Global Scenarios for LAC - World Banksiteresources.worldbank.org/EXTLACOFFICEOFCE/Resources/870892... · Notes: In panel B the ... Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua,
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11
How Nasty will the External Environment Get?Global Scenarios for LAC
RTM Retreat
Washington, DC2 November 2011
Chief Economist OfficeLatin America and the CaribbeanThe World Bank
The European EpicenterReversal of fortune!
3Source: Bloomberg
0 500 1000 1500 2000
SwedenGermany
FranceBelgium
SpainPortugal
Slovak RepIrelandGreece
ItalyPoland
ChileMalaysia
KoreaHungaryThailand
CroatiaMexico
BulgariaSouth Africa
RomaniaRussiaBrazil
VietnamPeru
PanamaColombiaIndonesiaPhillipines
TukeyKazakhastan
UkrainVenezuelaArgentina
Global Sovereign CDS31-Dec-2007, in basis points
0 1000 2000 3000 4000 5000 6000
SwedenGermany
ChileMalaysia
KoreaPanama
Slovak RepThailand
ColombiaMexico
BrazilPeru
FranceSouth Africa
PhillipinesIndonesia
RussiaKazakhastan
PolandBelgiumTurkey
BulgariaRomania
SpainVietnamCroatia
ItalyHungaryUkraineIreland
ArgentinaPortugal
VenezuelaGreece
Global Sovereign CDS16-Sep-2011, in basis points
The European epicenterOne currency, 17 sovereign debt issuers
4Source: Bloomberg
-5%
0%
5%
10%
15%
20%
25%
Mar
-93
Apr-9
4
May
-95
Jun-
96
Jul-9
7
Aug-
98
Sep-
99
Oct
-00
Nov
-01
Jan-0
3
Feb-
04
Mar
-05
Apr-0
6
May
-07
Jun-
08
Jul-0
9
Aug-
10
Sep-
11
Spreads Over German BondsIn %
Official Launch of the EuroPortugal
Greece
Ireland
France
Italy
Spain
The European epicenterStructural heterogeneity and the CGD trap
5
80
100
120
140
160
180
200
Q1-
2000
Q3-
2000
Q1-
2001
Q3-
2001
Q1-
2002
Q3-
2002
Q1-
2003
Q3-
2003
Q1-
2004
Q3-
2004
Q1-
2005
Q3-
2005
Q1-
2006
Q3-
2006
Q1-
2007
Q3-
2007
Q1-
2008
Q3-
2008
Q1-
2009
Q3-
2009
Q1-
2010
Q3-
2010
Q1-
2011
Unit Labor Costs in EuropeIndex base 100 = q1-2000
GermanyItalyPortugalGreeceFranceSpain
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Greece France Ireland Portugal Italy Spain
% o
f G
DP
Debt Sustainability in EuropeTheoretical vs Actual Primary Balance
Actual
Theoretical
Source: EuroStats and Bloomberg. For panel B, the theoretical primary balances is calculated using the last observation of the nominal interests rates on 10ys bonds, and assuming a long term inflation and growth of 1.5% and 2%, respectively.
The European epicenterIs a Euro in an Italian bank the same as a one in a German bank?
6Notes: In panel B the LIBOR–OIS is the difference between LIBOR and the overnight indexed swap (OIS) rates. Source: Bloomberg
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
350.0%
400.0%
Mar
-07
Jun-
07
Sep-
07
Dec
-07
Mar
-08
Jun-
08
Sep-
08
Dec
-08
Mar
-09
Jun-
09
Sep-
09
Dec
-09
Mar
-10
Jun-
10
Sep-
10
Dec
-10
Mar
-11
Jun-
11
Sep-
11
Libor - OIS Spreads in the US and EuropeIn percent
Libor - OIS Spread (USD)
Libor - OIS Spread (EUR)
0
50
100
150
200
250
300
350
50
60
70
80
90
100
110
120
130
Jan-
11
Jan-
11
Jan-
11
Feb-
11
Feb-
11
Mar
-11
Mar
-11
Apr-1
1
Apr-1
1
May
-11
May
-11
Jun-
11
Jun-
11
Jul-1
1
Jul-1
1
Aug-
11
Aug-
11
Aug-
11
Sep-
11
Sep-
11
Oct
-11
Oct
-11
bps
Inde
x bas
e 100
= Ja
n-11
European BanksBloomberg Europe Banks Index base 100 = Jan-11, CDS in bps
Bloomberg Europe Banks Index
Markit iTraxx Europe Financial CDS Index (rhs)
The US epicenterFeeble growth prospects: Keynes vs. Fischer
7Sources: Consensus Forecasts (October 2011) and Bloomberg.
