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LatinMacroWatch Special Analysis

LatinMacroWatch Special Analysis. LMW: the Big Picture on a Small Screen A new RES feature. 8-7-02. LAC-7 Outlook: The Specter of Capital Flight. August 7, 2002. Prepared for Presentation at IADB Board of Directors, Washington , DC. KEY QUESTIONS.

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LatinMacroWatch Special Analysis

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  1. LatinMacroWatch Special Analysis LMW: the Big Picture on a Small Screen A new RES feature 8-7-02

  2. LAC-7 Outlook: The Specter of Capital Flight August 7, 2002 Prepared for Presentation at IADB Board of Directors, Washington, DC

  3. KEY QUESTIONS • What’s behind the current sharp growth slowdown in the region? Is there evidence of Contagion? What kind? • Are the G-7 shooting in the right direction? Should Moral Hazard be their main concern? • How likely is it for the region to enter a new “lost decade”? • What is likely to happen in Brazil? • What should IDB do?

  4. OUTLINE I. Capital Flight and Macroeconomic Performance II. The Specter of Capital Flight III. Vulnerabilities to Capital Flight: Recent Experiences of Argentina, Uruguay and Brazil IV. Summary and the Role of the IADB

  5. LAC-7 Business Cycle: 1997-2002 (s.a. GDP, mean annualized quarterly growth rate) 9% Deceleration Recession Recovery Stalling 7% 5% 3% 1% -1% -3% -5% -7% 1997.I 1998.I 1999.I 2000.I 2002.I 1997.III 1998.III 1999.III 2000.III 2001.III 2001. I Includes: Argentina Brazil, Chile, Colombia, Mexico, Peru and Venezuela

  6. LAC-7 Components of Demand (1998.II = 100) Recession Stalling Recovery 130 Exports 120 Consumption 110 100 Investment 90 80 70 1999.I 2000.I 2002.I 1998.II 1999.II 2000.II 2001. I 2001.II 1998.III 1999.III 2000.III 2001.III 1998.IV 1999.IV 2000.IV 2001.IV Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru

  7. LAC-7 Capital Flows (4 quarters, millions of US dollars and % of GDP ) 120000 6% 100000 5% % of GDP 80000 4% Millions of US dollars 60000 3% 40000 2% 20000 1% 0 0% 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 1997-III 1998-III 1999-III 2000-III 2001-III Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

  8. LAC-7 Non-FDI Capital Flows (4 quarters, millions of US dollars and % of GDP ) 60000 2% % of GDP 1% 40000 20000 0% Millions of US dollars -1% 0 -20000 -2% -3% -40000 -60000 -4% 1997-I 1998-I 1999-I 2000-I 2001-I 2002-I 1997-III 1998-III 1999-III 2000-III 2001-III Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

  9. LAC-7 Business Cycle and Capital Flows (GDP and Non FDI Capital Flows, last four quarters) 7% 2% 6% 1% 5% Non FDI Capital Flows 4% 0% 3% Non FDI Capital Flows (% GDP) GDP (yoy % change) -1% 2% 1% GDP -2% 0% -1% -3% -2% -3% -4% Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02

  10. OUTLINE I. Capital Flight and Macroeconomic Performance II. The Specter of Capital Flight III. Vulnerabilities to Capital Flight: Recent Experiences of Argentina, Uruguay and Brazil IV. Summary and the Role of the IADB

  11. Net Private Capital Flows to LAC (Billions of real US dollars of May 2002, deflated by US CPI) 100 80 60 40 20 0 -20 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 Source: WEO, IMF

  12. Net Direct Investment to LAC (Billions of real US dollars of May 2002, deflated by US CPI) 70 60 50 40 30 20 10 0 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 Source: WEO, IMF

  13. Financial Flows to LAC (Billions of real US dollars of May 2002, deflated by US CPI) 100 80 60 40 20 0 -20 -40 -60 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 Financial Flows= Net Portfolio Investment + Othe Ner Investment Source: WEO, IMF

