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A Lost Decade?
An Emerging Market’s
1
Luiz Awazu Pereira da SilvaOctober 2012 - Moscow
An Emerging Market’s Perspective (Brazil)
The views expressed in this document are those of the presenter and do not
necessarily reflect those of the Central Bank of Brazil or its board members.
Outline and Issues
1. Already (2007-2012) in the Middle of a “Lost Decade” and Going…
2. It Takes Time to Exit from High Debt Crisis
3. This Crisis Offers Opportunities for EMEs like Brazil
2
3. This Crisis Offers Opportunities for EMEs like Brazil
4. Macro & Financial Stability in a “New Normal” Environment with Sudden Stops and Floods
5. Conclusions, Lessons for the G20
1. Already (2007-2012) in the Middle of a “Lost Decade” and Going…
3
100
102
104
106
108
110
112
114R
atio
NBER peak=100
Excluding current transfers receipts
USA – Worst Recovery for Income Per Capita
4
86
88
90
92
94
96
98
100
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Ra
tio
Quartes since NBER peak
1953 1957 1960 1969 1973 1980 1990 2001 2007/08
Source: Bureau of Economic Analysis
USA – High Debt for All Sectors
60%
70%
80%
90%
100%
110%
(% of GDP)NF Business
Household
Federal Government
+ 30 to 40% of GDPin 10 years
5Source: FED Saint-Louis
20%
30%
40%
50%
60%
jan
-66
jan
-68
jan
-70
jan
-72
jan
-74
jan
-76
jan
-78
jan
-80
jan
-82
jan
-84
jan
-86
jan
-88
jan
-90
jan
-92
jan
-94
jan
-96
jan
-98
jan
-00
jan
-02
jan
-04
jan
-06
jan
-08
jan
-10
jan
-12
Eurozone: Gross Debt by Sectors 1998 – 2010
(% of GDP)
6Source: IMF – GFSR April 2012
Maastricht
2. It Takes Time to Exit from High Debt Crisis (as we know well in the Tropics)
7
Exit From High Debt: Usually 3 Ways
• Default… but
- Unprecedented Action by Govs (Transfer of Liabilities onto PS Balance Sheet)
8
Balance Sheet)
- Unprecedented Action by CBs (QEs, LTRO, OMT) Removed Tail Risks
Exit From High Debt: Usually 3 Ways
• Growth
- Debt & Debt Service / Revenue & Income falls
- Collateral Value
9
- Collateral Value Recovers; Confidence Restored
Expected Growth Rates for 2012 & 2013 throughout 2011-2012: USA, Eurozone, Germany, China)
1,0
-0,5
1,7
0,4
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
Oct 11
Nov
11
Dec 1
1
Jan 1
2
Feb 1
2
Mar
12
Apr
12
May
12
Jun 1
2
Jul 12
Aug 1
2
Sep 1
2
Oct 12
Eurozone
2,4
2,1
2,8
2,0
1,5
1,8
2,1
2,4
2,7
3,0
Aug 1
1
Sep 1
1
Oct 11
Nov
11
Dec 1
1
Jan 1
2
Feb 1
2
Mar
12
Apr
12
May
12
Jun 1
2
Jul 12
Aug 1
2
Sep 1
2
Oct 12
USA
20132012
10Source: Bloomberg consensus
Oct 11
Nov
11
Dec 1
1
Jan 1
2
Feb 1
2
Mar
12
Apr
12
May
12
Jun 1
2
Jul 12
Aug 1
2
Sep 1
2
Oct 12
Aug 1
1
Sep 1
1
Oct 11
Nov
11
Dec 1
1
Jan 1
2
Feb 1
2
Mar
12
Apr
12
May
12
Jun 1
2
Jul 12
Aug 1
2
Sep 1
2
Oct 12
8,6
7,7
8,2
8,0
7,6
7,8
8,0
8,2
8,4
8,6
8,8
Oct 11
Nov
11
Dec 1
1
Jan 1
2
Feb 1
2
Mar
12
Apr
12
May
12
Jun 1
2
Jul 12
Aug 1
2
Sep 1
2
Oct 12
China
1,3
0,9
1,9
1,1
0,0
0,5
1,0
1,5
2,0
2,5
Oct 11
Nov
11
Dec 1
1
Jan 1
2
Feb 1
2
Mar
12
Apr
12
May
12
Jun 1
2
Jul 12
Aug 1
2
Sep 1
2
Oct 12
Germany
Lengthy Price Adjustment: USA & Japan
Commercial Real Estate Prices
Loss of Wealth Without Mentioning
Financial Asset Losses
11Source: Goldman Sachs
Exit From High Debt: Usually 3 Ways
• Inflation
- Negative Real Interest Rates
12
- “Forward-guidance”, Operation Twist, etc to trigger consumption and growth….