90
95
100
105
110
115
120
125
130
135
Mar
-03
Nov
-03
Jul-0
4
Mar
-05
Nov
-05
Jul-0
6
Mar
-07
Nov
-07
Jul-0
8
Mar
-09
Nov
-09
Jul-1
0
Mar
-11
Nov
-11
Jul-1
2
Mar
-13
Inde
x ba
se 10
0 =
Iq -
2003
US Economic ActivityGDP Index base 100 = Iq - 2003
2003-2007 trend
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
0
10
20
30
40
50
60
70
Jan-
06A
pr-0
6Ju
l-06
Oct
-06
Jan-
07A
pr-0
7Ju
l-07
Oct
-07
Jan-
08A
pr-0
8Ju
l-08
Oct
-08
Jan-
09A
pr-0
9Ju
l-09
Oct
-09
Jan-
10A
pr-1
0Ju
l-10
Oct
-10
Jan-
11A
pr-1
1Ju
l-11
Oct
-11
Indu
stri
al P
rodu
ctio
n (Y
oY)
ISM
Inde
x
Industrial Production and ISM IndexIndustrial Production (YoY %)
ISM Index Series2
The US EpicenterDowngraded but still the safe haven (“exorbitant privilege”)
8Source: Bloomberg
90
95
100
105
110
115
Dec
-10
Jan-
11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
Aug
-11
Sep-
11
Currencies: 2011Index base 100 = 1-Jan-2011
Japan UK
US-EUR Brazil
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1200
1300
1400
1500
1600
1700
1800
1900
2000
Jan-
11
Jan-
11
Feb-
11
Feb-
11
Mar
-11
Mar
-11
Apr
-11
Apr
-11
May
-11
May
-11
May
-11
Jun-
11
Jun-
11
Jul-1
1
Jul-1
1
Aug
-11
Aug
-11
Sep-
11
Perc
ent
USD
Gold and US T10 2011
Gold
US T10 (rhs)
Real cyclical de-coupling has been a salient feature of the post-crisis global economic landscape…
10Note: The group of developed countries refers to OECD countries excluding Turkey, Mexico, Republic of Korea, and Central European countries. Source: CPB (Netherlands Bureau for Economic Policy Analysis).
80
85
90
95
100
105
110
115
120
Jan-
06
Aug-
06
Mar
-07
Oct-0
7
May
-08
Dec-
08
Jul-0
9
Feb-
10
Sep-
10
Apr-1
1
World Industrial ProductionIndex Apr-08 = 100
CrisisAdvanced EconomiesEmerging Economies
51%38%
27%
34%44%
57%
8% 7% 8%8% 11% 8%
0%
20%
40%
60%
80%
100%
1996-2001 2001-2006 2009-2011
Contribution to World Economic GDPas a % of World GDP increase (PPP)
Others Other Advanced EconomiesEM - 20 Euro (15)+US+Japan+Canada+UK
For LAC it has been a decade of trend decoupling also
11Notes: In Panel B, High Performance EAP includes Korea Rep., Taiwan, Hong Kong, and Singapore; Low Performance EAP includes Indonesia, Philippines, Thailand, andMalaysia; LAC includes the following countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay, Venezuela, Bolivia, Costa Rica, Dominican Republic, Ecuador, ElSalvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua, Panama, and Paraguay. The weights are calculated using the 2007 nominal GDP. Source: Penn World Tables.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Cyclical Adjusted Growth
High-Income
Latin America
Avg 61-70 Avg 71-80 Avg 81-90 Avg 91-00 Avg 01-08 Avg 61-08
LAC 7 1.9% 0.4% -2.0% 0.2% 1.0% 0.3%Non - LAC 7 1.1% 0.5% -2.0% 0.1% 1.2% 0.2%
Argentina 1.3% -0.2% -2.5% 2.0% 1.4% 0.4%Brazil 2.9% 3.2% -3.3% -1.7% 0.5% 0.3%Chile 1.5% 0.5% -0.5% 2.9% 0.5% 1.0%Colombia 1.4% 1.0% -1.3% 0.0% 1.3% 0.5%Mexico 2.0% 0.3% -0.9% -1.6% 0.3% 0.0%Peru 2.4% -0.2% -3.8% 0.5% 2.9% 0.4%Venezuela 2.1% -2.1% -1.6% -0.5% 0.2% -0.4%
EAP 3.1% 2.1% 2.3% 1.3% 2.0% 2.2%China -0.5% 0.9% 1.6% 3.4% 6.2% 2.3%United States 0.9% -0.4% 1.1% 1.0% 0.6% 0.6%Japan 6.7% 1.1% 1.4% -0.7% 0.9% 1.9%
Average TFP growth per year
… much is due to the China connection
12
-0.2
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Jan-0
4
Jun-
04
Nov
-04
Apr-0
5
Sep-
05
Feb-
06
Jul-0
6
Dec
-06
May
-07
Oct
-07
Mar
-08
Aug-
08
Jan-0
9
Jun-
09
Nov
-09
Apr-1
0
Sep -
10
Feb-
11
Jul-1
1
Industrial Production: Latin America w.r.t Asia, US and Europe
AsiaUSEurope
Notes: In both panels, the coefficients were estimated using the percentage variation of industrial production against the percentage variation in industrial production in Asia, US and Europe. In Panel A the coefficients are associated to the following regression IP Latam=a+b1*IP(US)+b2*IP(Europe)+b3*IP(Asia). In Panel B, the coefficients are associated to IPLAC 6=a+b1*IP(US)+b2*IP(Europe)+b3*IP(Asia). LAC 6 includes Argentina, Brazil, Chile, Colombia, Peru and Mexico. One st .dev. in dashed lines. Sources: World Bank.
