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

1. “PERU’s TWELVE BEST KEPT SECRETS ” ReinventingBretton Woods/ G-24 /BCRP CUZCO 19-20 July , 2010 Ricardo V. Lago

2. THE AVALANCHE OF DOLLARS POURING ONTO PERU

4. PERU : PERFORMANCE 2008-10

7. 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

10. 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

15. Peru versus Brazil

16. Peru versus Chile

17. Peru versus Mexico

18. EXCHANGE RATES LEVELS

19. “PERU’sTWELVEBESTKEPTSECRETS ”

20. DON’T TELL ANYBODY WE HAVE MORE DOLLARS COMING IN THAN WE CAN HANDLE ………

21. `

22. 8 MACROECONOMICSECRETS 4 STRUCTURALSECRETS

23. Peru in 1990 Close to becoming a failed State Cambodia on the eve of the takeover by the Khmer Rouge

24. EIGHTMACROECONOMICSECRETS

25. PERU’S SOL IS STRONGERTHANCHINA’S YUAN SECRET # 1

26. NET INTERNATIONAL RESERVES

29. SECREST # 2 PERU’S BALANCE SHEET IS AS GOOD AS IT GETS SECRET # 1 SECRET # 2

31. PERU’S BANKINGSYSTEM IS SMALL BUTVERYSTRONG SECRET # 1 SECRET # 3

32. SMALL IS BEATIFUL BANCO DE CREDITO WAS ABLE TO FLOAT BONDS INTERNATIONALLY IN DECEMBER 2008 GOOD SUPERVISION FEWDERIVATIVES AS A SHARE OF GDP 1/5 of SPAINBANKINGSYSTEM 1/10 of UKBANKINGSYSTEM

33. PERU’S BANKINGSYSTEM IS UNDER-MORTGAGED SECRET # 4

34. MORTGAGEEXPOSURE 110,000 MORTGAGES For US$ 3.2 billon or 8 % of BANKINGSYTEM BALANCE SHEET

35. SCOPE FOR COUNTER-CYCLICAL POLICIES SECRET # 5

36. FISCAL STIMULUS

37. FISCAL STIMULUS = ABOUT 2.2% of GDP

38. MONETARY STIMULUS

39. 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

40. PORTFOLIO DIVERSIFICATION OF EXPORTS SECRET # 6

41. CLOSE to ½ of TOTAL EXPORTS : COPPER AND GOLD HISTORICALCORRELATION IN THE LAST 30 YEARS IS VERYLOW 10% IN PERIODS OF HIGH UNCERTAINTYCORRELATION IS NEGATIVE

43. POLICYMAKERS SECRET # 7

44. PIPELINE OF FDI SECRET # 8

46. FDI US$ 25 BillionUNDEREXECUTION U$ 30 Billion in PIPELINE

47. FOURSTRUCTURALSECRETS

48. 20 YEARS OF CONTINUED ECONOMIC REFORMS SECRET # 9

51. POPULATIONSUPPORT THE MARKET AND MISTRUST GOVERNMENT SECRET # 10

52. 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

56. SPECTACULARSUCCESS IN THE FIGHTAGAISTPOVERTY SECRET # 11

57. LOWRISK OF RETURN TO POPULISM SECRET # 12

59. FIND THE CORNERSTONE OF THE TWELVEANGLES

60. STUDY THE HISTORY OF THE PALACE OF INKA ROCA AND HENCE

62. THE END