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March 28, 2004March 28, 2004
LAC-7 Macroeconomic Outlook
LAC-7 Macroeconomic Outlook
I.I. Post-Adjustment Latin America: Back in Vogue with Post-Adjustment Latin America: Back in Vogue with International InvestorsInternational Investors
II.II. LAC-7 Macroeconomic Outlook: a Rosier Scenario LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004for 2004
III.III. Risks Ahead: the Specter of Fed TighteningRisks Ahead: the Specter of Fed Tightening
IV.IV. The Banking Sector: Introduction to SeminarThe Banking Sector: Introduction to Seminar
OUTLINE
I.I. Post-Adjustment Latin America: Back in Vogue with Post-Adjustment Latin America: Back in Vogue with International InvestorsInternational Investors
II.II. LAC-7 Macroeconomic Outlook: a Rosier Scenario LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004for 2004
III.III. Risks Ahead: the Specter of Fed TighteningRisks Ahead: the Specter of Fed Tightening
IV.IV. The Banking Sector: Introduction to SeminarThe Banking Sector: Introduction to Seminar
OUTLINE
200
400
600
800
1000
1200
1400
Jun-
97
Jun-
98
Jun-
99
Jun-
00
Jun-
01
Jun-
02
Jun-
03
35
55
75
95
115
135
155
Interest Rates
Spread
Spreads & Domestic Interest Rates
Russian Crisis
Do
me
stic
len
din
g r
ate
s
EM
BI+
ad
j. fo
r A
rge
ntin
a
(domestic lending rates, June 1998=100)
200
400
600
800
1000
1200
1400
Jun-
97
Jun-
98
Jun-
99
Jun-
00
Jun-
01
Jun-
02
Jun-
03
Emerging Markets Spreads & Domestic Interest Rates
Includes: Brazil, Chile, Colombia, Mexico, Peru & Venezuela
EM
BI+
ad
j. fo
r A
rge
ntin
a
Russian Crisis
Pre- Russian Crisis Spread
Emerging Markets Spreads(EMBI+ adj. for Argentina, in bp)
ENRON effect
0
20000
40000
60000
80000
100000
1997
-I
1997
-III
1998
-I
1998
-III
1999
-I
1999
-III
2000
-I
2000
-III
2001
-I
2001
-III
2002
-I
2002
-III
2003
-I
2003
-III
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
LAC-7 Total Capital Flows(4 quarters, millions of US dollars and in % of GDP)
Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela
Russian Crisis
% GDP (LAC-7 average)
Post-Adjustment Period
-10
40
90
140
190
240
290
En
e-9
0
En
e-9
2
En
e-9
4
En
e-9
6
En
e-9
8
En
e-0
0
En
e-0
2
En
e-0
4
LAC-7: External & Domestic Deleveraging
Russian Crisis
External Deleveraging(Financial flows in billions of real US dollars, cumulative since 1990)
79
84
89
94
99
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
150
170
190
210
230
250
270
Re
al D
om
est
ic B
an
k C
red
it (s
et
98
=1
00
)
Cu
mm
ula
tive
fin
an
cia
l flo
ws
Cumulative Financial Flows
Domestic bank credit
External &Domestic Deleveraging(real bank credit, Set-98=10)
LAC-7: Exchange Rate & International Reserves
Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
90
110
130
150
170
190
210
Jun-
98
Dic
-98
Jun-
99
Dic
-99
Jun-
00
Dic
-00
Jun-
01
Dic
-01
Jun-
02
Dic
-02
Jun-
03
Dic
-03
Nominal & Real Exchange Rate(vis-à-vis US dollar)
Real exchange rate
Nominal exchange rate
125000
135000
145000
155000
165000
175000
185000
195000
Jun
-98
Jun
-99
Jun
-00
Jun
-01
Jun
-02
Jun
-03
Post-Adjustment Period
Stock of International Reserves(millions of US dollars)
Post-Adjustment Period
+16%
+8%
LAC-7: Current Account Adjustment(4 quarters, millions of US dollars and % of GDP)
Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela
-14000
-12000
-10000
-8000
-6000
-4000
-2000
0
20001
99
7-I
19
97
-III
19
98
-I
19
98
-III
19
99
-I
19
99
-III
20
00
-I
20
00
-III
20
01
-I
20
01
-III
20
02
-I
20
02
-III
20
03
-I
20
03
-III
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
% GDP (LAC-7 average)
Russian Crisis Post-Adjustment Period
LAC-7: Asset Prices (Local stock market indices & bond prices, in US dollars, Oct. 2002=100)
Loca
l Sto
ck M
arke
t ind
ex (
US
$)
Bon
d P
