Download U.S. Monetary Policy and its Implications for Latin American

XXV MEETING OF THE LATIN AMERICAN NETWORK
OF CENTRAL BANKS AND FINANCE MINISTRIES
U.S. Monetary Policy and its Implications
for Latin American Economies
Adrián Armas
“When America sneezes, the world catches a cold.
If America gets a cold, the world gets influenza
and pneumonia”
GDP Growth (%)*
8
8
USA
6
6
4
4
2
2
World
0
0
-2
-2
-4
-4
1980
1982
1984
1986
1988
1990
1992
*Projections for 2007 and 2008
Source: World Economic Outlook, IMF, April 2007
1994
1996
1998
2000
2002
2004
2006
2008
Historically, slowdowns in the U.S. economy and
increases in Fed rates have been followed by
lower growth in Latin American countries
Latin American Growth and FED interest rate
Growth
9
7
5
3
1
-1
-3
-5
Mar80
Tequila
crisis
External Debt
Crisis
Mar82
Mar84
Mar86
Mar88
Mar90
Mar92
GDP growth (%)
Mar94
Mar96
Mar98
Mar00
Mar02
Rate
Argentina and
20,0
Uruguay
18,0
crisis
16,0
14,0
12,0
10,0
8,0
6,0
4,0
2,0
0,0
Mar- Mar04
06
FED interest rate
Source: Bloomberg and World Economic Outlook, IMF, April 2007
¿Why is the impact of increases in Fed interest
rates currently less significant?: The financial
channel
• Long-term rates (bonds and home mortgages) have not
followed the same trend (“conundrum”).
• Better communication of U.S. monetary policy: Through
its statements, the Fed announces policy changes before
they take place, leading to a gradual adjustment in markets.
• Despite Fed rate increases, investor risk aversion has not
changed dramatically.
• There has been a notorious improvement in emerging
markets’ fundamentals.
• Investors have started to differentiate among emerging
countries.
¿Why is the impact of a US slowdown less
significant?: The commercial channel
• U.S. GDP slowdown is still moderate and concentrated in
U.S. specific sectors (construction).
• Growth in emerging markets has offset U.S. slowdown.
• Commodity prices are explained not only by demand but
also by supply factors.
Stronger fundamentals put Latin America in a
better position to face external shocks (I)
2002
General Government Debt (% GDP)
2006
External Debt (% GDP)
160
180
140
160
120
140
120
100
100
80
80
60
60
40
40
20
20
0
0
Argentina
Argentina
Brazil
Colombia
México
Perú
Uruguay
Brazil
Colombia
México
Perú
Uruguay
Venezuela
Venezuela
External Vulnerability Indicator *
Total External Debt/Foreign reserves
600
1600
500
1400
400
1200
1000
300
800
600
200
400
100
200
0
0
Argentina
Brazil
Colombia
México
Perú
Uruguay
Venezuela
*Short-term External Debt + currently maturing Long-Term External Debt + Total
Nonresident Deposits over One Year/Official Foreign Exchange Reserves (%)
Argentina
Brazil
Colombia
México
Perú
Uruguay
Venezuela
Source: Moody’s, November 2006
Stronger fundamentals put Latin America in a
better position to face external shocks (II)
2002
GDP growth (%)
2006
GDP per capita (US$ dollar)
10
9
8
5
7
0
6
5
-5
4
3
-10
2
1
-15
Argentina
Brazil
Colombia
México
Perú
Uruguay
Venezuela
0
Argentina
Inflation
Brazil
Colombia
México
Perú
Uruguay
Venezuela
Fiscal balance (% of GDP)
45
2
40
1
35
0
30
-1
25
-2
20
-3
15
-4
10
-5
5
-6
0
-7
Argentina
Brazil
Colombia
México
Perú
Uruguay
Venezuela
Argentina
Brazil
Colombia
México
Perú
Uruguay
Venezuela
Source: Moody’s, November 2006
The turbulence episode of May-June 2006
reinforces the importance of better
fundamentals for emerging economies
Emerging economies: Current account and exchange rate variation
currency depreciation (% change)
June 28/ May 9
25
South Africa
20
Turkey
15
Colombia
Hungary
10
Iceland
Poland
New
Zealand
5
Mexico
Brazil
Chile
Philippines
Korea
Argentina
Czech Rep
0
Singapore
Malaysia
Thailand
Peru
Russia
-5
-20
-15
-10
-5
0
5
10
Current account/GDP (2006)
15
20
25
Source:Reuter, IMF
30
Despite the improvement in fundamentals,
some risks remain:
• A reversal of capital flows cannot be ruled out in
emerging economies.
