Download Reactions to the Sub-Prime Turmoil - Inter

Reactions to the Sub-Prime Turmoil
Carlos Hamilton V. Araújo
IADB, May 2008
1
Outline
I. Asset Prices
II. Banking System
III. Macroeconomic Developments
IV. Conclusion
2
I. Asset Prices
3
US Dollar Spike
Jun 14 2007=100
108
98
88
78
Jun
07
Jul
07
Aug
07
USD/BRL
Sep
07
Oct
07
USD/CNY
Source: Bloomberg
Nov
07
Dec
07
Jan
08
USD/JPY
Feb
08
Mar
08
USD/EUR
4
Sovereign Spread and Risk Aversion Index
Embi+Br
1.0
310
280
0.5
250
0.0
220
-0.5
-1.0
190
basis points
1.5
Risk Aversion Index
-1.5
160
-2.0
130
Jun Jul Ago Sep Oct Nov Dec Jan Feb Mar Apr May
07 07 07
07 07 07 07 08 08 08 08 08
Sources: JP Morgan Chase and Merrill Lynch
5
Ibovespa x Latin American Stock Exchanges
125
Jun 14 2007=100
115
105
95
85
75
Jun
07
Jul
07
Aug
07
Ibovespa
Sep
07
Oct
07
Mexbol
Source: Bloomberg
Nov
07
Dec
07
Merval
Jan
08
IPSA
Feb
08
Mar
08
IBVC
6
Other Comments
 Almost all IPOs, even those that had
already been announced, were
postponed
 The cost of the international financing
became prohibitive, even in case of
well ranked corporations
 There are reasons to believe that “this
time is different”
7
II. Banking Sector
8
Some Previous Developments
 Mainly in the second half of the 90s, the
Brazilian banking system passed through a
huge clean-up process
 In the last couple of years, the Congress
approved some laws enhancing the
protection of the creditors
 The above improvements contributed
decisively to strengthen the prospect for
the system
9
Assets Distribution
Ownership
% System Assets
50
40
30
20
10
0
2003
2004
Foreign
2005
Domestic
2006
2007
Government
10
Past Due Loans
Past Due Loans
Past Due Loans (90+ days) / Total Loans (%)
7,0%
6,0%
5,0%
4,0%
3,0%
2,0%
1,0%
0,0%
2003
2004
Foreign
2005
Domestic
Government
2006
2007
System
11
Profitability
Return on Equity
%
30
25
20
15
10
5
0
2003
2004
Foreign
2005
Domestic
2006
Government
2007
System
12
Cost of Deposits
Average Cost Deposits
%
18
15
12
9
6
3
0
2003
2004
Foreign
2005
Domestic
2006
Government
2007
System
13
Expansion of the Credit
Loans*
R$ bi
1.000
900
800
54,4%
700
53,9%
600
55,2%
500
57,0%
400
61,5%
300
200
100
44,8%
43,0%
38,5%
46,1%
45,6%
Jun
Nov*
-
Jun
2004
Jun
2005
Jun
2006
Individual Borrow ers
2007
Corporate Borrow ers
* Registered at the Central Bank Credit Information System
14
III. Macroeconomic Developments
15
US$ billion
Trade Balance
12-month accumulated
175
165
155
145
135
125
115
105
95
85
75
65
55
45
165.6
12-month
surplus:
US$36.4 bi
129.2
exports
imports
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Feb
99
00
01
02
03
04
05
06
07
08
16
Net FDI
45
35
FDI
US$ billion
25
15
5
-5
-15
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Feb
99 99 00 00 01 01 02 02 03 03 04 04 05 05 06 06 07 07
08
17
International Reserves
Mar 25:
US$194.3 bi
200
180
160
US$ billion
140
120
Apr 03: 15.9
100
80
60
40
20
end-of-2004:
27.5
0
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Mar
99
00
01
02
03
04
05
06
07
08
18
Net External Debt
175
150
1Q03:
165.2
US$ billion
125
4Q04:
135.7
100
75
50
25
0
4Q07:
-10.8
-25
1Q
02
3Q
02
1Q
03
3Q
03
1Q
04
3Q
04
1Q
05
3Q
05
1Q
06
3Q
06
1Q
07
4Q
07
19
External Sustainability Indicators
net external debt/exports
3.5
net external debt/GDP
de 3.1 para -0.1*
35
30
2.5
25
2.0
20
1.5
15
%
3.0
1.0
10
0.5
5
0.0
0
-0.5
-5
00 01 02 03 04 05 06 07 08
(Feb)
de 32.7 para –1.4%*
00 01 02 03 04 05 06 07 08
(Feb)
* Record low since the start of the series in 1970; 2008 –
estimates.
20
Interest Payments/Exports Ratio
from 35.6% to 9.5%*
38
34
30
%
26
22
18
14
10
6
1999
2000
2001
2002
2003
2004
2005
2006
* Record low since the start of the series in 1970.
2007
21
IPCA Expectations and Target
15
12-month IPCA
expectations
% p.a.
12
9
upper limit
6
central target
3
lower limit
0
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Dec
02
03
04
05
06
07
08
09
09
22
Inflation Convergence to Targets
IPCA (12-month trailing basis )
18
market
consensus
15
%
12
Feb 08:
4.61%
2008: 4.44%*
9
6
3
0
Jan
Jan
Jan
Jan
Jan
Jan
Jan
03
04
05
06
07
08
09
*March 20
23
Consolidated Public Sector Primary Surplus
7
6
avg. 1994-Jun/95
4.77%
% of GDP
5
Jan 08
4.15%
avg. 2003-2007
4.13%
4
3
2
avg. 1999-2002
2.91%
avg. Jul/95-1998
-0.08%
1
0
-1
-2
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
24
Debt/GDP
57
56.0
55
1Q 02 – 2Q 07 (quarterly data)
53
market
expectations
(annual data)
51
% of GDP
49
4Q 07
42.8
47
45
43
41
39
37
35
1Q
02
35.1
1Q
03
1Q
04
1Q
05
Source: BCB
1Q
06
1Q
07
2008
2012
25
Accumulated Reduction in FX-Linked
Domestic Debt as of Jan 2003
90
80.9
80
70
US$ billlion
60
50
40
30
20
10
0
-10
Jan
03
Jul
03
Jan
04
Jul
04
Jan
05
Jul
05
Jan
06
Jul
06
Jan
07
Jul
07
Jan
08
26
III. Conclusions
27
Conclusion
 Asset Prices
 Similarly to what was seen in the last two decades or so, the Brazilian
assets depreciated in response to the break out of the sub-prime financial
turmoil
 However, differently from the old pattern, the depreciation was relatively
modest and they fastly recovered and on balance have not been hardly
affected so far
 Banking Sector
 The Brazilian bank sector was healthy enough to overcome the problems
caused by the international liquidity crunch without sacrificing the recent
cicle of credit expansion
 Macroeconomic Developments
 Afer almost a decade of Inflation Targetting, flotation and generation of
primary surplus (privatisation, bank reform), “this time is different”
 From my perspective, since there has been a strong enhancement in the
fundamentals, this is largely the best explanation for the fact that so far
Brazil has not suffered a lot as a consequence of the sub-prime crisis
28