rice
inde
x
*Includes: Argentina, Brazil, Colombia, Mexico, Peru & Venezuela
95
105
115
125
135
145
155E
ne-0
2
Mar
-02
May
-02
Jul-0
2
Sep
-02
Nov
-02
Ene
-03
Mar
-03
May
-03
Jul-0
3
Sep
-03
Nov
-03
95
115
135
155
175
195
215
235
255
Stock Market Indices*
Bond Price Indices*
Post-Adjustment Period
-3%
-2%
-1%
1%
2%
3%
4%
5%
6%
7%
8%M
ar-9
7
Sep
-97
Mar
-98
Sep
-98
Mar
-99
Sep
-99
Mar
-00
Sep
-00
Mar
-01
Sep
-01
Mar
-02
Sep
-02
Mar
-03
Sep
-03
-4%
-3%
-2%
-1%
0%
1%
2%
LAC-7: Business Cycle and Financial Flows (GDP and financial flows, last four quarters)
GD
P (
yoy
% c
hang
e)
Fin
an
cia
l Flo
ws
(% G
DP
)
GDP
Financial Flows
Post-Adjustment PeriodRussian Crisis
LAC-7: Labour Market (s.a. unemployment, simple average)
Includes: Argentina, Brazil, Chile, Colombia, Mexico,Peru and Venezuela
Post-Adjustment PeriodAdjustment Period
5
6
7
8
9
10
11
12
13
Jun-
98
Dic
-98
Jun-
99
Dic
-99
Jun-
00
Dic
-00
Jun-
01
Dic
-01
Jun-
02
Dic
-02
Jun-
03
Dic
-03
LAC-7 excluding VenezuelaLAC-7
I.I. Post-Adjustment Latin America: Back in Vogue with Post-Adjustment Latin America: Back in Vogue with International InvestorsInternational Investors
II.II. LAC-7 Macroeconomic Outlook: a Rosier Scenario LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004for 2004
III.III. Risks Ahead: the Specter of Fed TighteningRisks Ahead: the Specter of Fed Tightening
IV.IV. The Banking Sector: Introduction to SeminarThe Banking Sector: Introduction to Seminar
OUTLINE
(US HY corporate bonds, bps over US Treasuries, and EMBI+ adjusted for Argentina)
300
400
500
600
700
800
900
1000
1100
1200
Jul-0
1
Sep
-01
Nov
-01
Ene
-02
Mar
-02
May
-02
Jul-0
2
Sep
-02
Nov
-02
Ene
-03
Mar
-03
May
-03
Jul-0
3
Sep
-03
Nov
-03
Ene
-04
200
300
400
500
600
700
800
900
1000
EM
BI+
Ad
just
ed
fo
r A
rgen
tin
a
Hig
h Y
ield
B
on
ds
ENRON effectEMBI+
(adjusted for Argentina)
US HY Corporate spread
International Financial Conditions for EMs
Pre Asian Crisis Spread
-50000
-40000
-30000
-20000
-10000
0
10000
20000
30000
40000
50000
19
97
-I
19
98
-I
19
99
-I
20
00
-I
20
01
-I
20
02
-I
20
03
-I
20
04
-I0
20000
40000
60000
80000
100000
1997
-I
1997
-IV
1998
-III
1999
-II
2000
-I
2000
-IV
2001
-III
2002
-II
2003
-I
2003
-IV
2004
-III
LAC-7 Capital Flows(4 quarters, millions of US dollars)
Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
Russian Crisis
Total Capital Flows Financial Flows
Russian Crisis
IIF Forecasts
IIF Forecasts
50
70
90
110
130
150
170
190
Oct
-97
Oct
-98
Oct
-99
Oct
-00
Oct
-01
Oct
-02
Oct
-03
Commodity Prices(1997.II=100)
Prim
ary
Co
mm
od
itie
s &
Fo
od
Oil Food
Non oil primary commodities
Non Oil Commodity PricesOil Pices
70
75
80
85
90
95
100
Oct
-97
Oct
-98
Oct
-99
Oct
-00
Oct
-01
Oct
-02
Oct
-03
Source: IMF
Source: LatinFocus Consensus Forecasts
(GDP growth forecasts weighted by GDP and LAC exports)G-3 Growth Forecasts
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2001 2002 2003 2004
Weigted by GDP
Weigted by LAC Exports
0 1 2 3 4 5
Japan
Euro Area
USA
2003 2004
(GDP yoy variation in %)LAC-7 Growth Forecasts
Source: Latin Focus Consensus Forecasts
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2002 2003 2004
Per CountryLAC-7
3 4 5 6 7
Mexico
Colombia
Brazil
Peru
Chile
Argentina
VenezuelaRebound Countries
(Investment yoy variation in %)LAC-7 Investment Forecasts
Source: Latin Focus Consensus Forecasts
-10
-8
-6
-4
-2
0
2
4
6
8
10
2002 2003 2004 3 8 13 18
Peru
Mexico
Brazil
Chile
Colombia
Venezuela
Argentina
Rebound Countries
Per CountryLAC-7
(Unemployment rate in %)LAC-7 Unemployment Forecasts
Source: Latin Focus Consensus Forecasts
10.2
10.4
10.6
10.8
11.0
11.2
11.4
11.6
11.8
2002 2003 2004 0 5 10 15
Mexico
Chile
Peru
Brazil
Venezuela
Colombia
Argentina
2003 2004
Per CountryLAC-7