  14. Cumulative Total Private Capital Flows to LAC (Billions of real US dollars of May 2002, deflated by US CPI) 1974-1981 1982-1989 80 500 450 60 400 40 350 300 20 250 0 200 150 -20 100 -40 50 0 -60 Total Private Flows Financial Flows FDI Total Private Flows Financial Flows FDI Source: WEO, IMF

  15. Cumulative Total Private Capital Flows to LAC (Billions of real US dollars of May 2002, deflated by US CPI) 1990-1998 1999-2001 600 250 200 500 150 400 100 300 50 200 0 100 -50 0 -100 Total Private Flows Financial Flows FDI Total Private Flows Financial Flows FDI Source: WEO, IMF

  16. Cumulative Total Private Capital Flows to LAC: 1990-2001 (Billions of real US dollars of May 2002, deflated by US CPI) 700 600 500 400 300 200 100 0 FDI Total Private Flows Financial Flows Source: WEO, IMF

  17. Cumulative Total Private Capital Flows to Asia (Billions of real US dollars of May 2002, deflated by US CPI) 1989-1997 1998-1999 600 150 100 500 50 400 0 300 -50 200 -100 100 -150 0 -200 Total Private Flows Financial Flows FDI Total Private Flows Financial Flows FDI Source: WEO, IMF

  18. OUTLINE I. Capital Flight and Macroeconomic Performance II. The Specter of Capital Flight III. Vulnerabilities to Capital Flight: Recent Experiences of Argentina, Uruguay and Brazil IV. Summary and the Role of the IADB

  19. Exposure of the Public Sector to Capital Flight (Public Debt in % of GDP) 65% In US$ 55% In domestic currency 45% 35% 25% 15% 5% Uruguay Argentina Brazil Chile Pre- Capital Flight levels Current levels

  20. Exposure of the Private Sector to Capital Flight (Share of foreign currency loans to the non financial private sector) 80% 70% 60% 50% 40% 30% 20% 10% 0% Argentina Uruguay Brazil Chile Pre- Capital Flight levels Current levels

  21. Exposure of the Financial System to the Public Sector Credit to the public sector in % of total assets 30% 25% 20% 15% 10% 5% 0% Brazil Argentina Uruguay Chile Pre- Capital Flight level Current level Current level

  22. Vulnerability to Capital Flight: A Summary Argentina Brazil Uruguay Chile Public Debt to GDP Financial mismatches of the Public Sector Financial Mismatches of the Private Sector Banking System Exposure to the Public Sector = Low vulnerability = High vulnerability = Medium vulnerability

  23. BRAZIL

  24. Exchange Rate and Country Risk 2400 3.1 2200 nominal exchange rate 2000 2.9 1800 2.7 1600 R$ per dollar basis points 2.5 1400 1200 2.3 1000 2.1 800 EMBI+ spread 600 1.9 1/2/01 3/2/01 5/2/01 7/2/01 9/2/01 1/2/02 3/2/02 5/2/02 7/2/02 11/2/01

  25. Public Debt (% of GDP) 61 Level: US$ 263.8 billion (58.6% of GDP) 59 57 55 53 51 49 47 45 Jul-00 Jul-01 Mar-00 Nov-00 Mar-01 Nov-01 Mar-02 May-00 May-01 May-02 Ene-00 Sep-00 Ene-01 Sep-01 Ene-02

  26. Public Debt Structure June 2002 Fixed Rate 7% Others 9% External or FX indexed Public Debt 44% Indexed to the Interest Rate 40%

  27. Banks’ Exposure to the Public Sector Public Bond Holdings 350% 300% 250% 200% 150% 100% 50% 0% In % of Banks’ Assets In % of Banks’ Net Worth

  28. Fiscal Sustainability April 2002 Primary Balance Public Debt (% of GDP) Required Observed Growth Rate Interest Rate 54.5% 10.9% 3.5% 3.9% 3.4% Adjustment = 0.5%

  29. 10.9% 3.5% 10% real depreciation +0.2% 57.2% Public Debt Dynamics Public Debt (% of GDP) Interest Rate Growth Rate Primary Balance that stabilizes Debt April 2002 10.9% 3.5% 3.9% 54.5% Fiscal Impact of:

