Download Carlos G. Fernández Valdovinos - International Economic Forum of

Latin America
Risks and Opportunities in the
New Global Context
Carlos G. Fernández Valdovinos
Central Bank of Paraguay
April, 2014
Roadmap
• The “new” international context
• Latin America: recent policies
challenges
• Brief highlights on Paraguay
• Summary
and
new
Roadmap
• The “new” international context
• Latin America: recent policies
challenges
• Brief highlights on Paraguay
• Summary
and
new
International context
• Almost 6 years after the beginning of the largest
crisis in the past 80 years, the global economy is
still in transition.
• But there are finally some signs (green shoots)
suggesting that the worst is over; at least for
developed economies.
• Latest projections suggest a more positive outlook,
with recovery continuing in the US and, albeit at a
somewhat lower pace, Europe.
• Overall, 2014 growth projections are now higher
than in the previous year (but with some regional
differences).
International context
• The new “normal” poses both positive and negative
risks to baseline projections, especially for emerging
markets.
• On the upside, the US recovery might be stronger
than expected, which could have a significant
positive impact on growth rates in LA countries.
• However, faster than expected pace of monetary
tightening may lead to abrupt falls in asset prices
and, in some cases, capital outflows and currency
depreciations.
Recovery is underway…
Widespread
economic
recovery, but with some
regional differences.
Source: IMF-WEO update January-2014.
… but emerging markets will face
some challenges…
Deceleration in China
China has become an important
trade partner for LAC countries,
however high growth rates for the
Chinese economy may not be
sustainable. In addition, rapid credit
growth to finance high investment
rates has raised concerns over the
robustness of the financial system.
The expected deceleration in China
had led to a revision in the prices of
main
commodities.
A
price
moderation for soy and copper is
expected in the medium-term. Oil,
however, would remain at current
levels.
Source: Bloomberg, IMF-WEO update October-2013.
.
Index (Jan-10=100
Lower commodity prices
… including more difficult external
financing conditions…
May 21, 2013 US Treasury
Bernanke announces a possible
reduction in the FED’s assetpurchase program
bond yields
Dec 18, 13
Bernanke announces the
withdrawal of the stimulus
will begin in early 2014.
The FED normalization of
monetary
policy
will
remain a key issue in the
short
term,
driving
periods of high volatility
in emerging markets.
Emerging Markets Bond s Index (EMBI)
In spite of resilient
capital flows, financial
conditions
have
remained tighter after
Bernanke’s
surprised
announcement of an
imminent tapering.
Source: Bloomberg.
… capital outflows and
pressures in domestic currencies
Bernanke’s
speech
May 21, 2013
Source: Haver Analytics
Source: Bloomberg, IADB.
Roadmap
• The “new” international context
• Latin America: recent policies
challenges
• Brief highlights on Paraguay
• Summary
and
new
LAC: improving conditions but some
deterioration a the margin
• Financial tensions are bound to arise in emerging
economies after the FED´s announcement. Changing
external conditions will have real effects in the
economies.
• Overall, U.S. recovery is a positive event, but in the
short term increased financial market and capital flow
volatility is a concern for emerging markets.
• When combined with domestic weaknesses, the result
could be sharper-than-expected capital outflows and
exchange rate adjustments.
• Recent “mini-stress” test: the rise in U.S. interest rates
since May triggered large changes in exchange rates,
sovereign spreads, stock markets, and gross portfolio
LAC: improving conditions but some
deterioration a the margin
• Nevertheless, the impact was not homogenous across
countries: fundamentals matter.
• The region, in general, has buffers to cope with these
kinds of shocks thanks to relatively moderate levels of
external debt, sizable official reserves, sound banking
systems, and flexible exchange rates.
• However, fundamentals have deteriorated in some
countries since 2008, following the implementation of
counter-cyclical policies.
• Still, the economies remain in better position than in
the 1990s.
Changing external conditions
will have an effect in LAC economies
…
Source:CBP.
… but the overall result over GDP
growth
should be positive
LAC6 GDP GROWTH
US GDP
T0
1,0%
T1
3,0%
Real Interest Rate (TB1Y)
-1,5%
2,0%
Variation Rate of
Commodity Price Index
-0,7%
-10,0%
15,8
20
VIX
Total Efect in LA6
Source:CBP.
0,87%
In the short run, better policies
will be crucial to dampen volatility
Prudent
Fiscal Policy
High
Credibility in
Monetary
policies
Better
Regulatory
Policies
PRUDENT
POLICIES
Flexible
Exchange
Rates
Healthy
Banking
Systems
Limited
External
Debt
May announcement showed that
fundamentals matter!
Exchange Rate Variation and
Inflation
Source: Bloomberg.
.
Current Account and Exchange Rate
Variation
GDP recovery was relatively
faster in LAC ….
Index (2007=100)
International
Financial Crisis
Source: CBP, CBCH
…thanks to improved
macroeconomic fundamentals.