I.I. Post-Adjustment Latin America: Back in Vogue with Post-Adjustment Latin America: Back in Vogue with International InvestorsInternational Investors
II.II. LAC-7 Macroeconomic Outlook: a Rosier Scenario LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004for 2004
III.III. Risks Ahead: the Specter of Fed TighteningRisks Ahead: the Specter of Fed Tightening
IV.IV. The Banking Sector: Introduction to SeminarThe Banking Sector: Introduction to Seminar
OUTLINE
200
400
600
800
1000
1200
1400
1600
1800
Dic
-93
Dic
-94
Dic
-95
Dic
-96
Dic
-97
Dic
-98
Dic
-99
Dic
-00
Dic
-01
Dic
-02
Dic
-03
0
1
2
3
4
5
6
7
EM
BÎ+
FE
D F
unds
Rat
e
(EMBI+ and FED Funds Rate)Emerging Markets and the FED
FED Funds Rate
EMBI+ Spread
Russian Crisis
The impact of the Fed Funds rate on Emerging Markets spreads during periods of Fed tightening: per 100 bp increase in the Fed Funds rate EM spreads increase 150 bp*
Lowest rate in 45 years
*Source: UBS estimations
FED tightening period: Dec 1993 - June 1995
Fed’s Open Market Committee January Statement
The FOMC changed the wording of its previous statement from:
The Fed’s Open Market Committee (FOMC) meeting took place January 27th-28th and the minutes were made public on January 28th
“keep rates low for a considerable period”
“be patient in removing its current policy accommodation”
to
99
101
103
105
107
109
111
23/1
0/03
06/1
1/03
20/1
1/03
04/1
2/03
18/1
2/03
01/0
1/04
15/0
1/04
29/0
1/04
300
310
320
330
340
350
360
370
380
390
400
23/1
0/03
30/1
0/03
06/1
1/03
13/1
1/03
20/1
1/03
27/1
1/03
04/1
2/03
11/1
2/03
18/1
2/03
25/1
2/03
01/0
1/04
08/0
1/04
15/0
1/04
22/0
1/04
29/0
1/04
EM
BI+
adj
. for
Arg
entin
a
Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela
LAC-7: Sell-Off After Fed Statement
EMBI Spreads EMBI Bond Prices(Sovereign spread, b.p.) (23-10-2003 = 100, US$)
Current Jan-09 Variation
Argentina 5845 5268 +577
Brazil 537 396 +141
Perú 361 255 +106
Venezuela 643 570 +73
Colombia 434 361 +73
Mexico 205 178 +27
Chile 94 83 +11
EMBI 349 304 +45
Current Jan-09 Variation
Argentina 68 74 -8%
Brazil 381 404 -6%
Peru 426 449 -5%
Venezuela 378 391 -3%
Colombia 213 219 -3%
Mexico 284 286 -1%
Chile 164 165 -1%
EMBI 252 261 -4%
Jan-09
Jan-09
Fed Statement
Fed Statement
97.0
97.5
98.0
98.5
99.0
99.5
100.0
100.5
101.0
23/1
0/03
06/1
1/03
20/1
1/03
04/1
2/03
18/1
2/03
01/0
1/04
15/0
1/04
29/0
1/04
Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela
Current Jan- 09 Depreciation
Chile 595 558 +7%
Mexico 11 11 +4%
Brazil 3 3 +3%
Argentina 3 3 +3%
Peru 3 3 +1%
Venezuela* 3027 2890 +5%
Colombia 2751 2768 -1%
* Parallel Market Exchange Rate 99
102
105
108
111
114
117
120
123
126
129
23/1
0/03
06/1
1/03
20/1
1/03
04/1
2/03
18/1
2/03
01/0
1/04
15/0
1/04
29/0
1/04
Current Jan-09 Variation
Brasil 192 215 -11%
Peru 195 210 -7%
Argentina 214 224 -4%
Chile 141 144 -2%
Mexico 158 149 +6%
Venezuela 353 325 +8%
Colombia 169 150 +13%
Nominal Exchange Rates Stock Markets(23-10-2003 = 100, domestic currency per dollar) (23-10-2003 = 100, local currency)
LAC-7: Sell-Off After Fed Statement
Jan-09
Jan-09
Fed Statement Fed Statement
I.I. Post-Adjustment Latin America: Back in Vogue with Post-Adjustment Latin America: Back in Vogue with International InvestorsInternational Investors
II.II. LAC-7 Macroeconomic Outlook: a Rosier Scenario LAC-7 Macroeconomic Outlook: a Rosier Scenario for 2004for 2004
III.III. Risks Ahead: the Specter of Fed TighteningRisks Ahead: the Specter of Fed Tightening
IV.IV. The Banking Sector: Introduction to SeminarThe Banking Sector: Introduction to Seminar
OUTLINE
2626
Public Sector Banks, PSBPublic Sector Banks, PSB. Their share is large in LAC, . Their share is large in LAC, although it decreased in the second half of the 1990s.although it decreased in the second half of the 1990s.
