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Presentation by RIcardo V. Lago II Cuzco Conference : " International Capital Flows : Old and New Debates" Conference organized by Reinventing Bretton Woods, G-24 - Central Reserve Bank of Peru
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Ricardo V. Lago
“PERU’s TWELVE BEST KEPT SECRETS ”
Reinventing Bretton Woods/ G-24 /BCRP
CUZCO 19-20 July , 2010
THE AVALANCHE OF DOLLARS POURING ONTO PERU
PERU :
PERFORMANCE 2008-10
PERU’S SUPERIOR PERFORMANCE :MY CONCLUSION IS THAT MACROECONOMIC
PERFORMANCE DEPENDED CRITICALLY ON :
1 .Whether the authorities were able to maintain exchange and interest rate stability. I look at daily data during period of maximum turbulence
2. Whether the authorities were able to maintain positive credit flows to the private sector
ANALYTICAL FRAMEWORK
Mundell-Fleming IS-LM-BP Rudi Dornbusch ( 1976 )
Exchange rate overshooting model t = 0 : before the Crisis
M (o) = p { C - a r + b y } C= Highly speculative money demand
t= 1 : the crisis hits C = Flight to safety M(1) = p { -a r+ by }
C= Excess supply of domestic money = excess demand for dollars
PERIOD OF MAXIMUM TURBULENCE
Period Sept 7th, 08 ( Fannie and Freddy ) to March 06 , 2009 ( Trough of US Stock Market)
Exchange rates for 4 countries normalized at 100 on Sept 7th , 08
FREQUENCY DISTRIBUTION
VARIABLE 1 : LEVEL OF THE EXCHANGE RATE
Peru versus Brazil
0
10
20
30
40
95
98
101
104
107
110
113
116
119
122
125
128
131
134
137
140
143
146
149
152
155
Po
rcen
taje
Índice del tipo de cambio
Perú: frecuencia relativa
0
10
20
30
40
95
98
101
104
107
110
113
116
119
122
125
128
131
134
137
140
143
146
149
152
155
Po
rcen
taje
Índice del tipo de cambio
Brasil: frecuencia relativa
Peru versus Chile
0
10
20
30
40
95
98
101
104
107
110
113
116
119
122
125
128
131
134
137
140
143
146
149
152
155
Po
rcen
taje
Índice del tipo de cambio
Perú: frecuencia relativa
0
10
20
30
40
95
98
101
104
107
110
113
116
119
122
125
128
131
134
137
140
143
146
149
152
155
Po
rcen
taje
Índice del tipo de cambio
Chile: frecuencia relativa
Peru versus Mexico
0
10
20
30
40
95
98
101
104
107
110
113
116
119
122
125
128
131
134
137
140
143
146
149
152
155
Po
rcen
taje
Índice del tipo de cambio
Perú: frecuencia relativa
0
10
20
30
40
95
98
101
104
107
110
113
116
119
122
125
128
131
134
137
140
143
146
149
152
155
Po
rcen
taje
Índice del tipo de cambio
México: frecuencia relativa
EXCHANGE RATES LEVELS
“PERU’s TWELVE BEST KEPT SECRETS ”
DON’T TELL ANYBODY WE HAVE MORE DOLLARS COMING IN THAN WE CAN HANDLE ………
`
8 MACROECONOMIC SECRETS
4 STRUCTURAL SECRETS
Peru in 1990
Close to becoming a failed State
Cambodia on the eve of the takeover by the Khmer Rouge
EIGHT MACROECONOMIC SECRETS
SECRET # 1
PERU’S SOL IS STRONGER THAN CHINA’S YUAN
NET INTERNATIONAL RESERVES
SECRET # 2
SECREST # 2
PERU’S BALANCE SHEET IS AS GOOD AS IT GETS
SECRET # 1
SECRET # 3
PERU’S BANKING SYSTEM IS SMALL BUT VERY STRONG
SECRET # 1
SMALL IS BEATIFUL
BANCO DE CREDITO WAS ABLE TO FLOAT BONDS INTERNATIONALLY IN DECEMBER 2008
GOOD SUPERVISION FEW DERIVATIVES AS A SHARE OF GDP
1/5 of SPAIN BANKING SYSTEM 1/10 of UK BANKING SYSTEM
SECRET # 4
PERU’S BANKING SYSTEM IS UNDER-MORTGAGED
MORTGAGE EXPOSURE
110,000 MORTGAGES
For US$ 3.2 billon or 8 % of BANKING SYTEM BALANCE SHEET
SECRET # 5
SCOPE FOR COUNTER-CYCLICAL POLICIES
FISCAL STIMULUS
FISCAL STIMULUS = ABOUT 2.2% of GDP
MONETARY STIMULUS
ANALYTICAL FRAMEWORK
Mundell-Fleming IS-LM-BP Rudi Dornbusch ( 1976 )
Exchange rate overshooting model t = 0 : before the Crisis
M (o) = p { C - a r + b y } C= Highly speculative money demand
t= 1 : the crisis hits C = Flight to safety M(1) = p { -a r+ by }
C= Excess supply of domestic money = excess demand for dollars
SECRET # 6
PORTFOLIO DIVERSIFICATION OF EXPORTS
CLOSE to ½ of TOTAL EXPORTS : COPPER AND GOLD
HISTORICAL CORRELATION IN THE LAST 30 YEARS IS VERY LOW 10%
IN PERIODS OF HIGH UNCERTAINTY CORRELATION IS NEGATIVE
SECRET # 7
POLICYMAKERS
SECRET # 8
PIPELINE OF FDI
FDI
US$ 25 Billion UNDER EXECUTION
U$ 30 Billion in PIPELINE
FOUR STRUCTURAL SECRETS
SECRET # 9
20 YEARS OF CONTINUED ECONOMIC REFORMS
SECRET # 10
POPULATION SUPPORT THE MARKET AND MISTRUST GOVERNMENT
The Situation in 1990
Massive default including with the IFIs Bout of Hyperinflation
12 months ending August 1990 ( 8,000 %)Highest daily rate 114%
Depression : 25 % cumulative drop in GDP 1988-1990
Widespread terrorist insurgency :The Shinning Path
SECRET # 11
SPECTACULAR SUCCESS IN THE FIGHT AGAIST POVERTY
SECRET # 12
LOW RISK OF RETURN TO POPULISM
FOR FURTHER INFORMATION ON PERU ‘S SECRETS VISIT “HATUNRUMIYOC” STREET FIND THE CORNERSTONE OF THE
TWELVE ANGLES STUDY THE HISTORY OF THE PALACE
OF INKA ROCA AND HENCE READ THE NOVEL “ LOS RIOS
PROFUNDOS “” OF JOSE MARIA ARGUEDAS TO UNDERSTAND THE SYMBOLISM OF THE CORNERSTONE
THE END