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1980 1984 1988 1992 1996 2000 2004 2008
Output Co-Movement Between LAC and China20 years rolling correlation of the Real GDP Growth
Brazil Chile ColombiaMexico Peru ArgentinaPanama Dom. Rep.
Financial coupling, however, is intensifying along a trend!
13Source: Bloomberg
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Equity Foreign Exchange CDS Spreads
Perc
ent
Emerging Market Asset Returns and Common Factors Average R-Squared from Country Regressions
Early Period (2000-2005)Late Period (Jan-05 to Jul-08)Crisis (Aug-08 to Apr-09)
60
70
80
90
100
110
120
Jan-
11Fe
b-11
Feb-
11M
ar-1
1M
ar-1
1A
pr-1
1A
pr-1
1M
ay-1
1M
ay-1
1Ju
n-11
Jun-
11Ju
l-11
Jul-1
1A
ug-1
1A
ug-1
1A
ug-1
1Se
p-11
Sep-
11O
ct-1
1O
ct-1
1N
ov-1
1
Stocks Markets 2011In USD, Index base 100 = Jan - 2011
Japan S&P 500
Brazil UK
Germany France
14Source: Bloomberg
0
10
20
30
40
50
60
70
80
90
Aug
-05
Dec
-05
Mar
-06
Jun-
06Se
p-06
Dec
-06
Mar
-07
Jun-
07Se
p-07
Dec
-07
Mar
-08
Jun-
08Se
p-08
Dec
-08
Mar
-09
Jun-
09Se
p-09
Dec
-09
Mar
-10
Jun-
10Se
p-10
Dec
-10
Mar
-11
Jun-
11Se
p-11
Dec
-11
VIX Index
Tranquil Sep2006-Jul2008Aug2008-May2009Jun2009-Apr2010May2010-Current
Lehman Brothers
QEI Flash Crash/PIGS
Jackson Hole (QEII)
Japan
US Downgrade
0
0.05
0.1
0.15
0.2
0.25
0.3
10 13 15 18 20 23 26 28 31 34 36 39 42 44 47 50 52 55 58 60 63 66 68 71 73 76 79
Den
sity
VIX
VIX Kernel Densities
TranquilSep2006-Jul2008Aug2008-May2009Jul2009-Apr2010May2010-Current
The financial stress we are living in…
15Notes: VIX returns are calculated as the percentage variation of the VIX index. Both the MSCI Latam returns and VIX returns are weekly returns. The Latam Sovereign Bond spreads returns are the EMBI Latam index (weekly) retunrs.
