Latin America Based on Latin American Economic Outlook 2009

Paris

5 December 2008

EmNet Quarterly Meeting

Javier Santiso

Director and Chief Economist

OECD Development Centre

The financial crisis: Should Latin America be worried?

Historically speaking, yes: when the U.S. sneezes, Latin America catches cold

Effect of US Recessions on Latin American growth

(Median for Region)

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

1974-75 1980 1982 1991 2001 All

RecessionsSource: IM F , 2007

United States

Latin America

Export Exposure to the US

(change in average output gap during recessions)

-3

-2,5

-2

-1,5

-1

-0,5

0

Least exposed Most exposed Least exposed Most exposed

Industrial Countries Emerging Markets

Source: Lane and M ilesi-Ferreti, 2006

The financial crisis: Should Latin America be worried?

Current account channel: trade and remittances

-5

0

5

10

15

20

25

2004 2005 2006 2007 2008

El Salvador Guatemala

Mexico Latin America

Remittances (%, annual growth)

Source: OECD Development Centre based on World Bank, November 2008

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

China EU US Rest of World

Latin American Exports (by destination)

Source: OECD Development Centre based on WITS data, 2008

65%

The financial crisis: Should Latin America be worried?

Financial channel: foreign banks in local markets

Structure of Mexican banks (% of total assets)

Source: OECD Development Centre based on World Bank, November 2008

Market share of Foreign Banks in local banking systems (% of total assets)

Source: OECD Development Centre based on WITS data, 2008

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Mexic

o

Chile

Venezuela

Bra

zil

Arg

entina

Colo

mbia

Peru

Source: OECD Development Centre based on National Sources and Credit Suisse, 2008

20%

24%

15%

20%

11%

5%5%Mexican Banks

BBVA

Santander

Citibank

HSBC

Scotiabank

Other Foreign

Source: OECD Development Centre based on National Sources and Credit Suisse, 2008

Initial impact is limited, thanks to credible economic policies and high internal demand

Source: OECD Development Centre, based on IMF (WEO October 2008)

-5

-4

-3

-2

-1

0

1

2

3

4

5

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Advanced countries Emerging countries

Latin America

-2

-1

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008

Advanced countries Latin America

Output gap (%) GDP (% annual growth)

Source: OECD Development Centre, based on IMF (WEO October 2008)

But risks remain, depending on sensitivity to international economic conditions and inflation

Inflation (% y-o-y) Industrial production (% annual growth)

Source: OECD Development Centre, based on Thomson Datastream, 2008Source: OECD Development Centre, based on Thomson Datastream, 2008

-6

-4

-2

0

2

4

6

8

10

jan-06 jul-06 jan-07 jul-07 jan-08 jul-08

Chile Brazil United States Mexico

1

2

3

4

5

6

7

8

9

10

jan-06 jul-06 jan-07 jul-07 jan-08 jul-08

Brazil Chile Mexico

GDP growth forecasts are on the downside, but still close to potential

Slowdown is not necessarily recession

GDP forecasts for 2009 (% annual growth)

Source: OECD Development Centre, based on Consensus Forecasts, 2008Source: OECD Development Centre, based on IMF (WEO), 2008

-0,5

0

0,5

1

1,5

2

2,5

3

3,5

4

2009 (April08) 2009 (July08) 2009 (Oct.08) 2009 (Nov.08)

Latin America Advanced economies

GDP forecasts for 2009 in Latam(% annual growth)

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

Argentina M exico Venezuela Chile Colombia Brazil Latam

September 08 October 08 November 08

Latin America remains highly vulnerable to international capital markets’ volatility …

Nominal exchange rate (US$, basis 100 = Nov.07) Equity market (basis 100 = Nov.07)

Source: OECD Development Centre based on Thomson Datastream, 2008Source: OECD Development Centre based on Thomson Datastream, 2008

35

45

55

65

75

85

95

105

115

125

nov.-07 jan.-08 mar-08 may-08 jul.-08 sept.-08 nov.-08

Argentina Brazil Chile S&P500 Mexico

80

90

100

110

120

130

140

nov.-07 feb.-08 may-08 aug-08 nov.-08

Brazil Chile Mexico

…but at least for the public sector, the sensibility has been reduced

Sovereign bond spreads and “global risk aversion”

Source: OECD Development Centre based on Thomson Datastream, 2008

E MB I G loba l L a tAm vs. VIX (2005-2008)

EMBI Latam = 7,9978xVIX + 146,8

R2 = 0,5261

0

200

400

600

800

1 000

1 200

1 400

1 600

5 15 25 35 45 55 65 75

VIX indexE

MB

I Glo

ba

l La

tAm

(b

p)

average

today

E MB I G loba l L a tAm vs. VIX (1998-2004)

EM BI Latam = 27,57xVIX + 117,06

R2 = 0,603

0

200

400

600

800

1 000

1 200

1 400

1 600

5 15 25 35 45 55 65 75

VIX index

EM

BI G

lob

al L

atA

m (

bp

)

average

Spreads are now much less sensitive to external shocks

The VIX index (CBOE Volatility Index) is the implied volatility of S&P500 index options.

