Overview of Latin America Based on the Latin American Economic Outlook 2009

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Javier Santiso, Director of the OECD Development Centre, presented in the most recent Emerging Market Network meeting an overview of Latin America based on the recently published Latin American …

Javier Santiso, Director of the OECD Development Centre, presented in the most recent Emerging Market Network meeting an overview of Latin America based on the recently published Latin American Economic Outlook 2009.

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  • 1. EmNet Quarterly Meeting Latin America Based on Latin American Economic Outlook 2009 Javier Santiso Director and Chief Economist OECD Development Centre Paris 5 December 2008
  • 2. The financial crisis: Should Latin America be worried? Historically speaking, yes: when the U.S. sneezes, Latin America catches cold Export Exposure to the US Effect of US Recessions on Latin American growth (change in average output gap during recessions) (Median for Region) United States 0 2% Latin America -0,5 1% 0% -1 -1% -1,5 -2% -2 -3% -4% -2,5 -5% -3 -6% Least exposed Most exposed Least exposed Most exposed -7% Industrial Countries Emerging Markets 1974-75 1980 1982 1991 2001 All So urce: Lane and M ilesi-Ferreti, 2006 So urce: IM F , 2007 Recessions
  • 3. The financial crisis: Should Latin America be worried? Current account channel: trade and remittances Latin American Exports (by destination) Remittances (%, annual growth) El Salvador Guatemala 100% 90% Mexico Latin America 25 80% 70% 20 60% 50% 15 40% 65% 10 30% 20% 5 10% 0% 0 2001 2002 2003 2004 2005 2006 2000 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 -5 2004 2005 2006 2007 2008 China EU US Rest of World Source: OECD Development Centre based on World Bank, November 2008 Source: OECD Development Centre based on WITS data, 2008
  • 4. The financial crisis: Should Latin America be worried? Financial channel: foreign banks in local markets Market share of Foreign Banks in local banking systems Structure of Mexican banks (% of total assets) (% of total assets) 90% 5% Mexican Banks 5% 80% 20% 70% BBVA 60% 11% 50% Santander 40% Citibank 30% 20% HSBC 10% 0% Scotiabank 20% 24% Mexico Argentina Brazil Peru Chile Colombia Venezuela Other Foreign Source: OECD Development Centre based on World Bank, November 2008 Source: OECD Development Centre based on WITS data, 2008 15% Source: OECD Development Centre based on National Sources and Credit Suisse, 2008 Source: OECD Development Centre based on National Sources and Credit Suisse, 2008
  • 5. Initial impact is limited, thanks to credible economic policies and high internal demand GDP (% annual growth) Output gap (%) Advanced countries Emerging countries Advanced countries Latin America Latin America 7 5 6 4 5 3 4 2 3 1 2 0 -1 1 -2 0 -3 -1 -4 -2 -5 2000 2001 2002 2003 2004 2005 2006 2007 2008 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: OECD Development Centre, based on IMF (WEO October 2008) Source: OECD Development Centre, based on IMF (WEO October 2008)
  • 6. But risks remain, depending on sensitivity to international economic conditions and inflation Industrial production (% annual growth) Inflation (% y-o-y) Chile Brazil United States Mexico Brazil Chile Mexico 10 10 9 8 8 6 7 4 6 2 5 0 4 -2 3 -4 2 -6 1 jan-06 jul-06 jan-07 jul-07 jan-08 jul-08 jan-06 jul-06 jan-07 jul-07 jan-08 jul-08 Source: OECD Development Centre, based on Thomson Datastream, 2008 Source: OECD Development Centre, based on Thomson Datastream, 2008
  • 7. GDP growth forecasts are on the downside, but still close to potential Slowdown is not necessarily recession GDP forecasts for 2009 GDP forecasts for 2009 in Latam (% annual growth) (% annual growth) September 08 October 08 November 08 Latin America Advanced economies 5 4 4,5 3,5 4 3 3,5 2,5 3 2 2,5 1,5 2 1 1,5 0,5 1 0 0,5 -0,5 0 2009 (April08) 2009 (July08) 2009 (Oct.08) 2009 (Nov.08) A rgentina M exico Venezuela Chile Co lo mbia B razil Latam Source: OECD Development Centre, based on IMF (WEO), 2008 Source: OECD Development Centre, based on Consensus Forecasts, 2008
  • 8. Latin America remains highly vulnerable to international capital markets’ volatility … Equity market (basis 100 = Nov.07) Nominal exchange rate (US$, basis 100 = Nov.07) Argentina Brazil Chile S&P500 Mexico Brazil Chile Mexico 125 140 115 130 105 95 120 85 110 75 65 100 55 90 45 35 80 nov.-07 jan.-08 mar-08 may-08 jul.-08 sept.-08 nov.-08 nov.-07 feb.-08 may-08 aug-08 nov.-08 Source: OECD Development Centre based on Thomson Datastream, 2008 Source: OECD Development Centre based on Thomson Datastream, 2008