International Debt
% of GDP
% of GDP
Government Debt
Source: IMF e-Library
% of GDP
%
Inflation
However, some vulnerability factors
recently increased in the region
General Govermment Structural
Balance*
Current Account Balances in
LA
Source: IMF
*Argentina, Brazil, Chile, Colombia, Dominican Republic, Ecuador, Guyana, Mexico, Panama, Paraguay, Peru, Venezuela
…rising the likelihood of
a “sudden stop” episode.
The expected cost of a sudden capital
stoppage has increased since the pre Lehman
period
Source: IADB- Andrew Powell-March 2014
Roadmap
• The “new” international context
• Latin America: recent policies
challenges
• Brief highlights on Paraguay
• Summary
and
new
Paraguay: sound macro-foundations
to face headwinds
• Over the past decade, policy frameworks and economic
fundamentals have been strengthened.
• Macro-Policies: government finances are sound,
inflation low, banks are strong, buffers are large, the
country is not excessively dependent on portfolio
inflows, and a flexible exchange rate regime which
makes a huge difference
• Structural Reforms: tax reforms in 1993 and 2013,
passage of a fiscal responsibility law, approval of a PPP
law to tackle infrastructure bottlenecks.
• The Fed exit from unconventional monetary policy will
be a bumpy ride, but Paraguay is in a good position to
weather more challenging times.
Strong economic growth
for a decade
Paraguay economic growth
1992-2014*
Sound policies and structural
reforms
increased
potential
growth rate. Paraguay average
economic growth in the last
decade is among the highest in
the region.
Source: IMF-WEO Oct-2013, Update Jan-2014 and CBP.
Paraguay experienced a solid
growth in the last decade
supported by production and
export of raw materials. Still, on
top of agriculture, construction
and services were also key
growth-drivers.
A central bank committed
to low and stable inflation…
A history of stable prices
Paraguay has never experienced
high rates of inflation and its
currency (the Guarani) recently
celebrated
its
seventieth
anniversary.
Monetary Regimes in Paraguay
Monetary Aggregates
The
CBP
started
the
implementation of an IT regime
in 2011. The explicit public
commitment to control inflation
as the primary objective is crucial
for greater investor confidence
and a more predictable business
environment.
Source: CBP.
Inflation Targeting
(Experimental Stage)
Inflation
Targeting
…with large buffers to dampen
excessive volatility…
International Reserves
Source: CBP and IMF-IFS. Year 2013, last data available.
International Reserves
(% of GDP)
…supported by sound
fiscal and external balances
Gen Govt Gross Debt (% of GDP)
Continued
fiscal
surpluses
(which reduced overtime the
level of public indebtedness)
compounded by a sharp
accumulation of foreign assets
has changed the country’s net
debtor position vis-à-vis the
world.
Source: IMF-WEO Oct-2013 and CBP.
Countries with BB- credit rating by Standard and Poors.
Paraguay experienced eight
consecutive years of fiscal
surpluses. This had allowed the
country to decrease its public
external debt from close to 60
percent of GDP to less than 10
percent, the lowest percentage
among economies with the same
credit ranking.
KEY RESULT: a steady improvement
in
credit rating
Rating
Fecha
Rating
Fecha
Rating
Credit
Watch
Fecha
Ba2
Feb 2014
BB-
Dec 2013*
BB-
+
Jan 2014
Ba3
Jan 2013
BB-
Aug 2012
BB- (inicial)
B1
Dec 2010
BB-
Jun 2010
BB-
Aug 2011
Apr 2008
B+
Aug 2010
Nov 2007
B
Jun 2007
Caa1
Apr 2003
B-
Jul 2004
B2 (inicial)
Jul 1999
SD
Feb 2003
B-
Nov 2002
B
Jun 1999
B+
Feb 1999
BB- (inicial)
Oct 1995
B3
Credit
Watch
+
B3
Caa1
+
Source: Bloomberg
Credit
Watch
-
Feb 2013
Jun 2012
Ratings up
Ratings down
Initial ratings
Roadmap
• The “new” international context
• Latin America: recent policies
challenges
• Brief highlights on Paraguay
• Summary
and
new
Summary
• A normalization on monetary conditions in the US is not
necessarily a negative event: economic and financial
effects will depend on robustness of economic policies.
• In LAC, fundamentals have improved over the past
decades and most economies are well prepared to face
external shocks.
• However, some countries in the region appear
somewhat more vulnerable to certain shocks: those
economies experienced a recent deterioration in fiscal
and external positions.
Summary
• Growth in the region is projected to remain in low gear,
reflecting a less supportive external environment and,
in some cases, domestic supply-side constraints.
• In countries with low inflation and anchored inflation
expectations, monetary policy should be the first line of
defense if downside risks materialize.
• Rebuilding fiscal buffers is a key priority, especially in
countries with tight capacity constraints or limited fiscal
space; it will also help constrain the continued widening
of current account deficits.
Summary
• History teaches that exits from extremely low U.S.
interest rates may be smooth or bumpy depending
critically on expectations, fundamentals and countries’
capacity to respond.
• Since monetary normalization is a chronicle foretold,
authorities should implement policy actions today to
minimize potential deleterious effects. This way
countries will gain more from the global recovery.
THANK YOU