LAC s Decade: Ending or Beginning?

Transcription

1 LAC s Decade: Ending or Beginning? LAC RLT Retreat Washington, DC 13 September 2011 Chief Economist Office Latin America and the Caribbean The World Bank 1

2 Structure of the presentation LAC s successful past decade The maturing recovery cycle Rising global uncertainty and risks Whither LAC s growth in the short and long run? 2

3 LAC s Successful Decade and the Maturing Recovery Cycle 3

4 LAC s success Non-inflationary growth decoupling from rich countries 7% 6% Cyclical-adjusted Growth in Latin America and High-Income Countries Trend growth computed using the band-pass filter High-Income Latin America 5% 4% 3% 2% 1% 0% The trend growth of real GDP growth is computed using the band-pass filter (Baxter and King, 1999). LCRCE staff calculations. Source: WDI World Bank; National Authorities. 4

5 LAC s success Reduction in poverty and income inequality Per Capita GDP Growth and Poverty LAC Countries Gini Coefficient Cumulative Change From 2009 to 1995 Moderate Poverty Rate US$ 4 a Day Poverty Headcount GDP Per Capita ,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 GDP Per Capita US Dollars Costa Rica Dominican Republic Colombia Uruguay Honduras Bolivia Chile El Salvador Argentina Panama Latin America Mexico Brazil Peru Paraguay Source: LCSPP based on Socio-Economic Database for Latin America and the Caribbean (CEDLAS and The World Bank). 5

6 LAC s success An expanding middle class Source: LAC Chief Economist Office, World Bank. 6

7 LAC s success Stellar performance during the 2009 global downturn 0.04 Growth in Real GDP Middle Income Countries 0.04 Growth in Real GDP Latin America and the Caribbean T-6 T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 T-6 T-5 T-4 T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5 T+6 Previous Cycles Current Cycle Previous Cycles Current Cycle LAC came out of the global crisis without balance sheet damage Notes: The figures represent the deviations from regional/group trend growth in real GDP on 13-quarter windows centered on previous and current troughs on real GDP. This figure depicts the behavior of real GDP in previous and current recession-recovery cycles. Sources: IMF s International Financial Statistics IFS, National Statistical Institutes and Central Banks, Haver Analytics. 7

8 LAC s success Region comes out of the crisis without systemic damage Financial Crises Around the World 8

9 LAC s success Joining the dynamic EMs in the recovery phase World Industrial Production Index Apr-08 = 100 Crisis Advanced Economies Emerging Economies Emerging economies with strongest recoveries include Brazil, China, India, Korea, Malaysia, Philippines and Thailand They represent 52% of emerging economies GDP Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Note: The group of developed countries refers to OECD countries excluding Turkey, Mexico, Republic of Korea, and Central European countries. Source: CPB (Netherlands Bureau for Economic Policy Analysis). 9

10 LAC s success Joining the EM family in the recovery phase 100% 80% Contribution to World Economic GDP as a % of World GDP increase (PPP) 8% 11% 8% 8% 7% 8% 60% 34% 44% 57% 40% 20% 51% 38% 27% 0% Others Other Advanced Economies EM - 20 Euro (15)+US+Japan+Canada+UK Note: The EM-20 economies are the 20 Emerging Economies with higher GDP PPP in 2011 within the Emerging Economies. They explain 81.9% of the Emerging Economies total GDP. The 20 economies are: China, India, Russia, Brazil, Mexico,Indonesia,Turkey, Iran, Poland, Argentina, Saudi Arabia, Thailand, South Africa Egypt, Pakistan,Colombia, Malaysia, Nigeria, Philippines and Venezuela. 10

11 LAC s uneven success Mutating regional heterogeneity Slow-Growth Countries within LAC GDP Index 2002 = 100 Actual Potential Medium-Growth Countries within LAC GDP Index 2002 = 100 Actual Potential High-Growth Countries within LAC GDP Index 2002 = 100 Actual Potential Sources: Potential GPD is computed as the average rate of growth between 2007 and Simple averages are used to construct the composite. The categorization of each group is as follow: Slow-growth are those countries that showed a less than 3.5% in their GDP real growth rate; Medium-growth are those between 3.5% and 10%: High-growth are those with 10% or more. For 2011 we used the last available forecast (Consensus Forecast June-2011). Sources: Consensus Forecast (June 2011); WEO (April 2011). 11

