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Crisis Averted—What’s Next? Rodrigo Valdés Western Hemisphere Department International Monetary Fund 22 October 2009 Agenda I. External Shocks II. Policy Reactions and Outlook III. Short-term challenges ― Zooming in IV. Preparedness, vulnerabilities, and medium-term challenges ― Zooming out V. Conclusions 2 I. External Shocks II. Policy Reactions and Outlook III. Short-term challenges ― Zooming in IV. Preparedness, vulnerabilities, and medium-term challenges ― Zooming out V. Conclusions 3 WEO Baseline scenario for the world economy: slow recovery with downside risks Real GDP Growth in LA6 and the World 1/ (Four quarter percent change, seasonally adjusted) 9 9 LA6 6 6 5.0 4.1 World 3 3 0 0 -3 -3 Advanced Economies -6 -6 2000 2002 2004 Source: IMF staff estimates. 1/ For LA6, PPP-GDP weighted average. 2006 2008 2010 2012 2014 4 Commodity prices are recovering as Asia rebounds Commodity Prices (Index 2002=100 of prices in U.S. dollars) 500 500 Oil, gas, and coal 400 400 Metals 300 300 200 200 Food and beverage 100 0 1995 100 0 97 99 01 03 05 Sources: Bloomberg, L.P.; and IMF staff calculations. 07 09 5 Financial market turmoil has receded… Latin American Financial Markets: Heat Map Local currency money market yields Local currency sovereign bond yields Equity Corporate external bond spreads Sovereign credit spreads Currency Lehman collapse Q1 Q2 2008 Low Dev. Low-Moderate Dev. Q3 Q4 Q1 2009 Sources: Bloomberg, L.P.; and IMF staff calculations. Q2 Q3 High-Moderate Dev. Extreme Dev. 6 Other external shocks to ease... …at different paces Remittances, Tourism, and External Demand 1/ (percent change, y/y) 25 6 20 Global Demand (right axis) 4 15 10 2 Remittances (left axis) 5 0 0 -5 US Tourists to the Caribbean (left axis) -2 -10 -15 -4 -20 -25 -6 2006 Source: IMF staff estimates. 2008 1/ Remittances and Tourism are 4-qtr moving averages. 2010 7 I. External Shocks II. Policy Reactions and Outlook III. Short-term challenges ― Zooming in IV. Preparedness, vulnerabilities, and medium-term challenges ― Zooming out V. Conclusions 8 Commodity exporting and financially integrated countries Other Commodity Exporters Tourism intensive commodity importers Other commodity importers 9 In contrast with the past, a number of countries implemented countercyclical fiscal policies… Change in primary deficits excluding commodity-related revenues (Percent of GDP 1/) 4 4 Commodity Exporting Financially Integrated Countries 3 3 Automatic Stabilizers Other Commodity Importing Countries 2 Other Commodity Exporting Countries 2 Commodity Importing, Tourism Intensive Countries 1 1 0 0 Source: IMF staff estimates. 1/ Simple averages of changes in primary balances 10 …and some countries also implemented expansionary monetary policies… Interest Rate Changes (Differences between September 2008 and the most recent data) 2 2 Bank Lending Rate 1 0 Commodity Exporting Financially Integrated Countries Commodity Importing Tourism Incentive Countries Other Commodity Exporting Countries 1 0 Other Commodity Importing Countries -1 -1 -2 -2 -3 -3 Money Market Rate -4 -4 -5 -5 -6 -6 Source: IMF staff estimates. 11 Exchange rate adjustment buffered the shocks in countries with ER Flexibility Nominal effective exchange rate 1/ (Index 2008=100) 115 115 Other commodity exporting countries 110 110 105 105 Other commodity importing countries 100 95 100 Commodity importing, tourism intensive countries Commodity exporting, financial integrated countries 95 90 90 85 85 2008 abr jul oct 2009 abr jul Source: IMF staff estimates. 1/ Index constructed using the simple average of monthly growth rates within each group. An increase (decrease) denotes an appreciation (depreciation). 