  • 9. …but at least for the public sector, the sensibility has been reduced Spreads are now much less sensitive to external shocks Sovereign bond spreads and “global risk aversion” E MB I G loba l L a tAm vs. V IX (1998-2004) E MB I G loba l L a tAm vs. V IX (2005-2008) 1600 1600 E MB I G lobal L atA m (bp) 1400 E MB I G lobal L atA m (bp) 1400 to day 1200 1200 average 1000 1000 average 800 800 600 600 EM B I Latam = 27,57xVIX + 1 7,06 1 400 400 EMBI Latam = 7,9978xVIX +146,8 R 2 = 0,603 2 R = 0,5261 200 200 0 0 5 15 25 35 45 55 65 75 5 15 25 35 45 55 65 75 VIX index VIX index Source: OECD Development Centre based on Thomson Datastream, 2008 The VIX index (CBOE Volatility Index) is the implied volatility of S&P500 index options.
  • 10. Capital markets are differentiating between countrie and with respect to past sovereign debt crises Markets do not appear to be anticipating a crisis for ‘credible’ countries EMBI sovereign bond spreads (bp) Fees and Sovereign bond spreads (Primary marke Argentina Brazil Chile Mexico Venezuela 1,8 Brazil (T-1) Turkey (T-3) 1,6 2000 Argentina (T-3) Un d erwritin g s p read (% ) Argentina (T-2) 1,4 Argentina(T-1) 1800 1600 1,2 Russia (T-1) Turkey (T-1) 1400 1,0 Russia (T-2) 1200 0,8 Turkey (T-2) 1000 800 0,6 Brazil (T-2) 600 0,4 400 today 0,2 200 0 0,0 nov.-07 jan.-08 mar-08 may-08 jul.-08 sep.-08 nov.-08 0 100 200 300 400 500 600 700 800 900 Bond s pre ad (bas is points ) Source: OECD Development Centre based on Thomson Datastream, 2008 Source: OECD Development Centre based on Latin American Economic Outlook, 2008
  • 11. Why such confidence? Public debt management has improved External debt is falling and countries can increasingly borrow abroad in local currency External Public Bonds in Latin America “Original Sin Index” External Public Bonds over GNP External Public Bonds over Exports (right axis) 1,0 25 80 0,8 70 20 0,6 60 15 50 0,4 10 40 0,2 5 30 0,0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2007 - June 2008 Brazil Colombia Peru Uruguay Source: OECD Development Centre calculations Source: OECD Development Centre calculations based on World Bank, Global Development based on World Bank, Global Development Finance Finance database (2008). database (2008).
  • 12. Latin America’s fiscal performance has much improved over recent years Revenues and expenditures Fiscal policy measures Fiscal policy volatility Latin America OECD Latin America OECD Fiscal balance Total revenue Total expenditure Fiscal balancec Total revenue Total expenditure Total revenue Total expenditure Total revenue Total expenditure Fiscal balance Fiscal balancec 50 3.5 3.5 50 45 45 40 3.0 3.0 40 35 2.5 2.5 35 30 30 25 2.0 2.0 25 20 20 1.5 1.5 15 15 10 1.0 1.0 10 5 5 0.5 0.5 0 0 -5 0.0 0.0 -5 1990-2006 1990-1994 1995-1999 2000-2006 1990-2006 1990 -1994 1995 -1999 2000 - 2006 1990-2006 1990 -1994 1995 -1999 2000 - 2006 1990-2006 1990-1994 1995-1999 2000-2006 Source: OECD Development Centre calculations based on the Source: OECD Development Centre calculations based on the ECLAC ILPES Public Finance database for Latin America, and OECD ECLAC ILPES Public Finance database for Latin America, and OECD General Government Accounts data for OECD countries . General Government Accounts data for OECD countries .
  • 13. However, fiscal policy does little to reduce inequality in Latin America Gini coefficients of income inequality, before and after taxes and transfers Inequality before taxes and transfers 60 While taxes and transfers 50 40 reduce the inequality by 19 30 Gini points in Europe, the 20 difference is less than two 10 Gini points in Latin America 0 United… France Austria Argentina Netherlands Germany Italy Denmark Poland Colombia Belgium Ireland Chile Peru Luxembourg Portugal Brazil Finland Greece Mexico Sweden Spain Source: OECD Development Centre (2008), based on Euromod (2008) for OECD countries and Goñi et al. (2008) for Latin America.
  • 14. Political context: democratic consolidation… Democratic Consolidation in Latin America: Experts’ and Citizens’ Views Number of presidential elections in Latin America 7 6 5 4 3 2 1 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201 201 1 2 Source: OECD Development Centre based on Nieto Parra and Santiso (2008) The Latin American countries covered are Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. For elections with a second (run-off) round, the date of the final round is used. Sources: BTI Index (2008) and Latinobarómetro (2007).
  • 15. This time around, the political cycle is favourable to Latin America The political cycle and capital markets Investment-Bank recommendations Real Exchange Rates around Elections around elections 0,4 103,0 overweig ht An inc reas e repres ents a deprec iation 0,3 102,5 0,2 102,0 (elec toral month = 100) 0,1 1 ,5 01 0,0 Index 1 ,0 01 -0,1 underweig ht 100,5 -0,2 100,0 -0,3 99,5 -0,4 99,0 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 0 = e le c tion m onth 0 = e le c tion m onth Source: OECD Latin American Economic Outlook, based on Nieto Parra and Santiso (2008),
  • 16. EmNet Quarterly Meeting Latin America Based on Latin American Economic Outlook 2009 Javier Santiso Director and Chief Economist OECD Development Centre www.oecd.org/dev/leo Paris 5 December 2008