12 LAC s uneven success Where you are matters less than to whom you are connected Cumulative Number of countries Mean growth * Mean Growth Mean Growth ** Max Min Low growth % 2.3% -0.3% 3.3% -12.3% Medium growth 7 4.4% 3.5% 2.4% 7.9% 4.1% High growth % 5.2% 4.9% 18.8% 10.0% Total % 3.7% 2.2% 18.8% -12.3% * This is the measure used to construct the "Potential GDP" ** This is the measure used to define the classification as "Low", "Medium" and "High". Low growth (<4%): St. Kitts and Nevis, Antigua and Barbuda, Grenada, Barbados, Jamaica, Bahamas, Venezuela, Trinidad and Tobago, St. Vincent and the Grenadines, El Salvador, St. Lucia, Dominica and Mexico Medium growth (4%-10%): Honduras, Belize, Haiti, Nicaragua, Guatemala, Costa Rica and Ecuador High growth (>10%): Chile, Colombia, Brazil, Guyana, Bolivia, Suriname, Paraguay, Dominican Republic, Peru, Argentina, Uruguay and Panama Sources: World Bank s World Development Indicators WDI (December 2010), IMF's World Economic Outlook WEO (April 2011), and Consensus Forecasts (June 2011) Latest available forecasts. Potential GDP is calculated computing the annual average real growth rate for the to 2007 GDP. Weighted averages (2007 Nominal GDP in USD Billions). 12

13 LAC s maturing cyclical recovery Overheating and endogenous inflationary pressures 30% Output Gap and Inflation LAC Countries CPI Inflation Rate (at June-11) 3 Months Moving Average, YoY 27% 24% 21% 18% 15% 12% 9% 6% 3% 0% JAM VEN HTI HND SLV DMA CRI BRB BOL DOM BRA ECU MEX CHL COL PAN PER ARG 2 ARG PRY URY -8% -6% -4% -2% 0% 2% 4% 6% 8% Output Gap 2011 GUA Notes: The area inside the box represents the range between the lowest and highest midpoints among inflation targeting countries. Sources: National Statistical Institutes and Central Banks, Haver Analytics. 13

14 LAC s maturing cyclical recovery Double tail spin push: commodity prices & capital inflows Gross Capital Inflows to LAC-7 Countries US$ Billions, Annual Flows Gross Inflows Non-FDI Gross Inflows FDI Mar-02 Aug-02 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 Wheat, Copper and Soybean, Index 01-Jan-05= Oil Copper Commodity Prices Most Relevant for LAC countries Soybean Wheat Jan-05 Feb-06 Mar-07 Apr-08 May- 09 Jun-10 Jul-11 Oil WTI, Current US$ Notes: Banks. Annualized capital inflows to LAC-7. Sources: IMF s Balance of Payments Statistics, National Statistical Institutes, and Central 14

15 Demands on domestic macro-financial policy Maintain inflation expectations well anchored 16% 14% 12% Food and Overall CPI Inflation : LAC-7 + URY YoY Variation, Medians Food Inflation Overall CPI Inflation 10% 8% 6% 4% 2% 0% Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Notes: There is a change in the methodology of calculation for both food and overall PCI index for Chile since January For the figure on the right, we used the latest available figure for each country. Weighted averages (2007 Nominal GDP in USD Billions) were used in the case of the regional numbers. Sources: Bloomberg, Instituto Nacional de Estadísticas de Chile INE, and Food and Agriculture Organization FAO (2010) and IMF's World Economic Outlook WEO (October 2010). 15

16 Demands on domestic macro-financial policy Avoid excessive currency appreciation Real Effective Exchange Rate Weighted Averages, Index Jan-05 = 100 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 China East Asian Tigers ECA High Income LAC Euro Area May-11 Notes: Weighted averages were calculated using the 2007 nominal GDP in USD Billions. An increase means an appreciation of the REER. Sources: IMF s International Financial Statistics IFS and IMF's World Economic Outlook WEO (April 2011). 16

17 Demands on domestic macro-financial policy Curb systemic risk buildup (financial excesses) 45% Real Credit Growth in LAC-6 Countries YoY Growth, % Total Housing Personal 35% 25% 15% 5% -5% Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 Notes: The figure depicts the (PPP-GDP) weighted average of the growth rates of (total, personal and housing) credit to the private sector for the six largest LAC countries (Argentina, Brazil, Chile, Colombia, Mexico, and Peru). Sources: National Statistical Institutes, Central Banks, and Superintendence of Banking. 17