2/ Excludes Jamaica. 12 Activity has started to pick-up in several countries Regional “green shoots” Commodity exporting, financially integrated countries sep Brazil Chile 2/ Colombia Mexico Peru oct nov 2009 jan dec feb mar apr may jun jul aug 5 6 1 1 1 2 2 6 4 4 4 4 6 1 1 2 6 1 1 1 6 4 4 5 5 6 1 1 2 2 6 4 4 4 4 -99 1 1 1 1 1 1 1 2 2 2 6 -99 5 5 5 6 1 2 2 2 1 2 6 4 1 2 1 2 2 1 2 6 4 4 4 -99 5 5 5 6 1 1 1 2 2 2 6 -99 2 2 6 5 6 1 1 2 2 6 -99 -99 6 2 6 5 6 1 1 2 2 2 -99 -99 1 1 1 1 1 2 2 2 6 4 4 6 1 1 2 2 1 1 1 2 2 6 1 -99 5 5 5 5 6 1 1 2 6 5 -99 -99 5 5 5 5 6 1 1 2 2 6 1 -99 5 5 5 5 6 1 1 2 2 6 5 5 2 2 1 1 1 1 1 2 2 6 -99 -99 5 5 5 5 6 1 1 2 2 2 -99 -99 Other commodity exporting countries Argentina 2/ Ecuador Paraguay Venezuela Other commodity importing countries Costa Rica Nicaragua Panama El Salvador Uruguay Commodity importing, tourism intensive countries Jamaica Barbados Source: IMF staff estimates. Expanding and above or equal to trend (average) Expanding and below trend (average) Moving sideways Contracting at a moderate rate Contracting at a fast rate Data not available 13 Yet the path of recovery underscores regional heterogeneity GDP growth in Latin America and the Caribbean (percentage change; weighted average by GDP-PPP within groups) 8 8 4 4 0 0 Other commodity exporting countries Commodity exporting, financially integrated countries Other commodity importing countries Commodity importing, tourism intensive countries -4 -4 2005 2006 Source: IMF staff estimates. 2007 2008 2009 2010 14 I. External Shocks II. Policy Reactions and Outlook III. Short-term challenges ― Zooming in IV. Preparedness, vulnerabilities, and medium-term challenges ― Zooming out V. Conclusions 15 Challenges for commodity exporting and financially integrated countries Timing and sequencing: • Start unwinding special financial facilities; • Pace fiscal withdrawal depending on strength of recovery; • Monetary policy normalization should follow fiscal. And, confront a likely scenario of capital inflows in search for yield: • FX flexibility to avoid one-sided bets; • If inflows scale is large and problematic, step-up financial regulation/supervision; • Revisit the fiscal stance. 16 Challenges for other commodity exporters Avoid procyclical fiscal policies: • Take advantage of firmer commodity prices, implement clearer policies to limit procyclicality. 17 Challenges for other net commodity importers Preserve fiscal resources: • Avoid procyclicality, but… • Preserve some stimulus for worsecase scenario. 18 Challenges for commodity importing tourism intensive countries Stay in crisis mode: • Prioritize spending. • Focus on macroeconomic stability. • Policy space limited by debt levels. 19 I. External Shocks II. Policy Reactions and Outlook III. Short-term challenges ― Zooming in IV. Preparedness, vulnerabilities, and medium-term challenges ― Zooming out V. Conclusions 20 Preparedness paid off – historical perspective A comparison of GDP in 2009 and in past crises (GDP index, 100 = year before the crisis) 104 Commodity exporting and financially integrated countries 104 102 102 100 100 98 98 96 96 94 94 92 Other commodity exporters Average 1982, 1998, 2001 2009 92 -1 0 1 2 3 -1 Other commodity importers 104 104 102 102 100 100 98 98 96 96 94 94 92 0 1 2 3 Commodity importers, tourism intensive countries 92 -1 0 1 2 Source: IMF staff estimates. 3 -1 0 1 2 3 21 Estimating the impact of the crisis suggests that… Growth in LAC-5 Real GDP 1/ (simple average, year on year percentage changes) 10 10 Predicted path in the absence of shocks 8 8 6 6 4 4 Observed Path 2 2 0 -2 0 -2 Sample Period used for counterfactual estimates -4 1994Q4 -4 1996Q4 1998Q4 2000Q4 2002Q4 2004Q4 Source: IMF staff estimates. 