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© 2007 Europa Partners Ltd. All rights reserved.
The Ongoing Crisis in the USA:
Carlos A. Anderson
Should we worry about its impact on the Peruvian Economy?
Table of Contents
1. Decoupling Theory: Myth or reality?
2. Contagion Channels• Current Account• Financial Channel• The Dollar Channel
3. Scenarios & Their Likely Impact
4. Conclusions
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
Theory: Decoupling
World Trade Simplified: Trade between 4 main Blocks
1
USA EU
ASIA2
4
3
OTHER EMERGING COUNTRIEs
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
Dimensions in World Trade
Trade between 4 main Blocks (2007)
1
USA EU
ASIA
OTHER EMERGING COUNTRIEs
2
4
3
North America Exports: 9%Imports: 15%
Other Emerging EconomiesExports: 13%Imports: 10%
EuropeExports: 48% Imports: 48%
Asia and AustralasiaExports: 31%Imports: 28%
Note: Region 1 includes USA only; Region 2 includes Europe and Canada; Region 3 includes Asia and Australasia and Region 4 is formed by the rest of the worldSource: GMID Euromonitor International
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
Since 2002 World Trade has duplicated
100
116
141
161
185
210
80
100
120
140
160
180
200
220
2002 2003 2004 2005 2006 2007
World Exports(2002=100)
Source: GMID Euromonitor International
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
Decoupling for Some, not All
GDP Growth correlation Latin America vs. USA
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Impact of Recessions …
Impact of USA Recessions usually felt in Latin America
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
And Slowdowns
While USA slowdowns have a limited effect Latin America
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
Some Decoupling Remarks
1. Decoupling varies from region to region and country to country
2. Past events will not necessarily repeat themselves
3. However, sheer size of the USA and its still undisputed economic leadership in the world imply that a crisis in the USA will be felt throughout the world.
4. We will now focus on the mechanisms behind and the extent of the possible impact in Peru.
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
Contagion Channels
1. Current account• Direct trade with USA • Remittances • China & Commodity Prices
2. Financial System• Banking system and Foreign Banks• Capital Markets
3. Dollar Channel• Exchange rate fluctuations
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
Direct Trade with USA & China
29.1%30.9%
24.1%
19.0%
9.8% 10.9%9.5%
11.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2004 2005 2006 2007
USA China
Source: Promperu
Share US in Peruvian exports is decreasing lower potential impact
China and other emerging economies increase their participation
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
Remittances & FDI
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Volatility in Development Flows
Low volatility Remittances flow most likely stable
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Commodities Spur Peruvian Exports
0
500
1,000
1,500
2,000
2,500
3,000
Ene00 Ene01 Ene02 Ene03 Ene04 Ene05 Ene06 Ene07
0%
10%
20%
30%
40%
50%
60%
70%
80%
Export. totales (mill. US$) Mineros/TotalTotal Exports (USD M) Mining Exports/Exports
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Commodities: Contribution to Exports & GDP
• Mining exports boom after 2003 share of GDP almost doubles from 10.4% in 2003 to 19.7 in 2007
• Experts as a share of GDP double between 2000 and 2007
M USD 2000 2001 2002 2003 2004 2005 2006 2007
GDP 53,323 53,935 56,756 61,342 69,735 79,485 93,027 109,069
Exports 6,955 7,026 7,714 9,091 12,809 17,368 23,800 27,956
Mining 4,804 4,730 5,369 6,356 9,199 12,950 18,374 21,493
Non Mining 2,150 2,295 2,345 2,734 3,611 4,418 5,426 6,463
CAGR
10.8%
22.0%
23.9%
17.0%
Mining / Exp. 69.1% 67.3% 69.6% 69.9% 71.8% 74.6% 77.2% 76.9%
Exp. / GDP 13.0% 13.0% 13.6% 14.8% 18.4% 21.9% 25.6% 25.6%
Mining 9.0% 8.8% 9.5% 10.4% 13.2% 16.3% 19.8% 19.7%
Non Mining 4.0% 4.3% 4.1% 4.5% 5.2% 5.6% 5.8% 5.9%
-
-
-
-
Source: IMF & Promperu
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
Commodity Prices are the Main Driver
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Price Metal Index2001=100
Source: Perspectivas del precio de los Metales. Apoyo Consultoría. Diciembre del 2006.
The Financial Channel: Foreign Banks in Peru
• Participation by Foreign Banks in Peru relatively low
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
Market Share of Foreign Banks in Local Banking SystemPercentage of Total Assets
The Capital Markets
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
may-07 jul-07 sep-07 nov-07 ene-08 mar-08 may-08-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
may-07 jul-07 sep-07 nov-07 ene-08 mar-08 may-08
Volatility IGBVL Volatility Dow Jones
Period Daily Weekly DJIA IGBVL
2006 H1 20.3% -3.3% 0.5% 1.5%
2006 H2 -1.0% 0.0% 0.4% 0.9%
2007 H1 15.5% 7.2% 0.5% 1.2%
2007 H2 47.3% 79.7% 0.9% 1.4%
2008 H1 10.6% 38.3% 1.0% 1.3%
Correlation Volatility
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The Dollar Channel
• The Impact through the exchange rate can be significant
• A US crises could lead to a dollar collapse, which would result in a much cheaper Dollar and a more expensive Peruvian Sol
• The possible impact on the Peruvian economy:
1. Exports to the US will fall
2. Remittances send from the US will be worth less
3. The international crisis will likely affect the worlds economic activity
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
2.6
2.7
2.8
2.9
3
3.1
3.2Sol versus Dollar (last year)
Source: BCRP
Scenarios
Impact on Peruvian Economy trough
Crisis USDirect
TradeRemittances
Commodity Demand & Prices
Banking System
Capital Markets
Dollar Channel
Moderate L/M L L/M L L/M L/M
Severe M L M/H L M M
• A moderate crisis will be felt through direct trade, lower demand for commodities combined with lower prices, and tightening of capital markets
• A severe crisis in the USA, with spillovers to the rest of the world including China, is the worst case scenario. Considerable lower demand for commodities combined with considerably lower prices as well as temporal investment stop as a result of higher interest rates could have considerable implications for Peru. An even weaker dollar will make exports to the US more expensive while imports will be cheaper and as a result the current account will worsen
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.
Conclusions
• Peru's exposure to US economy is important given current account channel, (trade and remittances) financial channel (effect on the Lima Bolsa) and the dollar channel.
• However, the impact of a US slowdown may be more reduced than in the past given:
1. Robust internal demand
2. Improvement of credibility and fiscal policies
3. The increasing role of the rest of the emerging countries in the worlds economy
Authorised and regulated by The Financial Services Authority.© 2007 Europa Partners Ltd. All rights reserved.