y = -0.1688x + 0.0087y = -0.5596x + 0.0061y = -0.1729x + 0.0067y = -0.1449x + 0.0015-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
-40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
MSC
I Ret
urns
VIX Returns
Elasticity of MSCI Latam w.r.t. VIXWeekly
Sep2006-Jul2008Aug2008-May2009Jun2009-Apr2010May2010-Sep2011
y = 0.237x + 0.0019
y = 0.5306x + 0.0079y = 0.1641x - 0.0091y = 0.1917x + 0.0034
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
-40.0% -20.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
EM
BI L
atam
Ret
urns
VIX Returns
Elasticity of Latam Sovereign Bond Spreads w.r.t. VIXWeekly
Sep2006-Jul2008Aug2008-May2009Jun2009-Apr2010May2010-Sep2011
… is hitting LAC assets, but much less virulently than in the Lehman aftermath, so far
Benign scenario: real decoupling continuesIf China’s growth rate and commodity prices remain high
16
30
50
70
90
110
130
150
50
100
150
200
250
300
350
400
Jan-
05
Oct
-05
Jul-0
6
Apr
-07
Jan-
08
Oct
-08
Jul-0
9
Apr
-10
Jan-
11
Oct
-11
Oil
WT
I, C
urre
nt U
S$
Whe
at, C
oppe
r and
Soy
bean
, In
dex
01-Ja
n-05
=10
0
Commodity PricesOil WTI in Current US$, Wheat, Copper and Soybean: Index base
Jan-05=100
-100
-50
0
50
100
150
200
250
300
350
400
Mar
-02
Aug
-02
Jan-
03Ju
n-03
Nov
-03
Apr
-04
Sep-
04Fe
b-05
Jul-0
5D
ec-0
5M
ay-0
6O
ct-0
6M
ar-0
7A
ug-0
7Ja
n-08
Jun-
08N
ov-0
8A
pr-0
9Se
p-09
Feb-
10Ju
l-10
Dec
-10
Gross Capital Inflows to LAC-7+URY Countries US$ Millions, Annual Flows
Gross Inflows Non-FDI Gross Inflows FDI
TOT dominates over other external factors for LAC
17Notes: LAC6+URY :Argentina, Brazil, Chile, Colombia, Mexico, Peru and Uruguay. Assumes shocks of (i) 40 percent drop in all commodity prices, leading to a -2.8 percentage points of GDP terms of trade shock (based on LA7's average net commodity exposure); (ii) a slowdown in global growth of 3.3 percent; (iii) a fall of 137 basis points in the US 10-year T-bond yield; and (iv) an increase of 14 points in the VIX. These assumptions are broadly consistent with developments during the 2008–09 crisis. Source: IMF’s WEO (Sep-2011)
-1.8%
-1.5%-1.3%
0.1%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
ToT VIX World GDP Growth US T10
LAC6+URY: Impact of a 2008 Crisis-like EventPercentage points of GDP growth
Countries with weak policies**= -6.1%
*"Strong Policies" With floating exchange rate regime, 15 percent dollarization and balanced primary fiscal accounts**"Weak Policies" With de-facto crawling band (narrower than +/-5 percent), 30 percent dollarization and primary balance of -2 percent of GDP
Countries with strong policies*= -0.47%
Forecasts are being revised downward world-wide, but so far seem to be assuming a benign scenario
18Source: Consensus Forecasts (2011)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
EEUU EuroZone China Latin America South East Asia Eastern Europe
GDP Growth Forecasts EvolutionForecasts for 2012
January 2011
October 2011
LAC was already expected to decelerate, and downward revisions have not been large, so far
19
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%Tr
in. &
Tob
.Jam
aica
El Sa
lvado
rG
uate
mala
Vene
zuela
Braz
ilM
exico
Costa
Rica
Nica
ragu
aLA
CBo
livia
Ecua
dor
Dom
. Rep
.Pa
ragu
ayCo
lom
bia
Uru
guay
Chile
Peru
Arge
ntin
aPa
nam
a
Actual Growth and Growth Forecast: LAC CountriesWeighted Averages for LAC
2011
2012
Bad scenario: a global downward re-coupling
In this scenario, major tail risks materialize and another great recession ensues
All transmission channels would be activated Terms of trade
External demand for LAC exports of goods and services
Remittances
Financial channels
LAC countries that have the greatest shock absorption capacity are not necessarily those with the greatest growth potential Mexico versus Argentina
20
Bad scenario: a global downward re-couplingLines of defense in shock absorption
Robust monetary policy frameworks in LAC, mostly Shock absorption via e-rate flexibility/monetary policy independence
Rate increases over the past 15 month gives the region room to maneuver
How good are LAC’s fiscal buffers? Comfortable public debt situation but insufficient fiscal flexibility
Much less space among Central American and Caribbean countries
How good are LAC’s financial system buffers? Strong capital and liquidity positions, except in the Caribbean
Have systemic risks been brewing in the past year or so?
How good are LAC’s social safety nets? Ability to scale up social assistance programs vary widely in the region
Social insurance frameworks are the weak link
21
LAC’s success A decade of high growth and progress in social equity
23Source: LCSPP based on Socio-Economic Database for Latin America and the Caribbean (CEDLAS and The World Bank).