18 Adjusting the macro-financial policy response Monetary-fiscal policy mix and macro-prudential policies 1,600 1,400 1,200 1,000 Monetary Policy Interest Rate Differential Spread w.r.t FED Funds Rate, In Basis Points Brazil Chile Colombia Peru Mexico % 19% Primary Expenditure % of GDP, LAC-6 Countries % Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 17% 16% 15% Notes: The figures in Panels B is the cyclically-adjusted primary expenditure and primary balance for the major six LAC countries (Argentina, Brazil, Chile, Colombia, Mexico, and Peru). Sources: Bloomberg, Haver Analytics, National Statistical Institutes, and Central Banks. 18

19 Rising Global Uncertainty and Risks 19

20 The European Epicenter Deeper and broader concerns about debt viability 120% General Goverment Gross Debt and Fiscal Stance As a % of GDP and as a % of Potential GDP General Goverment Gross Debt (% of GDP) 100% 80% 60% 40% 20% Ireland US Portugal UK Spain France Brazil Peru Argentina 0% -12% -10% -8% -6% -4% -2% 0% 2% 4% General Goverment Structural Balance (% potential GDP) Chile Source: IMF WEO (April 2011) 20

21 The European Epicenter From drama to trauma France UK CDS (5 years) in Europe In Basis Points Ireland+Greece+Portugal Spain Italy Aug-10 Aug-10 Sep-10 Oct-10 Nov-10 Nov-10 Dec-10 Jan-11 Jan-11 Feb-11 Mar-11 Mar-11 Apr-11 May-11 May-11 Jun-11 Jul-11 Aug-11 Note: The average CDS is computed for Ireland, Greece and Portugal. Source: Bloomberg 21

22 The European Epicenter Reversal of fortune! Greece Portugal Venezuela Argentina Ukrain Spain Italy Hungary Vietnam Croatia avg Romania Bulgaria Belgium Tukey Poland Kazakhastan Russia France Indonesia Phillipines South Africa Slovak Rep Peru Thailand Brazil Colombia Mexico Korea Panama Malaysia Chile Germany Sweden Global Sovereign CDS Aug-2011, in basis points Argentina Venezuela Ukrain Kazakhastan Tukey Phillipines Indonesia Colombia Panama Peru Vietnam Brazil Avg Russia Romania South Africa Bulgaria Mexico Croatia Thailand Hungary Korea Malaysia Chile Poland Italy Greece Slovak Rep Portugal Spain Belgium France Germany Sweden Global Sovereign CDS Dec-2007, in basis points Source: Own calculation based on Bloomberg 22

23 The U.S. Epicenter Still well below potential and a risk of a double dip 130 US Economic Activity GDP Index base 100 = Iq GDP Index Trend 90 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Source: National sources 23

24 The U.S. Epicenter A threat of a double dip? Keynes or Fischer? 6.0% GDP and Unemployment in the US GDP QpQ SAAR %, Unemployment as a % of 12.0% 4.0% 10.0% 2.0% GDP QoQ SAAR 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Mar-06 GDP QoQ SAAR % Unemployment (rhs) Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun % 6.0% 4.0% 2.0% 0.0% Unemployment Rate ISM Index Industrial Production and ISM Index Industrial Production (YoY %) ISM Index Industrial Production (% YoY, rhs) 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Industrial Production (YoY) Source: National sources. 24

25 The U.S. Epicenter Narrowing room for policy maneuvering 3,000 Other The FED Balance Sheet - Assets Side Factors Affecting Reserve Balances, US$ Billion 2,500 Central Bank Liquidity Swaps New Program Portfolio 2,000 1,500 Loans and Discounts Including Float Term Auction Facility (TAF) Treasury Securities 8.0% FED Funds Rate and Taylor Rule Estimation 1, % % 0 2.0% Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May % -2.0% -4.0% -6.0% Spread Taylor Rule Rate Estimation (Bloomberg Model) FED Fund Rate Jul-91 Oct-92 Jan-94 Apr-95 Jul-96 Oct-97 Jan-99 Apr-00 Jul-01 Oct-02 Jan-04 Apr-05 Jul-06 Oct-07 Jan-09 Apr-10 Jul-11 Source: National sources. 25

