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Comments on “Policy Trade-offs for Unprecedented Times” Mauricio Cardenas, Senior Fellow and Director, Latin America Initiative Brookings Institution April 22, 2009 1 Comments • Very good report • It makes two major key points: » Problems in LAC are only about to begin » Policymakers should worry more about a sustained recovery • Structures analysis around a fundamental concept (ILR) • Challenges complacency • But reaches excessively pessimistic conclusions I will make 8 points 2 Point 1: LAC governments should not bet on a V-shaped recovery 3 Point 1: LAC governments should not bet on a V-shaped recovery And according to the latest IMF’s projection, there are severe downside risks to LAC’s GDP growth: 4 2009 GDP Projections 2009 GDP Growth Projections RGE April 2009 JP Morgan March 2009 WEO April 2009 Argentina -1.8% -3.0% -1.5% Brazil -1.4% -1.4% -1.3% Chile -0.4% -1.5% 0.1% Colombia -0.7% 0.5% 0.0% Mexico -4.6% -4.0% -3.7% Peru 2.8% 3.5% 3.5% Venezuela -2.0% -0.5% -2.2% Latin America -2.1% -2.2% -1.5% Sources: IMF, WEO, April 2009, JP Morgan, and RGE Monitor. 5 Point 2: Reserves are at record highs and external debt at record lows 6 Point 3: Fiscal accounts have worsened, but not too much. 7 Point 4. This crisis started differently, but now looks familiar Source: IMF, WEO, April 2009 8 The paper’s key contribution: Focus on Precarization and Liquidity International Liquidity Ratio (+) International Reserves (-) All public sector maturing debt (domestic and external) (-) Stock of sterilization instruments (-) Short term external liabilities of the private sector Determinants: Initial debt levels, effective level of reserves, debt maturities, future fiscal deficits Missing: Current accounts, FDI, and new lending. 9 Point 5. A note of optimism on new issues and FDI Balance of Payments Financing: Latin America and the Caribbean (Percent of GDP) 8 6 Private direct investment Other private Net financing flows 8 Private portfolio Official flows 6 4 4 2 2 0 0 -2 -2 3Total of equity, syndicated loans, and international bond issuances. -4 -4 1990 92 Source: IMF, WEO, April 2009 94 96 98 00 02 04 06 08 10 12 14 10 Point 6. Nonfinancial Firms are not excessively leveraged, and banks are making significant profits Source: IMF, WEO, April 2009 11 Point 7. Assumptions and Results The maturity structure of public debt is assumed to deteriorate, but: “On April 14, Colombia sold $1 billion worth of sovereign bonds (offering of additional 2019 bonds with a yield of 7.375 percent) On April 21, Peru offered up to 200 million soles ($65 million) in soldenominated sovereign bonds on the local market. The bonds will be a reopening of the outstanding Aug. 12, 2031 bond. Brazil issued a sovereign bond in January worth $1.025 billion. The bond, due in 2019, came with an interest coupon of 5.875% for an effective yield of 6.127%. The government may reopen its Global 2019 overseas bond later this year.” 12 Point 7. Assumptions and Results (cont.) The paper says: “A general implication that emerges from these scenarios is that in the absence of policies, in some cases liquidity ratios could arguably reach dangerous thresholds that could lead to a crisis.” The question is what is that dangerous threshold. We start at 200%. When should we begin to worry (adjust)? Now? ILR’s seem to be doomed to fall: • Automatic fiscal stabilizers • Fiscal stimulus measures • Financial precarization • Monetary expansion So, determining the reasonable level is crucial 13 Point 8. Conclusion Measure the impact of ILR’s on key economic variables (financial and real). A reduction in the ILR is desirable (the purpose of having reserves) The question is how much?