financial stability in latin america agustin carstens_asba... · source: world bank and imf world...

October, 2016

Financial Stability in Latin AmericaEleventh High Level Meeting on Global Banking Standards and Supervisory Priorities in the Americas

Financial Stability in Latin America

1. Introduction

2. External Environment

3. Macrofinancial risks and Vulnerabilities

4. Latin American Banking

5. Conclusions

2Financial Stability in Latin America

• Over the last decades, countries in Latin America have

reduced the risk of domestically driven financial crises and

enhanced their resilience to external shocks.

• In turn, financial institutions in Latin American economies

have exhibited a strong resilience to both domestic and

external shocks.

• Nevertheless, recent developments in the global economy

as well as domestic factors pose challenges in terms of the

risks and vulnerabilities for financial stability in several

countries.

3

Introduction



1. Introduction


3. Macrofinancial Risks and Vulnerabilities


5. Conclusions



The international environment has been characterized byweakness in global economic activity and the stagnation ofworld trade

-1

0

1

2

3

4

5

6

7

2006

2008

2010

2012

2014

2016

2018

2020

2011 2012

201320142015

2016

Global Growth Forecast%

Source: IMF, World Economic Outlook

-25

-20

-15

-10

-5

0

5

10

15

20

25

20

06

20

07

20

08

20

09

2010

20

11

20

12

20

13

20

14

2015

20

16

World TradeAnnual % Change

Source: World Trade Organization


The Chinese economy has slowed and commodity pricesremain at low levels

0

2

4

6

8

10

12

14

16

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16 0

100

200

300

400

500

600

20

06

2007

20

08

20

09

20

10

20

11

2012

20

13

20

14

20

15

20

16

Energy

Industrial Metals

Agriculture & Livestock

China Real GDP Growth%

Commodity PricesIndex

Source: IMF, World Economic Outlook Source: Bloomberg


Monetary policy remains highly accommodative inadvanced economies, although in the U.S. thenormalization process is gradually underway

0

10

20

30

40

50

60

70

80

90

0

5

10

15

20

25

30

35

20

08

2009

20

10

20

11

20

12

20

13

20

14

20

15

2016

Federal Reserve

ECB

Bank of England

Bank of Japan

-1

0

1

2

3

4

5

6

20

08

20

09

20

10

20

11

20

12

20

13

20

14

2015

20

16

Federal ReserveBank of EnglandECBBank of Japan

Central Banks Balance Sheets% GDP

Central Banks Interest Rates%

Source: Federal Reserve, European Central Bank, Bank of England, Bank of Japan, Haver Analytics.

Source: Bloomberg


1. Introduction




5. Conclusions



Latin America has experienced an economic slowdown andfiscal deficits have widened

GDP Growth%


-2

0

2

4

6

8

10

Arg

enti

na

Bra

zil

Ch

ile

Col

ombi

a

Cos

ta R

ica

Do

min

ican

Rep

ub

lic

Ecu

ado

r

El S

alva

dor

Gu

atem

ala

Jam

aica

Mex

ico

Pan

ama

Per

u

Uru

guay

Average growth rate 2010-2012

Average growth rate2013-2015

-12

-10

-8

-6

-4

-2

0

2

4

Arg

enti

na

Bra

zil

Ch

ile

Col

ombi

a

Co

sta

Ric

a

Dom

inic

an R

epu

blic

Ecu

ad

or

El S

alva

dor

Gu

atem

ala

Jam

aica

Me

xico

Pana

ma

Peru

Uru

guay

2010 2015

Fiscal Balance% GDP


Public debt levels have shown an upward trend in the region


*Weighted average by GDP. Countries included: Argentina,Brazil, Chile, Colombia, Costa Rica, Dominican Republic ,Ecuador, El Salvador, Guatemala, Jamaica, Mexico,Panama, Peru and Uruguay.

Gross Public DebtWeighted average by GDP*

Gross Public Debt% GDP

42

44

46

48

50

52

54

56

58

2007

2008

2009

2010

2011

2012

2013

2014

2015

0

20

40

60

80

100

120

140

160

Arg

en

tin

a

Bra

zil

Ch

ile

Co

lom

bia

Co

sta

Ric

a

Do

min

ican

Re

pu

blic

Ecua

dor

El S

alv

ad

or

Gu

atem

ala

Jam

aica

Me

xico

Pana

ma

Pe

ru

Uru

gu

ay

2010 2015


Domestic credit increased over the last years, although ithas recently slowed in line with economic activity

Domestic Credit to Private Sector% GDP

Domestic Credit to Private SectorWeighted average by GDP*

% GDP

Source: World Bank*Weighted average by GDP. Countries included: Brazil,Chile, Colombia, Costa Rica, Dominican Republic , ElSalvador, Guatemala Jamaica, Mexico, Peru and Uruguay.

0

20

40

60

80

100

120

Bra

zil

Chi

le

Co

lom

bia

Cos

ta R

ica

Do

min

ican

Rep

ub

lic

El S

alv

ad

or

Gu

atem

ala

Jam

aica

Mex

ico

Per

u

Uru

guay

2010 2015

15

20

25

30

35

40

45

50

55

60

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015


Source: World Bank and IMF World Economic Outlook*On average, credit growth has been 2.7 times GDP growth.

