real exchange rate fluctuations: reflections on the uruguayan experience umberto della mea *...
TRANSCRIPT
Real Exchange Rate Fluctuations:Reflections on the Uruguayan Experience
Umberto Della Mea* Economic Policy Division Central Bank of Uruguay
Outline
I. Some simple facts about real exchange rate fluctuations in a dollarized, multi-rest-of-the-world economy.
II. What to do?
III. Addendum: about the effect of real exchange rate fluctuations on fiscal solvency
* The views here expressed are those of the author and do not necessarily represent those of the Central Bank of Uruguay.
Whither rest-of-the-world?
Real effective exchange rates and exports share
40
60
80
100
120
140
160
180
200
En
e-0
0
Ab
r-00
Jul-0
0
Oct-0
0
En
e-0
1
Ab
r-01
Jul-0
1
Oct-0
1
En
e-0
2
Ab
r-02
Jul-0
2
Oct-0
2
En
e-0
3
Ab
r-03
Jul-0
3
Oct-0
3
En
e-0
4
Ab
r-04
Jul-0
4
Oct-0
4
En
e-0
5
Ab
r-05
Jul-0
5
Oct-0
5
En
e-0
6
20
00
=1
00
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
% Argentina % Brazil % Rest of the World Global
Argentina Brasil Rest of the World
185%
A winner’s curse?: the real exchange rate as a transmission mechanism…
90
110
130
150
170
190
210
2000
2001
2002
2003
2004
2005
RE
R B
ase
2000
=10
0
-21%-18%-15%-12%-9%-6%-3%0%3%6%9%12%15%
% of G
DP
Net Capital Outflows (right scale) RER (extra regional)
… between the capital and the current account: strong RER appreciations seem mostlyexplained by capital inflows. Sudden-stops and sudden-starts (not offset by similar changes in international reserves) are usually behind sharp changes in trends.
Who's afraid of dollarization?: the procyclical role of the banking sector
Liabilities dollarization (currently 92%) introduces positive balance-sheet effects: non performing assets and banks solvency improve in periods of growth, boosting confidence in the banking system, fueling capital inflows (including repatriations) and further appreciating the real exchange rate.
Private Banking System
100
120
140
160
180
200
20
00
20
01
20
02
20
03
20
04
20
05
RE
R B
ase
20
00
=1
00
15
20
25
30
35
40
45
50
55
No
n P
erfo
rmin
g L
oa
ns (in
%)
Non Performing Loans RER (extra regional)
Private Banking System
100
120
140
160
180
200
20
00
20
01
20
02
20
03
20
04
20
05
RE
R B
ase
20
00
=1
00
-30
-25
-20
-15
-10
-5
0
5
Re
turn
on
Asse
ts (in %
)
Return on Assets RER (extra regional)
Return on assets improve with the real exchange rate, further encouraging credit risk taking and more agressive credit policies which feed back real exchange rate appreciation through capital inflows and domestic expenditure.
Who's afraid of dollarization?: the procyclical role of the banking sector (cont.)
The original sin in reverse…
100
120
140
160
180
200
2000
2001
2002
2003
2004
2005
RER
Base
200
0=10
0
30
40
50
60
70
80
90
100
110
Debt/GDP (in %
)
Debt/GDP RER (extra regional)
• Governments in emerging economies often need to issue foreign currency debt (original sin), even in domestic markets (original super-sin).
• Real exchange rate appreciations improve fiscal solvency through Debt/GDP and Interest/Revenues reduction.
100
120
140
160
180
200
2000
2001
2002
2003
2004
2005
RER
Base
200
0=10
0
5
8
11
14
17
20
Interest/Revenues (in %)
Interest payments/Govt revenues RER (extra regional)
90
110
130
150
170
190
210
2000
2001
2002
2003
2004
2005
RE
R B
ase
20
00
=1
00
0
500
1000
1500
2000
2500
3000
BP
S o
ver U
ST
Sovereign Spread RER (extra regional)
Sovereign credit quality is normally a ceiling for private credit quality. An improval in fiscal accounts may also trigger more investment and private capital flights.
