latinmacrowatch special analysis

LatinMacroWatch

Special Analysis

LatinMacroWatch

Special Analysis

8-7-028-7-02

LMW: the Big Picture on a Small Screen

A new RES feature

August 7, 2002August 7, 2002

LAC-7 Outlook: The Specter of Capital FlightLAC-7 Outlook:

The Specter of Capital Flight

Prepared for Presentation at IADB Board of Directors, Prepared for Presentation at IADB Board of Directors, WashingtonWashington, DC, DC

33

KEY QUESTIONSKEY QUESTIONS

What’s behind the current sharp growth What’s behind the current sharp growth slowdown in the region? Is there evidence of slowdown in the region? Is there evidence of Contagion? What kind?Contagion? What kind?

Are the G-7 shooting in the right direction? Are the G-7 shooting in the right direction? Should Moral Hazard be their main concern?Should Moral Hazard be their main concern?

How likely is it for the region to enter a new How likely is it for the region to enter a new “lost decade”?“lost decade”?

What is likely to happen in Brazil?What is likely to happen in Brazil?

What should IDB do?What should IDB do?

OUTLINE

I. I. Capital Flight and Macroeconomic Capital Flight and Macroeconomic PerformancePerformance

II.II. The Specter of Capital FlightThe Specter of Capital Flight

III.III. Vulnerabilities to Capital Flight: Recent Vulnerabilities to Capital Flight: Recent Experiences of Argentina, Uruguay and BrazilExperiences of Argentina, Uruguay and Brazil

IV.IV. Summary and the Role of the IADBSummary and the Role of the IADB

LAC-7 Business Cycle: 1997-2002(s.a. GDP, mean annualized quarterly growth rate)

Includes: Argentina Brazil, Chile, Colombia, Mexico, Peru and Venezuela

Deceleration Recession Recovery Stalling

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%1

997

.I

199

7.II

I

199

8.I

199

8.II

I

199

9.I

199

9.II

I

200

0.I

200

0.II

I

200

1. I

200

1.II

I

200

2.I

70

80

90

100

110

120

130

1998

.II

1998

.III

1998

.IV

1999

.I

1999

.II

1999

.III

1999

.IV

2000

.I

2000

.II

2000

.III

2000

.IV

2001

. I

2001

.II

2001

.III

2001

.IV

2002

.I

Exports

Consumption

Investment

Recession StallingRecovery

LAC-7 Components of Demand(1998.II = 100)

Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru

LAC-7 Capital Flows(4 quarters, millions of US dollars and % of GDP )

Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

0

20000

40000

60000

80000

100000

1200001

997

-I

199

7-I

II

199

8-I

199

8-I

II

199

9-I

199

9-I

II

200

0-I

200

0-I

II

200

1-I

200

1-I

II

200

2-I

0%

1%

2%

3%

4%

5%

6%

% of GDP

Millions of US dollars

LAC-7 Non-FDI Capital Flows(4 quarters, millions of US dollars and % of GDP )

Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

-60000

-40000

-20000

0

20000

40000

600001

997

-I

199

7-I

II

199

8-I

199

8-I

II

199

9-I

199

9-I

II

200

0-I

200

0-I

II

200

1-I

200

1-I

II

200

2-I

-4%

-3%

-2%

-1%

0%

1%

2%% of GDP

Millions of US dollars

LAC-7 Business Cycle and Capital Flows (GDP and Non FDI Capital Flows, last four quarters)

-3%-2%-1%0%1%2%3%4%5%6%7%

Ma

r-9

6

Se

p-9

6

Ma

r-9

7

Se

p-9

7

Ma

r-9

8

Se

p-9

8

Ma

r-9

9

Se

p-9

9

Ma

r-0

0

Se

p-0

0

Ma

r-0

1

Se

p-0

1

Ma

r-0

2

GD

P (

yoy

% c

han

ge)

-4%

-3%

-2%

-1%

0%

1%

2%

No

n F

DI C

apit

al F

low

s (%

GD

P)

GDP

Non FDI Capital Flows

OUTLINE





1111

-20

0

20

40

60

80

100

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Net Private Capital Flows to LAC(Billions of real US dollars of May 2002, deflated by US CPI)

Source: WEO, IMF

1212

0

10

20

30

40

50

60

70

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Net Direct Investment to LAC(Billions of real US dollars of May 2002, deflated by US CPI)

Source: WEO, IMF

1313

-60

-40

-20

0

20

40

60

80

100

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Financial Flows to LAC(Billions of real US dollars of May 2002, deflated by US CPI)