• Countries with a currency mismatch need:
– Accumulation of international reserves.
– Increase in the share of domestic-currencydenominated public debt.
– Availability of resources from international
institutions.
The accumulation of international reserves is
needed to build a buffer stock
In billions of US$
80
70
60
50
40
30
20
10
0
Brazil
Argentina
Mexico
Colombia
2002
Peru
Uruguay
Venezuela
2006
As percentage of GDP
18
16
14
12
10
8
6
4
2
0
Brazil
Argentina
Mexico
Colombia
2002
Peru
Uruguay
Venezuela
2006
Source: IMF, Central Banks and others
The share of public debt in domestic currency
has increased over the last years, leading to a
lower currency mismatch
Share of General Government Debt in Foreign
Currency* (%)
100
80
60
40
20
0
Brazil
Argentina
Mexico
Colombia
2002
Peru
Uruguay Venezuela
2006
*Includes foreign-currency-indexed debt
Source: Moody’s, November 2006
On the other hand, export market
diversification reduces vulnerability of the
export sector to U.S. slowdown
Latin American Exports, by Market (%)
2006
2000
Europe
15%
Others
1%
Middle East
Asia y Oceania 1%
8%
U.S. & Canada
75%
Europe
19%
Others
2%
Asia & Oceania
13%
Middle East
2%
U.S. & Canada
64%
Source: Direction of Trade, IMF
The recent boom in the prices of Peruvian
commodities seems to be more related to Asian
growth, international liquidity and supply
factors, rather than U.S. growth
Terms of Trade
(% change)
U.S. GDP Growth (%)
8
30
25
U.S. Growth
6
20
4
15
10
2
5
0
0
-5
-2
Terms of Trade
-10
-4
-15
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Source: BEA and Central Bank of Peru
Diversification and low correlation among
key export prices diminish external
vulnerability
PRICE CORRELATION: MINING PRODUCTS
January 1970 - March 2007 (in real terms)
GOLD
SILVER
SILVER
COPPER
ZINC
LEAD
TIN
81%
Copper and gold are Peru’s main
export goods
COPPER
35%
35%
ZINC
17%
24%
79%
LEAD
40%
64%
72%
57%
TIN
75%
61%
70%
66%
81%
CRUDE OIL
76%
69%
10%
12%
38%
36%
Greater than 80%
Between 60% and 80%
Lower than 60%
Source: Central Bank of Peru
Adjusting for the effect of high prices,
the current account deficit remains at a
moderate level
Balance of Payments 2006 (% of GDP)
9,5
2,3
1,2
-1,1
current account
current prices
trade balance
2003 prices
Source: Central Bank of Peru
Peru has taken advantage of recent growth and
high commodity prices to improve the fiscal
position
Fiscal deficit (% of GDP)
3,3
3,0
2,5
2,2
1,6
1,7
1,7
1,2
1,0
1,0 0,9
0,3
0,2
-2,1
2000
2001
2002
current
2003
2004
2005
2006
structural
Source: Central Bank of Peru
The fiscal surplus was reflected in higher
public sector deposits with the central bank
(Millions of S/.)
25000
Public sector deposits
20000
Certificates of deposit
15000
10000
5000
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0
Monetary policy has been conducted
according to domestic conditions
Peru interbank rate vs. Fed Funds rate
FED Funds rate
Interbank rate - Peru
Mar-07
Jan-07
Nov-06
0,5
Sep-06
0,5
Jul-06
1,0
May-06
1,0
Mar-06
1,5
Jan-06
1,5
Nov-05
2,0
Sep-05
2,0
Jul-05
2,5
May-05
2,5
Mar-05
3,0
Jan-05
3,0
Nov-04
3,5
Sep-04
3,5
Jul-04
4,0
May-04
4,0
Mar-04
4,5
Jan-04
4,5
Nov-03
5,0
Sep-03
5,0
Jul-03
5,5
May-03
5,5
Mar-03
6,0
Jan-03
6,0
XXV MEETING OF THE LATIN AMERICAN NETWORK
OF CENTRAL BANKS AND FINANCE MINISTRIES
U.S. Monetary Policy and its Implications
for Latin American Economies
Adrián Armas