Latin America
The financial crisis and Latin America
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%
Mex
ico
Chi
le
Ven
ezue
la
Bra
zil
Arg
entin
a
Col
ombi
a
Per
u
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 has been limited
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)
thanks to credible economic policies and high internal demand
However this has increased recently
Inflation (% y-o-y) Industrial production (% annual growth; moving average)
Source: OECD Development Centre, based on Thomson Datastream, 2009Source: OECD Development Centre, based on Thomson Datastream, 2009
-15
-10
-5
0
5
10
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Brazil Chile 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 Jan-09
Brazil Chile Mexico
But a monetary stimulus could be possible in some Latin American countries
GDP growth forecasts are on the downside
Slowdown is not necessarily recession
GDP forecasts for 2009 and 2010 (% annual growth)
Source: OECD Development Centre, based on Consensus Forecasts, 2009Source: OECD Development Centre, based on Consensus Forecasts, 2009
GDP forecasts for 2009 in Latam (% annual growth)
-2
-1
0
1
2
3
4
5
LatinAmerica
NorthAmerica
WesternEurope
Asia/Pacific EasternEurope
2009 2010
na
-1
0
1
2
3
4
5
Argentina Mexico Venezuela Chile Colombia Brazil Latam
September 08 October 08 November 08 January 09
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, 2009Source: OECD Development Centre based on Thomson Datastream, 2009
35
45
55
65
75
85
95
105
115
125
Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09
Brazil Mexico Colombia S&P500
80
90
100
110
120
130
140
150
160
Feb-08 May-08 Aug-08 Nov-08 Feb-09
Brazil Chile Mexico Colombia
…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, 2009
Spreads are now much less sensitive to external shocks
The VIX index (CBOE Volatility Index) is the implied volatility of S&P500 index options.
E MB I G loba l L a tAm vs. VIX (2005-2009)
0
200
400
600
800
1 000
1 200
1 400
1 600
5 15 25 35 45 55 65 75VIX index
EM
BI G
loba
l Lat
Am
(bp)
average
today
E MB I G loba l L a tAm vs. VIX (1998-2004)
0
200
400
600
800
1 000
1 200
1 400
1 600
5 15 25 35 45 55 65 75VIX index
EM
BI G
loba
l Lat
Am
(bp)
average
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, 2009
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 )
Und
erw
riting
spr
ead
(%)
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, 2009
today
Fees and Sovereign bond spreads (Primary market)
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09
Argentina Brazil Chile Colombia
Mexico Venezuela
Why such confidence? Public debt management has improved
Source: OECD Development Centre calculations based on World Bank and Consensus Forecast, 2009.
“Original Sin Index”External Public Debt in Latin America (% of GDP)
Source: OECD Development Centre calculations based on Dealogic, 2009.
External debt is falling and countries can increasingly borrow abroad in local currency
0,0
0,2
0,4
0,6
0,8
1,0
2002 2003 2004 2005 2006 2007 - 2008
Brazil Colombia Peru Uruguay
0
5
10
15
20
25
30
35
40
45
50
2003 2004 2005 2006 2007 2008 2009 2010
Brazil Chile Colombia Mexico Venezuela
However refinancing risks exist in a context of illiquidity in the international markets
Source: OECD Development Centre based on Dealogic, 2009.
Corporate Bond High-Yield Issuance (US$ mill.)Global Covered Bond Issuance (US$ mill.)
Source: OECD Development Centre based on Dealogic, 2009.
This is above all true for the Latin Corporates (External maturities reach $32bn in 2009)
40 000
60 000
80 000
100 000
120 000
140 000
160 000
2003Second
Half
2004Second
Half
2005Second
Half
2006Second
Half
2007Second
Half
2008Second
Half
50 000
100 000
150 000
200 000
250 000
300 000
2003 2004 2005 2006 2007 2008
Revenues and expenditures
Fiscal policy volatility
Latin America’s fiscal performance has much improved over recent years
Fiscal policy measures
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
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…
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, Ecuador, Mexico, Peru and Venezuela. For elections with a second (run-off) round, the date of the final round is used.
0
1
2
3
4
5
6
7
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Capital Markets, Democracyand the Cost of Debt
There are clear links between political processes, particularly elections, and instability in the debt and currency markets
Source: Nieto Parra and Santiso (2008a), based on Datastream database.
The political cycle and capital markets
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 90 = e le c tion m onth
Ind
ex
-1,0
-0,8
-0,6
-0,4
-0,2
0,0
0,2
0,4
0,6
0,8
1,0
Correlation Between Exchange Rate and Sovereign- bond Spreads During Elections
Capital Markets, Democracyand the Cost of Debt
Bank recommendations are downgraded prior to elections, but tend to move positively again once the uncertainty has passed
Source: Nieto Parra and Santiso (2008a), based on Datastream database.