  30. Growth Rate Interest Rate Public Debt (% of GDP) Primary Balance that stabilizes Debt April 2002 10.9% 3.5% 3.9% 54.5% Fiscal Impact of: 10.9% 3.5% 10% real depreciation +0.2% 57.2% 1% increase in the domestic interest rate 11.4% 3.5% +0.3% 54.5% Public Debt Dynamics

  31. Growth Rate Interest Rate Public Debt (% of GDP) Primary Balance that stabilizes Debt April 2002 10.9% 3.5% 3.9% 54.5% Fiscal Impact of: 10.9% 3.5% 10% real depreciation +0.2% 57.2% 10.9% 2.5% +0.6% 1% reduction in the growth rate 54.5% Public Debt Dynamics 1% increase in the domestic interest rate 11.4% 3.5% +0.3% 54.5%

  32. I. FISCAL DEFICIT (est.) 11,535 20,787 88,861 46,768 II. PUBLIC DEBT AMORTIZATIONS Domestic Debt 75,282 41,005 External Debt 13,580 5,763 58,303 109,649 III. (I) + (II) 19,000 19,000 IV. MONETARY BASE V. POTENTIAL LIQUIDITY REQUIREMENTS: (III) + (IV) 77,303 128,649 Liquidity Requirements of the Public Sector (Millions of US dollars) July 02- Dec 02 July 02- June 03

  33. Liquid International Resources of the Public Sector (Millions of US dollars) I. International Reserves (end June without IMF loan) 32,000 II. IMF Credit Line 10,000 III. Total Available Liquid Funds ( I+II) 42,000 In % of July02-Dec02 Liquidity Req. 54% In % of July02-May03 Liquidity Req. 33% Note: Under the IMF agreement there is an agreed floor for reserves of US$ 15 billion.

  34. Total Gross Private External Debt In millions of US$ 170000 150000 130000 110000 90000 70000 50000 1998-I 1999-I 2000-I 2001-I 1998-II 1999-II 2000-II 2001-II 1998-III 1999-III 2000-III 2001-III 1997-IV 1998-IV 1999-IV 2000-IV 2001-IV

  35. Liquidity Requirements of the Private Sector (Millions of US dollars) July 02- Dec 02 July 02- June 03 EXTERNAL DEBT AMORTIZATIONS 16,370 28,309 Medium and Long Term 14,957 9,694 Short Term 6,676 13,352

  36. Capital flight and financial collapse can generate: • severe productive disruptions • political instability • social unrest … and these conditions may validate the initial flight. Furthermore the disruptive effects of the flight of financial capital can frighten FDI and thereby multiply its effects.

  37. OUTLINE I. Capital Flight and Macroeconomic Performance II. The Specter of Capital Flight III. Vulnerabilities to Capital Flight: Recent Experiences of Argentina, Uruguay and Brazil IV. Summary and the Role of the IADB

  38. SUMMARY • There are clear signs of Capital Flight since the 1998 Russian Crisis. • Economic Contagion is not obvious, although the whole region is suffering from higher spreads. • The depth and spread of crises in region may be rooted in • G-7 Pontious Pilate approach to financial crisis in EMs, caused by fear of a Moral Hazard epidemic. • Political cycle and backward-looking politicians who fail to see the enormous rebound potential of the region. • Financial vulnerabilities

  39. ROLE OF THE IADB • Help to convey the regional view about the cause of, and remedies for, the current crises--partly to counteract the Moral Hazard obsession: • it is time for the IADB to move forward from the end of the line, and make its voice heard and heeded at the planning stage! • Design social programs that help prevent social unrest, a serious deterrent for FDI (the main source of international finance in the region). • Design social programs to ameliorate the impact of crises on poverty. • Enhance competitiveness programs and support of FTAA negotiations.

  40. LAC-7 Outlook: The Specter of Capital Flight August 7, 2002 Prepared for Presentation at IADB Board of Directors, Washington, DC

  41. LatinMacroWatch Special Analysis LMW: the Big Picture on a Small Screen A new RES feature 8-7-02

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