1/ Growth in Brazil, Chile, Colombia, Mexico and Peru; simple average of annual growth. 2006Q4 2008Q4 Latin American countries saved 4 percent of GDP during the current crisis Growth in LAC-5 Real GDP 1/ (simple average, year on year percentage changes) 6 6 4 4 2 2 Observed Growth 0 0 -2 -2 Counterfactual Estimates with Actual Shocks -4 -4 4 percent -6 -6 -8 -8 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 Source: IMF staff estimates. 1/ Growth in Brazil, Chile, Colombia, Mexico and Peru; simple average of annual growth. 2009Q3 Relative performance of emerging economies Changes in expected growth for 2009 (Percentage points of revision in growth forecasts, before and after crisis) What explains the differences? Bolivia Uruguay Brasil • Pre-crisis credit boom Colombia Peru Panama Avg. Latin America • Bank leverage Chile Ecuador Paraguay Costa Rica Argentina • Inflexible exchange rates • Lack of fiscal restraint Macro policies during the boom & financial regulation and supervision Avg. Rest of World • Greater trade links Mexico • International reserves are not found to have explanatory power -20 -15 -10 -5 Source: IMF staff estimates. 0 24 The cost of reserves is not trivial… possibility for cooperative solutions IMF Credit and Reserves in percent of GDP (2008) 14 IMF credit in percent of GDP 12 10 8 Reserves, in percent of GDP 6 4 2 0 Costa Rica El Salvador Source: IMF staff estimates. Guatemala Colombia Mexico 25 The IMF in Latin America and the Caribbean IMF Lending, 2008-09 (Committed resources, millions of SDR) 45,000 40,000 PRGF/ESF 1/ Flexible credit lines 35,000 Stand-by Arrangements 30,000 25,000 20,000 15,000 10,000 5,000 0 Latin America and Rest of the World the Caribbean Latin America and Rest of the World the Caribbean June 30, 2008 June 30, 2009 Source: IMF staff estimates. 26 It is now necessary to rebuild fiscal space… Fiscal Adjustment (percent of GDP) Solid colors: Structural Adjustment to 2009 (F) Headline PB to keep debt constant. Commodity exporting and financially integrated countries Debt/GDP: 36% Stripes: Automatic (Cyclical) Adjustment Other Commodity Exporters Dots: Extra Adjustment if Trend Growth is Lower (by 0.35%) and Interest Rates Higher (by 90bps) Debt/GDP: 36% Tourism intensive commodity importers Debt/GDP: 91% Other commodity importers Debt/GDP: 47% 0.0 Source: IMF staff estimates. 1.0 2.0 3.0 4.0 5.0 27 It is now necessary to rebuild fiscal space… Fiscal Adjustment (percent of GDP) Solid colors: Structural Adjustment to 2009 (F) Headline PB to keep debt constant. Commodity exporting and financially integrated countries Debt/GDP: 36% Stripes: Automatic (Cyclical) Adjustment Other Commodity Exporters Dots: Extra Adjustment if Trend Growth is Lower (by 0.35%) and Interest Rates Higher (by 90bps) Debt/GDP: 36% Tourism intensive commodity importers Debt/GDP: 91% Other commodity importers Debt/GDP: 47% 0.0 Source: IMF staff estimates. 1.0 2.0 3.0 4.0 5.0 28 Concluding remarks – Limiting vulnerabilities and replenishing buffers • Fiscal policy should get better prepared. Aim at lower debt levels, larger automatic stabilizers, and systematic calculation of structural positions. • Financial regulation agenda should keep up with new learning. Examples: Consider capital charges for systemic risk contribution, clearer mandates for financial stability and enlargement of perimeter of regulation, and limiting procyclicality (eg, dynamic provisioning) • If consistent with FX regime, adopt more exchange rate flexibility. • Strike a balance on FX liquidity buffers. While apparently useful, they are costly. 29