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.