Bank PrivatizationBank Privatization:: Before 1995Before 1995: Bolivia, Chile, Ecuador, Peru, Brazil and : Bolivia, Chile, Ecuador, Peru, Brazil and
Mexico. Mexico. After 1995After 1995: Argentina and Nicaragua.: Argentina and Nicaragua.
Foreign BanksForeign Banks. Their share increased in the 1990s, especially . Their share increased in the 1990s, especially in Argentina Mexico and Peruin Argentina Mexico and Peru
Why the Change in Banking StructureWhy the Change in Banking Structure? Partly as a result of ? Partly as a result of crises that hit the regioncrises that hit the region
Argentina 1995: 32 banks closed & 37 merged.Argentina 1995: 32 banks closed & 37 merged.Colombia 1998-99: 4 banks closed & 3 merged.Colombia 1998-99: 4 banks closed & 3 merged.Mexico 1995-96: massive foreign bank entryMexico 1995-96: massive foreign bank entry
Banking Sector: Stylized Facts
2727
Public Sector Banks, PSBPublic Sector Banks, PSB. They tend to have weaker . They tend to have weaker balance sheets and profitability than their private sector balance sheets and profitability than their private sector counterparts counterparts
Thus, PBS may increase the probability that an external Thus, PBS may increase the probability that an external shock will lead to a crisis. However, a poorly shock will lead to a crisis. However, a poorly implemented privatization process may make the implemented privatization process may make the situation even worsesituation even worse
Foreign Banks, ProcyclicalForeign Banks, Procyclical? There is a lively debate ? There is a lively debate about this. The recent experience in Chile suggests that about this. The recent experience in Chile suggests that they may exacerbate capital outflows in times of crisis.they may exacerbate capital outflows in times of crisis.
Is Bank Privatization a Good Thing?
Public Sector Banks Around the World
0
10
20
30
40
50
60
70
80
90
100
Industrial
Countries
Sub-Saharan
Africa
Latin America
East Asia and
Pacific
Developing
Countries
East and Central
Europe
Middle East and
North Africa
South Asia
Sha
re o
f P
SB
Ass
ets
(%
)
1970
1985
1995
Source: IDB calculations based on data from La Porta et al. (2001)
2929
Public Sector Commercial BanksPublic Sector Commercial Banks
0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00%
Nicaragua
Guatemala
El Salvador
Chile
Colombia
Argentina
Brazil
Costa Rica
2000
1995
Source: IDB calculations based on bank superintendence data
Share of PSB assets (%)
3030
Foreign-Owned BanksForeign-Owned Banks
0 10 20 30 40 50 60 70 80
El Salvador
Guatemala
Costa Rica
Bolivia
Colombia
Brazil
Chile
Argentina
Peru
Mexico
2002
1995
Share of Foreign Owned banksSource: Own calculations based on superintendence data
* For Argentina 2001
3131
COMMERCIAL BANKS: Relationships Between COMMERCIAL BANKS: Relationships Between Public and Private BanksPublic and Private Banks
-2%-1%0%1%2%3%4%5%6%7%8%9%
Loans to PublicSector
Non PerformingLoans
Return onAssets
3232
CHILEAN BANKS: Foreign / Total Assets
0
1
2
3
4
5
6
7
1994 1995 1996 1997 1998 1999 2000 2001 2002
0
1
2
3
4
5
6
7
Domestic
Foreign
System
% %
Source: Caballero, Cowan and Kearns (2003)