Domestic Credit to Private Sector and GDP growth*

Average 2010-2015

Domestic credit has grown faster than economic activity

-1

1

3

5

7

9

11

13

15

Bra

zil

Ch

ile

Co

lom

bia

Co

sta

Ric

a

Do

min

ican

Re

pu

blic

El S

alva

do

r

Gu

atem

ala

Jam

aica

Mex

ico

Peru

Uru

guay

Average economic growth 2010-2015

Average growth of domestic credit to private sector 2010-2015


External debt of non-financial corporations has exhibited anupward trend in the region

0

1

2

3

4

5

6

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: BIS*International debt securities

*Weighted average by GDP. Countries included: Argentina,Brazil, Chile, Colombia, Costa Rica, Dominican Republic ,Guatemala Jamaica, Mexico and Peru.

External Debt of Non-financial Corporations

Weighted average by GDP*

External Debt of Non-financial Corporations*

% GDP

0

5

10

15

20

25

30

Arg

enti

na

Bra

zil

Chi

le

Col

ombi

a

Cos

ta R

ica

Do

min

ican

Re

p.

Gu

atem

ala

Jam

aica

Mex

ico

Peru

2010 2015


Scenarios for deleveraging in LATAM Firms and Default Rates

0

5

10

15

20

25

30

2001

2003

2005

2007

2009

2011

2013

2015

0 10 20 30 40 50

Peru

Chile

Mexico

Argentina

Colombia

Brazil

ICR <= 1

1 < ICR <= 2

2 < ICR <= 3

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2007

2008

2009

2010

2011

2012

2013

2014

2015

LATAM corporate debt to EBITDAMultiples

Share of corporate debt by interest coverage ratio bucket

2016%

Dollar Bond Default Rates in Latin America

%

Source: Global Stability Report, IMF Oct 16 Source: Global Stability Report, IMF Oct 16 Source: Global Stability Report, IMF Oct 16

• After having slowed during the last few years, capital flows

to Latin America have recently picked up.

Given accommodative monetary conditions in major

advanced and the moderate recovery in commodity prices,

capital flows to the region have started to recover.

However, Latin American economies still face the risk of

reversals in capital flows, disorderly increases in domestic

interest rates and additional foreign exchange pressures.

This scenario represents an important challenge for

domestic financial systems.


Macrofinancial Risks and Vulnerabilities


1. Introduction




5. Conclusions


0.6

0.8

1

1.2

1.4

1.6

1.8

2

2.2

EmergingAsia

EmergingEurope

LatinAmerica

Other EMEs

2010 2015

10

11

12

13

14

15

16

17

18

EmergingAsia

EmergingEurope

LatinAmerica

Other EMEs

2010 2015

17

Regulatory Capital to Risk-WeightedAssets

%


Return on Assets%

Banks in EMEs appear well-capitalized and have beenable to maintain adequate levels of profitability

Weighted average based on total assets of banking systems in Emerging Asia (China, India, Indonesia, Malaysia, Philippines, Singapore and Thailand), EmergingEurope (Czech Republic, Hungary, Poland, Russia, Turkey), Latin America (Argentina, Brazil, Chile, Colombia, Mexico and Peru) and other emerging countries(Israel, Saudi Arabia, South Africa, United Arab Emirates).Source: IMF, Financial Soundness Indicators and Global Financial Stability Report.

40

60

80

100

120

140

160

180

EmergingAsia

EmergingEurope

LatinAmerica

OtherEMEs

2010 2015

5

10

15

20

25

30

35

EmergingAsia

EmergingEurope

LatinAmerica

OtherEMEs

2010 2015

1

2

3

4

5

6

7

EmergingAsia

EmergingEurope

LatinAmerica

OtherEMEs

2010 2015

18

Bank Provisions to Nonperforming Loans

%


Nonperforming Loans to Total Loans

%

Foreign-Currency-Denominated Loans to Total

Loans%

Loan performance in EMEs shows some deterioration.Actions must be taken to maintain high asset quality


10

20

30

40

50

Emerging Asia EmergingEurope

Latin America Other EMEs

2010 2015

70

80

90

100

110

120

130

EmergingAsia

EmergingEurope

Latin America Other EMEs

2010 2015

19

Customer Deposits to Total Loans%


Wholesale funding%

Banks funding structure has become more dependent onwholesale funding


• Considerable progress has been achieved in the region to enhance financial

stability by improving regulation and supervisory practices.

• However, progress has been heterogeneous and important shortcomings still

remain. Areas which deserve attention are:

Quality and quantity of capital.

Implementation of liquidity standards.

Supervisors’ operational and resources independence.

Supervisory frameworks over banks’ risk management policies.

Forward looking estimation of credit losses and provisioning practices.

Internal controls, audit and Know-your-customer (AML-CFT)

Consolidated supervision.

Macroprudential policy frameworks. Clear mandate and scope of systemic

stability; macroprudential toolkit, and; effective coordination, execution

and accountability mechanisms.

20

Regulation and supervision of the banking sector



1. Introduction




5. Conclusions


• Given the complex external environment and the domestic

vulnerabilities prevailing in several cases, Latin America

economies need to:

Design and adopt growth enhancing reforms and diversify

their economies.

Implement sound macroeconomic policies and improve

their economic fundamentals.

In some cases, further strengthening the supervisory and

regulatory framework may be needed to prevent the

development of financial imbalances.

Authorities must be prepared to intervene in key financial

markets in order to preserve their orderly functioning.

22

Conclusions


financial stability in latin america agustin carstens_asba... · source: world bank and imf world...

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