26 The U.S. Epicenter The downgrade and the swing in market sentiment Lehman Briothers Market Trends and Volatility VIX Index and S&P 500 QEI VIX Index S&P 500 (rhs) US Flash downgrade Crash/ PIGS Japan Jackson Hole (QEII) Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Source: Bloomberg 26

27 The U.S. Epicenter The downgrade and global financial coupling Stock Markets: 2011 In USD, Index base 100 = Jan Jan-11 Jan-11 Brazil S&P 500 Japan UK Germany France Jan-11 Feb-11 Feb-11 Mar-11 Mar-11 Apr-11 Apr-11 May-11 May-11 Jun-11 Jun-11 Jul-11 Jul-11 Jul-11 Percent 100% 90% 80% 70% 60% 50% Emerging Market Asset Returns and Common Factors Average R-Squared from Country Regressions Early Period ( ) Late Period (Jan-05 to Jul-08) Crisis (Aug-08 to Apr-09) 40% 30% 20% 10% 0% Equity Foreign Exchange CDS Spreads Source: Bloomberg 27

28 The U.S. Epicenter Downgraded but still the safe haven 1800 Gold and US T % Gold US T10 (rhs) 3.5% % % Japan Currencies: 2011 Index base 100 = 1-Jan-2011 UK US-EUR Brazil 1200 Jan-11 Jan-11 Feb-11 Feb-11 Mar-11 Mar-11 Mar-11 Apr-11 Apr-11 May-11 May-11 Jun-11 Jun-11 Jul-11 Jul-11 Aug % Dec-10 Jan-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Source: Bloomberg 28

29 Whither LAC? 29

30 Benign scenario: real decoupling continues Can LAC turn cyclical recovery into higher trend growth? Successful management of the cycle is essential to break free from the historical boom-bust pattern LAC bumps against structural speed limits at low growth rates Productive capacity in LAC lacks the efficiency and flexibility to accommodate robust long-run growth rates Could the region avoid the natural resource curse The volatility trap The enclave trap The rent seeking trap and turn natural resources into a blessing? It is all about saving (for stabilization and asset building), diversification, and institutions 30

31 LAC has experienced 100 years of growth solitude 60% 50% Gold Standard Period One Hundred Years of Solitude GDP Per Capita Relative to the US, Weighted Averages Interwar Period Import Substitution Lost Decade Washington Consensus Washington Dissensus 40% 30% 20% LAC 10% East Asian Tigers / US 0% Notes: Note: The was group. Source: of East IFM s Asian IFS tigers includes Hong Kong (China), Indonesia, Malaysia, Republic of Korea, Singapore, Thailand, and Taiwan (China). Maddison ( ) was used from 1900 to We used the Real Per Capita GDP growth from WDI to calculate the levels from 2006 to Source: LCRCE Staff calculations based on Maddison (2007, 2009) and WDI 31

32 Post-WWII growth in LAC, by country groups 80% Diverging 50% Semi-Converging 70% 45% 60% 40% 35% 50% 30% 40% 25% 30% 20% 20% 15% 10% 10% 5% 0% 0% Venezuela, RB Argentina Uruguay Chile Dominican Republic 60% Non-Converging 40% Fluctuating 50% 35% 30% 40% 25% 30% 20% 20% 15% 10% 10% 5% 0% % Colombia Guatemala El Salvador Bolivia Paraguay Mexico Brazil Note: Maddison ( ) was used from 1900 to We used the Real Per Capita GDP growth from WDI to calculate the levels from 2006 to Source: LCRCE Staff calculations based on Maddison (2007, 2009) and WDI 32

33 Bad scenario: global downward re-coupling How much can LAC s new immune system resist? Robust monetary policy frameworks in LAC, mostly First line of defense in shock absorption: e-rate flexibility and countercyclical monetary policy (LAC has earned it!) How good are LAC s fiscal buffers? Comfortable public debt levels but now is the time for more fiscal savings How good are LAC s financial system buffers? Strong capital and liquidity positions but have systemic risks been brewing in the past year or so? How good are LAC s social safety nets? Ability to scale up social assistance programs varies widely in the region Social insurance frameworks are the weak link 33

34 Thank you 34

35 constrained by insufficiently redistributive fiscal 35