Financial Flows= Net Portfolio Investment + Othe Ner Investment

Source: WEO, IMF

1414

Cumulative Total Private Capital Flows to LAC (Billions of real US dollars of May 2002, deflated by US CPI)

Source: WEO, IMF

0

50

100

150

200

250

300

350

400

450

500

-60

-40

-20

0

20

40

60

801974-1981 1982-1989

FDI Total Private Flows

Financial Flows


Financial Flows

1515

Cumulative Total Private Capital Flows to LAC (Billions of real US dollars of May 2002, deflated by US CPI)

Source: WEO, IMF

0

100

200

300

400

500

600

-100

-50

0

50

100

150

200

250


Financial Flows

1990-1998 1999-2001


Financial Flows

1616

0

100

200

300

400

500

600

700

Financial Flows FDI Total Private Flows

Cumulative Total Private Capital Flows to LAC: 1990-2001(Billions of real US dollars of May 2002, deflated by US CPI)

Source: WEO, IMF

1717

Cumulative Total Private Capital Flows to Asia (Billions of real US dollars of May 2002, deflated by US CPI)

Source: WEO, IMF

0

100

200

300

400

500

600

-200

-150

-100

-50

0

50

100

150

1989-1997 1998-1999


Financial Flows


Financial Flows

OUTLINE





Exposure of the Public Sector to Capital Flight(Public Debt in % of GDP)

5%

15%

25%

35%

45%

55%

65%

Uruguay Argentina Brazil Chile

In US$

In domestic currency

Current levelsPre- Capital Flight levels

0%

10%

20%

30%

40%

50%

60%

70%

80%

Argentina Uruguay Brazil Chile

Exposure of the Private Sector to Capital Flight(Share of foreign currency loans to the non financial private sector)

Current levelsPre- Capital Flight levels

Exposure of the Financial System to the Public SectorCredit to the public sector in % of total assets

0%

5%

10%

15%

20%

25%

30%

Brazil Argentina Uruguay Chile

Current levelPre- Capital Flight levelCurrent level

Vulnerability to Capital Flight: A Summary

Brazil ChileArgentina Uruguay

Financial Mismatches of the Private Sector

= High vulnerability

= Medium vulnerability

= Low vulnerability

Financial mismatches of the Public Sector

Public Debt to GDP

Banking System Exposure to the Public Sector

BRAZIL

600

800

1000

1200

1400

1600

1800

2000

2200

24001/

2/01

3/2/

01

5/2/

01

7/2/

01

9/2/

01

11/2

/01

1/2/

02

3/2/

02

5/2/

02

7/2/

02

basi

s po

ints

1.9

2.1

2.3

2.5

2.7

2.9

3.1

R$

per

dolla

r

nominal exchange rate

EMBI+ spread

Exchange Rate and Country Risk

Public Debt(% of GDP)

45

47

49

51

53

55

57

59

61

En

e-0

0

Ma

r-0

0

Ma

y-0

0

Jul-

00

Se

p-0

0

No

v-00

En

e-0

1

Ma

r-0

1

Ma

y-0

1

Jul-

01

Se

p-0

1

No

v-01

En

e-0

2

Ma

r-0

2

Ma

y-0

2

Level: US$ 263.8 billion (58.6% of GDP)

Public Debt StructureJune 2002

Indexed to the Interest Rate

40%

Fixed

Rate 7%

Others

9%

External or FX indexed Public Debt

44%

Banks’ Exposure to the Public Sector Public Bond Holdings

0%

50%

100%

150%

200%

250%

300%

350%

In % of Banks’ Assets In % of Banks’ Net Worth

Fiscal SustainabilityApril 2002

54.5% 10.9% 3.5% 3.9%

Public Debt (% of GDP) Interest Rate Growth Rate

Primary Balance

3.4%

Required Observed

Adjustment = 0.5%

Public Debt Dynamics

April 2002

Fiscal Impact of:

54.5% 10.9% 3.5% 3.9%

Public Debt (% of GDP)

Interest Rate

Growth Rate

Primary Balance that stabilizes Debt

10% real depreciation

57.2% 10.9% 3.5% +0.2%


57.2% 10.9% 3.5% +0.2%


April 2002

Fiscal Impact of:

54.5% 10.9% 3.5% 3.9%


Interest Rate

Growth Rate


1% increase in the domestic interest rate

54.5% 11.4% 3.5% +0.3%


57.2% 10.9% 3.5% +0.2%

1% increase in the domestic interest rate

54.5% 11.4% 3.5% +0.3%

April 2002

Fiscal Impact of:

54.5% 10.9% 3.5% 3.9%


Interest Rate

Growth Rate


1% reduction in the growth rate

54.5% 10.9% 2.5% +0.6%


Liquidity Requirements of the Public Sector

(Millions of US dollars)July 02 - Dec 02 July 02 - June 03

I. FISCAL DEFICIT (est.) 11,535 20,787

II. PUBLIC DEBT AMORTIZATIONS 46,768 88,861

Domestic Debt 41,005 75,282

External Debt 5,763 13,580

III. (I) + (II) 58,303 109,649

IV. MONETARY BASE 19,000 19,000

V. POTENTIAL LIQUIDITY REQUIREMENTS: (III) + (IV) 77,303 128,649

Liquid International Resources of the Public Sector(Millions of US dollars)

I. International Reserves (end June without IMF loan) 32,000

II. IMF Credit Line 10,000

III. Total Available Liquid Funds ( I+II) 42,000

Note: Under the IMF agreement there is an agreed floor for reserves of US$ 15 billion.

In % of July02-Dec02 Liquidity Req.

In % of July02-May03 Liquidity Req.

54%

33%

Total Gross Private External DebtIn millions of US$

50000

70000

90000

110000

130000

150000

1700001

997

-IV

199

8-I

199

8-I

I

199

8-I

II

199

8-I

V

199

9-I

199

9-I

I

199

9-I

II

199

9-I

V

200

0-I

200

0-I

I

200

0-I

II

200

0-I

V

200

1-I

200

1-I

I

200

1-I

II

200

1-I

V

Liquidity Requirements of the Private Sector

(Millions of US dollars)

July 02 - Dec 02 July 02 - June 03

EXTERNAL DEBT AMORTIZATIONS 16,370 28,309

Medium and Long Term 9,694 14,957

Short Term 6,676 13,352

Capital flight and financial collapse can generate:

severe productive disruptionssevere productive disruptions

political instabilitypolitical instability

social unrestsocial unrest

… … and these conditions may validate the initial and these conditions may validate the initial flight. Furthermore the disruptive effects of the flight. Furthermore the disruptive effects of the flight of financial capital can frighten FDI and flight of financial capital can frighten FDI and thereby multiply its effects. thereby multiply its effects.

OUTLINE





3838

SUMMARYSUMMARY

There are clear signs of Capital Flight since the 1998 There are clear signs of Capital Flight since the 1998 Russian Crisis.Russian Crisis.

Economic Contagion is not obvious, although the whole Economic Contagion is not obvious, although the whole region is suffering from higher spreads.region is suffering from higher spreads.

The depth and spread of crises in region may be rooted The depth and spread of crises in region may be rooted in in G-7 Pontious Pilate approach to financial crisis in G-7 Pontious Pilate approach to financial crisis in

EMs, caused by fear of a Moral Hazard epidemic.EMs, caused by fear of a Moral Hazard epidemic.Political cycle and backward-looking politicians who Political cycle and backward-looking politicians who

fail to see the enormous rebound potential of the fail to see the enormous rebound potential of the region.region.

Financial vulnerabilitiesFinancial vulnerabilities

3939

ROLE OF THE IADBROLE OF THE IADB

Help to convey the regional view about the Help to convey the regional view about the cause of, and remedies for, the current crises--cause of, and remedies for, the current crises--partly to counteract the Moral Hazard obsession:partly to counteract the Moral Hazard obsession:it is time for the IADB to move forward from it is time for the IADB to move forward from

the end of the line, and make its voice heard the end of the line, and make its voice heard and heededand heeded at the planning stage! at the planning stage!

Design social programs that help prevent social Design social programs that help prevent social unrest, a serious deterrent for FDI (the main unrest, a serious deterrent for FDI (the main source of international finance in the region).source of international finance in the region).

Design social programs to ameliorate the impact Design social programs to ameliorate the impact of crises on poverty.of crises on poverty.

Enhance competitiveness programs and support Enhance competitiveness programs and support of FTAA negotiations.of FTAA negotiations.

August 7, 2002August 7, 2002

LAC-7 Outlook: The Specter of Capital FlightLAC-7 Outlook:

The Specter of Capital Flight

Prepared for Presentation at IADB Board of Directors, Prepared for Presentation at IADB Board of Directors, WashingtonWashington, DC, DC

LatinMacroWatch

Special Analysis

LatinMacroWatch

Special Analysis

8-7-028-7-02

LMW: the Big Picture on a Small Screen

A new RES feature

latinmacrowatch special analysis

Documents