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ROUNDTABLE POLICYMAKER DISCUSSION: The Financial Angle. Guillermo A. Calvo IADB, University of Maryland and NBER October 24, 2003. OVERVIEW OF PRESENTATION. The last five years have witnessed a marked slowdown in LAC growth
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ROUNDTABLE POLICYMAKER DISCUSSION: The Financial Angle Guillermo A. Calvo IADB, University of Maryland and NBER October 24, 2003
OVERVIEW OF PRESENTATION • The last five years have witnessed a marked slowdown in LAC growth • which has led to questioning the effectiveness of Reforms that took place in the 1990s. • However, the debate tends to abstract from factors that are external to the region. • In particular, the debate seems to ignore the serious turmoil in the Bond Market for EMs brought about by the Russian 1998 crisis, • and which may lie behind poor growth performance.
CAPITAL FLOWS AFTER THE RUSSIAN CRISIS
LAC-7: Business Cycle and Financial Flows (GDP and financial flows, last four quarters) Financial Flows GDP Financial Flows (% GDP) GDP (yoy % change)
LAC-7 Capital Flows (4 quarters, millions of US dollars) Russian Crisis 100000 80000 60000 40000 20000 0 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 2003-I 1997-III 1998-III 1999-III 2000-III 2001-III 2002-III 2003-III Institute of International Finance Forecasts Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
LAC-7: Current Account Adjustment (4 quarters, millions of US dollars) 1000 -1000 -3000 -5000 -7000 % GDP -9000 -11000 Russian Crisis -13000 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 2003-I 1997-III 1998-III 1999-III 2000-III 2001-III 2002-III Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela
200 150 100 50 0 Ene-90 Ene-91 Deleveraging in LAC-7 (Financial flows in billions of real US dollars, cumulative since 1990) Russian Crisis Ene-92 Ene-93 Ene-94 Ene-95 Ene-96 Ene-97 Ene-98 Ene-99 Ene-00 Ene-01 Ene-02 Ene-03
LAC-7: Capital Flows & Bank Credit (Cumulative financial flows in billions of real US dollars since 1990 & real bank credit, Set-98=10) Russian Crisis 230 100 210 Domestic bank credit 190 95 170 Real Domestic Bank Credit (set 98=100) Cummulative financial flows 90 150 Cumulative Financial Flows 85 130 80 110 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Mar-99 Mar-00 Mar-98 Mar-01 Mar-02 Mar-03 Nov-99 Nov-00 Nov-01 Nov-02 Nov-98
230 210 190 ENRON effect 170 150 130 110 Dic-97 Dic-98 Dic-99 Dic-00 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Deleveraging in LAC-7 (Cumulative financial flows in billions of real US dollars since 1990 and EMBI+ adj. for Argentina) 1500 Russian Crisis Cumulative financial flows 1300 1100 900 Cummulative financial flows EMBI+ adj. for Argentina 700 EMBI+ 500 300 Dic-01 Dic-02 Jun-02 Jun-03
LAC-7: Spreads & Domestic Interest Rates (EMBI+ adj. for Argentina and domestic lending rates) 1700 155 Russian Crisis 1500 135 Spread 1300 115 1100 95 Domestic lending rates (June 1998=100) EMBI+ adj. for Argentina 900 75 700 Interest Rates 55 500 300 35 Dic-97 Dic-98 Dic-99 Dic-00 Dic-01 Dic-02 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Includes: Brazil, Chile, Colombia, Mexico, Peru & Venezuela
LAC-7 Business Cycle: 1997-2003 (s.a. GDP, annualized quarterly growth rate, Venezuela excluded) Recession Recovery Recovery Stalling 7% 5% 3% 1% -1% -3% -5% 1997.I 1998.I 1999.I 2000.I 2002.I 2003.I 1997.III 1998.III 1999.III 2000.III 2001.III 2002.III 2001. I
LAC-7: Labour Market (s.a. unemployment, simple average, excluding Venezuela) 11.5 Recession Recovery Stalling Recovery 11.0 10.5 10.0 9.5 9.0 8.5 8.0 Dic-97 Dic-98 Dic-99 Dic-00 Dic-01 Dic-02 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Includes: Argentina, Brazil, Chile, Colombia and Mexico
LAC-7 Investment Cycle: 1997-2003 (s.a. investment, annualized quarterly growth rate, Venezuela excluded) Recession Recovery Recovery Stalling 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 1997.I 1998.I 1999.I 2000.I 2002.I 2003.I 2001. I 1997.III 1998.III 1999.III 2000.III 2001.III 2002.III Includes: Argentina, Brazil, Chile, Colombia, Mexico and Peru
LAC-7 Growth Forecasts (GDP yoy variation in %) 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 2002 2003 2004 Source: Latin Focus Consensus Forecasts
OUTLOOK • The capital market looks much more favorable for EMs. • Delevaraging and large real depreciation should help LAC to take advantage of improved capital market conditions. • This positive phase should be utilized to lessen financial vulnerabilities by: • financial reform • trade opening • monetary arrangements, e.g., currency unions.