… and the spillover towards the private sector
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
En
e-0
2
Ma
r-02
Ma
y-02
Jul-0
2
Se
p-0
2
No
v-02
En
e-0
3
Ma
r-03
Ma
y-03
Jul-0
3
Se
p-0
3
No
v-03
En
e-0
4
Ma
r-04
Ma
y-04
Jul-0
4
Se
p-0
4
No
v-04
En
e-0
5
Ma
r-05
Ma
y-05
Jul-0
5
Se
p-0
5
No
v-05
CPI, 12 rolling months Tradables Non tradables
Digression: monetary policy and inflation targeting under RER pressure
N
T
PP
by 21% minimum CPI inflation consistent with 13% 0N
Likely monetary policy constraint: “achieve inflation target s.t. N0”
• Productivity differentials, changes in preferences technology, changes in public sector expenditure and shocks in the terms of trade don’t seem enough to understand massive changes in this variable. Sudden-stops and sudden-starts in capital movements seem good candidates, instead.
• What to do, then? The usual candidates are:
What to do? The basic approach
Curbing the boom-bust cycle by modifying capital and reserve requirements to the banks: might generate problems if they are regarded as (1) a change in the rules, in the upside or (2) a regulatory subsidy, in the downside.
Countercyclical provisions: the advantage of having contingent rules to the state of the nature.
Capital controls: ¿…?
Fiscal flexibility: always welcome.
Sterilized FX interventions? Efficiency under discussion.
Unsterilized FX interventions? Inflation risks.
The unlikely usefulness of nominal exchange rate policies
Nominal and real FX move in opposite
directions (61% of total cases)
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Avg nominal depreciation/devaluation Avg real depreciation/devaluation
Addendum: real exchange rate and fiscal solvency: stock vs flow approaches
YD
qi
YPFS
dtYD
d
t
11
1
11
.
*
*
The stock approach, when public debt is foreign currency denominated
The standard exercise of fiscal solvency à la Blanchard is based on the analysis of the Debt/GDP (D/Y) ratio under a set of assumptions concerning: the primary fiscal surplus (PFS), the interest rate (i*), the rate of growth (), the international tradable inflation (t
*) and the evolution of the RER (q) weighted by the share of tradables in the GDP deflator ():
...1
&
'
0
EFFECTEXCHANGE
OFTERMS
G
T
TGONEFFECTREALGOVT
dt
IPIP
d
dtTGd
dtFDd
001 GTGT
G
T
GTqdq
IPIP
d
Addendum: real exchange rate and fiscal solvency: stock vs flow approaches
The flow approach
The fiscal deficit at constant prices depends on the real evolution of revenues and expenditures, but also on the evolution of the terms of trade of the government:
FD
where:
If Tradables weigh more in the revenues basket (T) than in expenditures (G), -eg, because taxes are more based on consumption goods while expenditures are more concentrated in nontradables (e.g, wages and pensions), then a real depreciation improves the fiscal accounts.
RER defined as q=PT/PN vs TE (phi=PR/PE)
5060708090
100110120
1991
1993
1995
1997
1999
2001
2003
q
80
85
90
95
100
105
phi
q phi
Fiscal impact of a % change in RER, Uruguay 1991-2004 (preliminary)
TE effect as a % of real revenues, as a function of % changes in RER (q=PT/PN)
-80%
-60%
-40%
-20%
0%
20%
40%
-30%
-20%
-10%
0% 10%
20%
30%
40%
% changes in RER
The RER is highly correlated with the government’s terms of exchange: an increase in PT over PN increases the domestic purchasing power of tax revenues
This correlation sustained a significant improvement in the fiscal flows in 2002, measured at constant prices. But during appreciations, it is countercyclical and mitigates the stock effect!
Addendum: real exchange rate and fiscal solvency: stock vs flow approaches
Addendum: real exchange rate and fiscal solvency: stock vs flow approaches
-6000
-4000
-2000
0
2000
4000
6000
19
99
20
00
20
01
20
02
20
03
20
04
mill
ion
s o
f U
YP
, 1
99
1 p
rice
s
80
90
100
110
120
130
140
150
160
170
180
RE
R B
ase
20
00
=1
00
Quantum effect Terms of Exchange Effect
Other RER (extra region, right scale)
Decomposition of changes in the fiscal deficit (preliminary)
