11

ROUNDTABLE POLICYMAKER ROUNDTABLE POLICYMAKER DISCUSSION: The Financial AngleDISCUSSION: The Financial Angle

Guillermo A. CalvoGuillermo A. CalvoIADB, University of Maryland and NBERIADB, University of Maryland and NBER

October 24, 2003October 24, 2003

22

OVERVIEW OF PRESENTATIONOVERVIEW OF PRESENTATION

The last five years have witnessed a marked The last five years have witnessed a marked slowdown in LAC growthslowdown in LAC growth

which has led to questioning the effectiveness of which has led to questioning the effectiveness of Reforms that took place in the 1990s.Reforms that took place in the 1990s.

However, the debate tends to abstract from factors However, the debate tends to abstract from factors that are that are external to the regionexternal to the region..

In particular, the debate seems to ignore the serious In particular, the debate seems to ignore the serious turmoil in the Bond Market for EMs brought about by turmoil in the Bond Market for EMs brought about by the the Russian 1998 crisisRussian 1998 crisis,,

and which may lie behind poor growth performance.and which may lie behind poor growth performance.

CAPITAL FLOWS AFTER

THE RUSSIAN CRISIS

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

Ma

r-9

6

Se

p-9

6

Ma

r-9

7

Se

p-9

7

Ma

r-9

8

Se

p-9

8

Ma

r-9

9

Se

p-9

9

Ma

r-0

0

Se

p-0

0

Ma

r-0

1

Se

p-0

1

Ma

r-0

2

Se

p-0

2

Ma

r-0

3

-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

0

20000

40000

60000

80000

10000019

97-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

LAC-7 Capital Flows(4 quarters, millions of US dollars)

Russian Crisis

Institute of International Finance ForecastsIncludes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

-13000

-11000

-9000

-7000

-5000

-3000

-1000

1000

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

LAC-7: Current Account Adjustment(4 quarters, millions of US dollars)

Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela

% GDP

Russian Crisis

Deleveraging in LAC-7 (Financial flows in billions of real US dollars, cumulative since 1990)

0

50

100

150

200

Ene

-90

Ene

-91

Ene

-92

Ene

-93

Ene

-94

Ene

-95

Ene

-96

Ene

-97

Ene

-98

Ene

-99

Ene

-00

Ene

-01

Ene

-02

Ene

-03

Russian Crisis

LAC-7: Capital Flows & Bank Credit (Cumulative financial flows in billions of real US dollars since 1990 & real bank credit, Set-98=10)

Re

al D

om

est

ic B

an

k C

red

it (s

et

98

=1

00

)

80

85

90

95

100

Mar

-98

Jul-9

8

Nov

-98

Mar

-99

Jul-9

9

Nov

-99

Mar

-00

Jul-0

0

Nov

-00

Mar

-01

Jul-0

1

Nov

-01

Mar

-02

Jul-0

2

Nov

-02

Mar

-03

110

130

150

170

190

210

230

Cumulative Financial Flows

Domestic bank credit

Cum

mul

ativ

e fin

anci

al f

low

s

Russian Crisis

Deleveraging in LAC-7(Cumulative financial flows in billions of real US dollars since 1990 and EMBI+ adj. for Argentina)

110

130

150

170

190

210

230

Jun-

97

Dic

-97

Jun-

98

Dic

-98

Jun-

99

Dic

-99

Jun-

00

Dic

-00

Jun-

01

Dic

-01

Jun-

02

Dic

-02

Jun-

03

300

500

700

900

1100

1300

1500Russian Crisis

EMBI+

ENRON effect

Cumulative financial flows

Cum

mul

ativ

e fin

anci

al f

low

s

EM

BI+

adj

. for

Arg

entin

a

300

500

700

900

1100

1300

1500

1700

Jun-

97

Dic

-97

Jun-

98

Dic

-98

Jun-

99

Dic

-99

Jun-

00

Dic

-00

Jun-

01

Dic

-01

Jun-

02

Dic

-02

Jun-

03

35

55

75

95

115

135

155

LAC-7: Spreads & Domestic Interest Rates (EMBI+ adj. for Argentina and domestic lending rates)

Includes: Brazil, Chile, Colombia, Mexico, Peru & Venezuela

EM

BI+

adj

. for

Arg

entin

a

Dom

estic

lend

ing

rate

s (J

une

1998

=10

0)

Interest Rates

Spread

Russian Crisis

THE REAL SIDE

LAC-7 Business Cycle: 1997-2003(s.a. GDP, annualized quarterly growth rate, Venezuela excluded)

Recession Recovery Stalling Recovery

-5%

-3%

-1%

1%

3%

5%

7%

19

97

.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

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

Jun-

97

Dic

-97

Jun-

98

Dic

-98

Jun-

99

Dic

-99

Jun-

00

Dic

-00

Jun-

01

Dic

-01

Jun-

02

Dic

-02

Jun-

03

LAC-7: Labour Market (s.a. unemployment, simple average, excluding Venezuela)

Includes: Argentina, Brazil, Chile, Colombia and Mexico

Recession Recovery Stalling Recovery

LAC-7 Investment Cycle: 1997-2003(s.a. investment, annualized quarterly growth rate, Venezuela excluded)

Recession Recovery Stalling Recovery

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

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

Includes: Argentina, Brazil, Chile, Colombia, Mexico and Peru

(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

1616

OUTLOOKOUTLOOK

The capital market looks much more favorable for The capital market looks much more favorable for EMs.EMs.

Delevaraging and large real depreciation should help Delevaraging and large real depreciation should help LAC to take advantage of improved capital market LAC to take advantage of improved capital market conditions.conditions.

This positive phase should be utilized to lessen This positive phase should be utilized to lessen financial vulnerabilities by:financial vulnerabilities by:financial reformfinancial reformtrade openingtrade openingmonetary arrangements, e.g., currency unions.monetary arrangements, e.g., currency unions.