Capital markets are differentiating between countries and with respect to past sovereign debt crises

Markets do not appear to be anticipating a crisis for ‘credible’ countries

EMBI sovereign bond spreads (bp)

Source: OECD Development Centre based on Thomson Datastream, 2008

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1,6

1,8

0 100 200 300 400 500 600 700 800 900

Bond s pre ad (bas is points )

Un

de

rwri

tin

g s

pre

ad

(%

) Argentina (T-3)Argentina (T-2)

Argentina(T-1)

Brazil (T-2)

Brazil (T-1)

Russia (T-2)

Russia (T-1)

Turkey (T-3)

Turkey (T-2)

Turkey (T-1)

Source: OECD Development Centre based on Latin American Economic Outlook, 2008

today

Fees and Sovereign bond spreads (Primary market)

0

200

400

600

800

1000

1200

1400

1600

1800

2000

nov.-07 jan.-08 mar-08 may-08 jul.-08 sep.-08 nov.-08

Argentina Brazil Chile Mexico Venezuela

Why such confidence? Public debt management has improved

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

30

40

50

60

70

80

External Public Bonds over GNP External Public Bonds over Exports (right axis)

Source: OECD Development Centre calculations based on World Bank, Global Development Finance database (2008).

0,0

0,2

0,4

0,6

0,8

1,0

2002 2003 2004 2005 2006 2007 - June

2008

Brazil Colombia Peru Uruguay

“Original Sin Index”External Public Bonds in Latin America

Source: OECD Development Centre calculations based on World Bank, Global Development Finance database (2008).

External debt is falling and countries can increasingly borrow abroad in localcurrency

Revenues and expenditures

Fiscal policy volatility

Latin America’s fiscal performance has much improved over recent years

Fiscal policy measures

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1990-2006 1990 -1994 1995 -1999 2000 - 2006

Latin America

Total revenue Total expenditureFiscal balance

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1990-2006 1990 -1994 1995 -1999 2000 - 2006

Total revenue Total expenditureFiscal balancec

OECD

-5

0

5

10

15

20

25

30

35

40

45

50

1990-2006 1990-1994 1995-1999 2000-2006

Latin America

Fiscal balance Total revenue Total expenditure

-5

0

5

10

15

20

25

30

35

40

45

50

1990-2006 1990-1994 1995-1999 2000-2006

OECD

Fiscal balancec Total revenue Total expenditure

Source: OECD Development Centre calculations based on the ECLAC ILPES Public Finance database for Latin America, and OECD

General Government Accounts data for OECD countries .

Source: OECD Development Centre calculations based on the ECLAC ILPES Public Finance database for Latin America, and OECD

General Government Accounts data for OECD countries .

Gini coefficients of income inequality, before and after taxes and transfers

0

10

20

30

40

50

60

Arg

enti

na

Bra

zil

Ch

ile

Co

lom

bia

Mex

ico

Peru

Au

stri

a

Bel

giu

m

Den

mar

k

Fin

lan

d

Fran

ce

Ger

man

y

Gre

ece

Irel

and

Ital

y

Luxe

mb

ou

rg

Net

her

lan

ds

Pola

nd

Port

uga

l

Spai

n

Swed

en

Un

ited

…

Inequality before taxes and transfers

While taxes and transfers reduce the inequality by 19

Gini points in Europe, the difference is less than two

Gini points in Latin America

However, fiscal policy does little to reduce inequality in Latin America

Source: OECD Development Centre (2008), based on Euromod (2008) for OECD countries and Goñi et al. (2008) for Latin America.

Democratic Consolidation in Latin America: Experts’ and Citizens’ Views

Sources: BTI Index (2008) and Latinobarómetro (2007).

Political context: democratic consolidation…

0

1

2

3

4

5

6

7

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: OECD Development Centre based on Nieto Parra and Santiso (2008)

Number of presidential elections in Latin America

The Latin American countries covered are Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. For elections with a second (run-off) round, the date of the final round is used.

This time around, the political cycle is favourable to Latin America

Source: OECD Latin American Economic Outlook, based on Nieto Parra and Santiso (2008),

The political cycle and capital markets

Investment-Bank recommendations around elections

Real Exchange Rates around Elections

99,0

99,5

100,0

100,5

101,0

101,5

102,0

102,5

103,0

-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

0 = e le c tion m onth

Ind

ex

(ele

cto

ral m

on

th =

10

0)

An

inc

rea

se

re

pre

se

nts

a d

ep

rec

iatio

n-0,4

-0,3

-0,2

-0,1

0,0

0,1

0,2

0,3

0,4

-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

0 = e le c tion m onth

un

de

rwe

igh

t

ov

erw

eig

ht

Latin America Based on Latin American Economic Outlook 2009

Paris

5 December 2008

EmNet Quarterly Meeting

Javier Santiso

Director and Chief Economist

OECD Development Centre

www.oecd.org/dev/leo