The political cycle and capital markets
Investment-Bank recommendations around elections
Brazil 2002 and 2006: From Lula Preta to Lula de Mel
-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 90 = e le c tion m onth
-1,0
-0,5
0,0
0,5
1,0
200 200 200 200 200 200
P residential election date
Capital Markets, Democracyand the Cost of Debt
Bank recommendations are downgraded prior to elections, but tend to move positively again once the uncertainty has passed
Source: Nieto Parra and Santiso (2008a), based on Datastream database.
The political cycle and capital markets
Argentina: recommendations(1:overweight, 0:neutral, -1:underweight)
-1,00
-0,50
0,00
0,50
1,00
J ul-97 J ul-98 J ul-99 J ul-00 J ul-01 J ul-02 J ul-03 J ul-04 J ul-05 J ul-06
Presidential election date
Mexico: recommendations(1:overweight, 0:neutral, -1:underweight)
-1,000
-0,500
0,000
0,500
1,000
J ul-97 J ul-98 J ul-99 J ul-00 J ul-01 J ul-02 J ul-03 J ul-04 J ul-05 J ul-06
Presidential election date
Capital Markets, Democracyand the Cost of Debt
The market’s fears have some justification: elections are indeed associated with fiscal volatility
Note: The impact of elections on fiscal policy is calculated as the difference between the fiscal variable (as percentage of GDP) during the election year and non-election years.
Source: Nieto Parra and Santiso (2008b, forthcoming)
Are Capital-market Jitters around Elections Justified?
P rimary balanc e
-0,8
-0,7
-0,6
-0,5
-0,4
-0,3
-0,2
-0,1
0,0
0,1
OECD Latin America
P rimary ex penditure
-0,1
0,0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
OECD Latin America
Impact of Elections on Fiscal Policy, 1990-2006 (% of GDP)
Capital Markets, Democracyand the Cost of Debt
Across individual Latin American countries, it exposes considerable variation
Note: The impact of elections on fiscal policy is calculated as the difference between the fiscal variable (as percentage of GDP) during the election year and non-election years.
Source: Nieto Parra and Santiso (2008b, forthcoming)
Are Capital-market Jitters around Elections Justified?
-1,0-0,50,00,51,01,52,02,53,03,54,0
Impact of Elections on Fiscal Policy, 1990-2006 (% of GDP)
Capital Markets, Democracyand the Cost of Debt
The economic pronouncements made by Latin American electoral candidates differ markedly among countries
Source: Nieto Parra and Santiso (2008a), based on The Economist (2008).
Uncertainty around elections: the role of economic-policy Platforms
Non-credible policies announced by Candidates, 1998-2008
0
1
2
3
4
0
10
20
30
40
50
60
% o
f to
tal e
lecti
on
s
Elections with non credible policies announced (right axis)
Number of elections with non credible policies announced
Is Latin American Democracy Maturing In the eyes of the Capital Markets?
The election effect has been much less marked since 2006 than before...
Source: Nieto Parra and Santiso (2008a)
Investment-bank recommendations around elections
by year, Latin America
-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
Before 2006 Since 2006
There were elections in 2006 in all the large countries of Latin America other than Argentina.
Is Latin American Democracy Maturing In the eyes of the Capital Markets?
...and is partially supported by higher primary surplus due to high GDP growth rather than spending restraint, and there has been no decrease in non-credible policy pronouncements (e.g., Argentina, Mexico, Peru and Venezuela).
Note: The impact of 2005 and 2006 elections on fiscal policy is calculated as the difference between the fiscal variable (as a proportion of GDP) during the election year and prior non-election years.
Source: Nieto Parra and Santiso (2008b, forthcoming)
Impact of Presidential Elections on Fiscal Variables (% of GDP)P rimary balanc e
-1
0
1
2
3
4
5
P rimary ex penditure
-2
-1
0
1
2
3
4
5
Public debt management and political cycles
• Debt levels still high, but considerable progress has been made.• Good public debt management is linked to healthy development
of the domestic bond markets in the region• Sovereign bonds markets have been keenly sensitive to political
events: Why?- Investors worry about pre-election fiscal expansion to attract voters (1990-2006, impact of general elections on fiscal expenditure in LA come close to 25% of GDP growth; virtually zero in OECD), with negative post-electoral consequences…- … and that candidates economic policy platforms are not credible
The political dimension of public debt
Based on Latin American Economic Outlook 2009
London
February 2009
Latin America: The Fiesta is Over
Javier Santiso
Director and Chief EconomistOECD Development Centre