-0.1 -0.05 0 0.05 0.1
ParaguayPeru
BrazilMexico
Latin AmericaPanama
ArgentinaEl Salvador
ChileBolivia
HondurasUruguay
ColombiaDominican Republic
Costa Rica
Gini Coefficient Cumulative ChangeFrom 2009 to 1995
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
20
25
30
35
40
45
1994
1996
1998
2000
2002
2004
2006
2008
2010
GDP P
er C
apita
US
Doll
ars
Mod
erat
e Pov
erty
Rat
e US
$ 4 a
Day
Per Capita GDP Growth and Poverty LAC Countries
Poverty Headcount GDP Per Capita
Cyclical-adjusted Growth in Latin America and High-Income CountriesTrend growth computed using the band-pass filter
0%
1%
2%
3%
4%
5%
6%
7%
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
High-Income
Latin America
LAC: Expanding Middle Class
LAC’s uneven successMutating regional heterogeneity
24Sources: Potential GPD is computed as the average rate of growth between 2007 and 2003. Simple averages are used to construct the composite. The categorization ofeach group is as follow: Slow-growth are those countries that showed a less than 3.5% in their 2011-2008 GDP real growth rate; Medium-growth are those between 3.5%and 10%: High-growth are those with 10% or more. For 2011 we used the last available forecast (Consensus Forecast June-2011). Sources: Consensus Forecast (June –2011); WEO (April – 2011).
90
100
110
120
130
140
150
160
170
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Slow-Growth Countries within LACGDP Index 2002 = 100
ActualPotential
90
100
110
120
130
140
150
160
170
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Medium-Growth Countries within LACGDP Index 2002 = 100
ActualPotential
90
100
110
120
130
140
150
160
170
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
High-Growth Countries within LACGDP Index 2002 = 100
ActualPotential
LAC’s uneven successWhere you are matters less than to whom you are connected
25Sources: World Bank’s World Development Indicators – WDI (December 2010), IMF's World Economic Outlook – WEO (April 2011), and Consensus Forecasts (June 2011) –Latest available forecasts. Potential GDP is calculated computing the annual average real growth rate for the 2002-2007 to 2007 GDP. Weighted averages (2007 NominalGDP in USD Billions).
Low growth (<4%): St. Kitts and Nevis, Antigua and Barbuda, Grenada, Barbados, Jamaica, Bahamas, Venezuela, Trinidad and Tobago, St. Vincent and the Grenadines, El Salvador, St. Lucia, Dominica and Mexico
Medium growth (4%-10%): Honduras, Belize, Haiti, Nicaragua, Guatemala, Costa Rica and Ecuador
High growth (>10%): Chile, Colombia, Brazil, Guyana, Bolivia, Suriname, Paraguay, Dominican Republic, Peru, Argentina, Uruguay and Panama
Number of countries
Mean growth 2003-2007*
Mean Growth 2003-2011
Mean Growth 2008-2011**
Max. 2008-2011
Min. 2008-2011
Low growth 13 4.4% 2.3% -0.3% 3.3% -12.3%Medium growth 7 4.4% 3.5% 2.4% 7.9% 4.1%High growth 12 5.4% 5.2% 4.9% 18.8% 10.0%Total 32 4.8% 3.7% 2.2% 18.8% -12.3%* This is the measure used to construct the "Potential GDP"
** This is the measure used to define the classification as "Low", "Medium" and "High".
Cumulative
VIX dominates stock market co-movement in crisis times
26Notes: The coefficient showed in both panels are associated to the following regression MSCI Latam returns=a+b1*VIX returns+b2*S&P500 returns.
MSCI LatAm Returns = a+b1*VIX+b2*S&P500
(0.0263)-0.174
-0.012-0.059
-0.200
-0.150
-0.100
-0.050
0.000
0.050
0.100
Coefficient of VIX
MSCI Latam w.r.t VIX and S&P500: VIX CoefficientRobust standar errors in parentheses
Sep2006-Jul2008Aug2008-May2009Jun2009-Apr2010May2010-Sep2011
-0.056
(0.073)
(0.019)
(0.025)
1.012 1.197 1.3530.719
-0.200
0.000
0.200
0.400
0.600
0.800
1.000
1.200
1.400
1.600
1.800
Coefficient SP500
MSCI Latam w.r.t VIX and S&P500: S&P500 Coefficient Robust standar errors in parentheses
Sep2006-Jul2008Aug2008-May2009Jun2009-Apr2010May2010-Sep2011
(0.212)
(0.195)
(0.132)
(0.213)
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