Comments on The Effect of Oil Prices: Case of Importers Discussant: Ratna Sahay International Monetary Fund October 19, 2006 XXIV Meeting of the Latin.

Comments onComments onThe Effect of Oil The Effect of Oil

Prices:Prices:Case of ImportersCase of Importers

Discussant: Ratna SahayDiscussant: Ratna Sahay

International Monetary FundInternational Monetary Fund

October 19, 2006October 19, 2006

XXIV Meeting of the Latin America Network ofXXIV Meeting of the Latin America Network of

Central Banks and Finance MinistriesCentral Banks and Finance Ministries

OverviewOverview

Presentation nicely contrasts previous Presentation nicely contrasts previous shocks with current shockshocks with current shock

Presentation is consistent with IMF viewPresentation is consistent with IMF view

Comments will focus on additional and Comments will focus on additional and somewhat different interpretation of the somewhat different interpretation of the presentationpresentation

Role of good luck and good policiesRole of good luck and good policies

Good luck: Robust global Good luck: Robust global growth: alternative growth: alternative

interpretationinterpretation Not only demand factors (US, China), which would result Not only demand factors (US, China), which would result

inin Sharp wage increases: not happened, unlike 1970s spiralSharp wage increases: not happened, unlike 1970s spiral Higher interest rates: not occurred; savings high, especially ChinaHigher interest rates: not occurred; savings high, especially China

Rather, reflects strength of positive supply-side factorsRather, reflects strength of positive supply-side factors High TFP growthHigh TFP growth Increased supply of factors of production, particularly cheap labor Increased supply of factors of production, particularly cheap labor

in newly emerging markets (China, India)in newly emerging markets (China, India) Therefore, increased prices of complementary factors of Therefore, increased prices of complementary factors of

production: commodity prices and oil production: commodity prices and oil →→

““Strong growth despite high oil prices” or “High oil Strong growth despite high oil prices” or “High oil prices because of strong growth”? Answer: Common prices because of strong growth”? Answer: Common shock (positive supply shock and unanticipated higher shock (positive supply shock and unanticipated higher growth) raised both. growth) raised both.

Good luck: Positive growth Good luck: Positive growth surprise...surprise...

WEO growth projections revised WEO growth projections revised upwardsupwards

0

1

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8

World Advanced Economies Emerging Market &Developing Countries

April 2006

September 2006

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World Advanced Economies Emerging Market &Developing Countries

April 2006September 2006

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1

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World Advanced Economies Emerging Market &Developing Countries

April 2006

September 2006

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World Advanced Economies Emerging Market &Developing Countries

April 2006September 2006

% %

Source: WEO, September 2006

...translates to higher oil demand ...translates to higher oil demand and pricesand prices

Figure 6. China: GDP and Oil Consumption(quarterly; year-on-year percent change)

-10

-5

0

5

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15

20

25

1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1

GDP China Demand Projected GDP

Sources: International Energy Agency, World Economic Outlook and IMF Staff

Projection

Source: Hossein Samiei (2006) “Global Economy and the Oil Market”, mimeo, IMF

200 150 100 50 0 50 100 150 200 250

ZimbabweMadagascar

Cape Verde.Central African Rep

Djibouti Côte d'Ivoire

Guinea-Bissau Comoros

UgandaZambia

Albania Rwanda

Burkina Faso Kenya Mali Niger

GuineaIndia

NepalSão Tomé and Príncipe

Senegal Malawi

Armenia Cambodia Honduras

St .LuciaPakistan

Grenada Dominica

Sierra LeoneSt .Vincent and the Grenadines

Benin Mauritania

Sri Lanka Nicaragua

Bangladesh Ethiopia Guyana

Gambia ,The Georgia

Haiti Mozambique

Moldova Kyrgyz Republic

MongoliaEritrea

Lao PDR Maldives

MyanmarTajikistan

Lesotho Ghana

Uzbekistan Bhutan Burundi

KiribatiSamoa

Solomon Islands Tanzania Togo Tonga

Vanuatu

Zimbabwe MadagascarCape Verde Central African Rep.Djibouti Côte d'Ivoire Guinea-Bissau Comoros Uganda ZambiaAlbania Rwanda Burkina Faso Kenya Mali Niger Guinea IndiaNepalSão Tomé and PríncipeSenegalMalawi ArmeniaCambodia Honduras St. Lucia PakistanGrenada Dominica Sierra Leone St. Vincent and the GrenadinesBenin Mauritania Sri LankaNicaragua Bangladesh Ethiopia Guyana Gambia, The Georgia Haiti Mozambique Moldova Kyrgyz Republic Mongolia EritreaLao PDRMaldives Myanmar TajikistanLesotho Ghana Uzbekistan Bhutan Burundi Kiribati SamoaSolomon Islands Tanzania Togo Tonga Vanuatu

2002 2005

Crude oil price on world market

("Brent," Europe)

Retail fuel price in the U.S.

Good policies: Higher oil price pass throughGood policies: Higher oil price pass through(Developing countries)(Developing countries)

Source: Hossein Samiei (2006)

Good policies: Better LAC fiscal Good policies: Better LAC fiscal performanceperformance

2002 2003 2004 2005 2006 200722

23

24

25

26

27

28

29

Total revenues and primary spending(Percent of GDP)

Source: IMF staff estimates.

Primary spending

Revenues

Primary surplus

Good policies: Better LAC Good policies: Better LAC monetary framework leading monetary framework leading

to low inflationto low inflation

95 97 99 01 03 05 070

5

10

15

20

25

30

35

40

Inflation(Annual % change, p.a.)

Source: WEO.

Latin America

Looking aheadLooking ahead GlobalGlobal

Output gaps are closing Output gaps are closing →→ Inflation is picking up Inflation is picking up →→ Risks to growth are weighted to the down side Risks to growth are weighted to the down side →→ Oil prices increasingly reflect future supply Oil prices increasingly reflect future supply

concerns concerns

RegionalRegional Latin AmericaLatin America

Slowing global growth, higher US interest rates could Slowing global growth, higher US interest rates could hurt hurt →→

Key challenge: raise long-term growth, with fiscal Key challenge: raise long-term growth, with fiscal discipline (IMF REO, Mexico, November 2006) discipline (IMF REO, Mexico, November 2006) →→

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