USA, Eurozone, UK- Policy Rates
13Source: IMF-WEO Oct 2012
2
4
6
8
10
12
an
nu
alra
te
Fed Funds Defl CPI
Prime Rate Defl CPI
USA - Real Interest Rates
14
-6
-4
-2
0
2
jul-
54
jul-
56
jul-
58
jul-
60
jul-
62
jul-
64
jul-
66
jul-
68
jul-
70
jul-
72
jul-
74
jul-
76
jul-
78
jul-
80
jul-
82
jul-
84
jul-
86
jul-
88
jul-
90
jul-
92
jul-
94
jul-
96
jul-
98
jul-
00
jul-
02
jul-
04
jul-
06
jul-
08
jul-
10
jul-
12
%,
an
nu
al
Source: Bloomberg
Why Is This Time Even Worse?
15
1. 3 Sectors Affected Simultaneously with Very High Levels of Debt (Gov, Private NF, HHS) ���� affects Banks, vicious circle
2. All Systemic Economic Zones Affected & Simultaneously in Crisis (USA, Euro + Japan) ����RoW and EMEs (BRICs) affected, after using
Why Is This Time Worse? Debt+Political Uncertainty
16
RoW and EMEs (BRICs) affected, after using extensive counter-cyclical policies in 2008-09
3. Idiosyncratic Political Economy Issues in each of the Systemic Zones (Fiscal Clift + Debt Ceiling in the US; Incomplete Monetary Union + Fiscal Federal Architecture in Europe; Domestic Politics in Japan & China)
Actual Growth Rates from 2010 to 2012: BRICs
17
Indeed Heading To 2nd Half of a “Lost Decade”
• Prolonged Period of Mediocre Growth hopefully with no “tail” event (i.e., a large macro-financial accident) transmission thru trade, finance & confidence channels
• Conventional and Unconventional Policy Instruments Become (less or even) Inoperative
18
Become (less or even) Inoperative
- FP & MP not usable and/or not effective
- Weak/broken (credit) multiplier & (financial) accelerator
• And Greater Uncertainty & Gloom ���� Agents’ expectations & behavior (the CNN Channel?)
More Risks Might Appear End 2012-Early 2013
• China’s deceleration & landing (soft or hard?)
• Eurozone untested new framework (ESM+BankingUnion+OMT)
19
- Spain (to ask or not to ask?)
- Contagion into Italy/France?
• USA Fiscal Clift and Debt Ceiling
3. This crisis offers opportunities / risks for EMEs like Brazil
20
Opportunity for EMEs Like Brazil
• Maintaining Macro & Financial Stability ���� Lower Risk:
- Fiscal (Debt), Flex ERR, IT � Credibility � lower rates
- Strong FS Regulation, combining MP & MaP
• Continuing Structural Reforms ���� Higher Productivity:
- Human K, Physical K (Infra) � TFP
21
- Human K, Physical K (Infra) � TFP
- Lower idiosyncratic costs (burocracy, high taxes, etc.)
• Socio-political stability ���� LT Sustainability:
- Inclusion, integration, inequality & poverty reduction
- Building policy awareness & consensus
In Volatile World Beware of Markets’ Cyclothimic Behavior
22
Keep Inflation on Target for 8th Year in a Row
8
10
12
14
16
18%
yo
y
23Source: BCB
0
2
4
6
8
de
z 9
9
de
z 0
0
de
z 0
1
de
z 0
2
de
z 0
3
de
z 0
4
de
z 0
5
de
z 0
6
de
z 0
7
de
z 0
8
de
z 0
9
de
z 1
0
de
z 1
1
Low Inflation & Risk ���� Declining Real Interest Rate
15
20
25
an
nu
al
24Source: BM&FBovespa / BCB
0
5
10
jan
02
jan
03
jan
04
jan
05
jan
06
jan
07
jan
08
jan
09
jan
10
jan
11
jan
12
% a
nn
ua
l
Jul 20th
1.9%
360-day market rate discounted by the IPCA expected for the next 12 months (Focus)up to Jul 20th
Continued Commitment to Strong Fiscal Targets
Primary fiscal surplus
3,2 3,3
3,73,8
3,23,3
3,4
2,0
2,7
3,13,0
2,0
2,5
3,0
3,5
4,0
% o
f G
DP
25Source: BCB
0,0
0,5
1,0
1,5
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
*
% o
f G
DP
*May 12
52,0
60,4
54,8
50,6
48,447,3
45,5
45
48
51
54
57
60%
of
GD
P
-25.3 p.p. of GDP
Keeping Sound Net Public Debt Dynamics
2626
38,5
42,1
39,2
36,4
35,1
33
36
39
42
45
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
*
% o
f G
DP
Source: BCB
*Jun 12
17,5 17,116,5
15,7 15,7 15,5 15,1 14,7 14,7 14,6 14,2 14,0 13,912,7 12,7
11,6
8
10
12
14
16
18
20%
Keep High Bank Capital / Risk-Weighted Assets (%)
27
0
2
4
6
Ind
on
esia
Bra
zil
Tu
rke
y
Un
ite
d K
ing
do
m
Me
xic
o
Arg
en
tin
a
Ca
na
da
Un
ite
d S
tate
s
So
uth
Afr
ica
Ru
ssia
Ja
pa
n
So
uth
Ko
rea
Ind
ia
Ch
ina
Ita
ly
Au
str
alia
Source: IMF
2012 Q2 or latest available data
111 109
81
7367
5652
45 43 43 413840
60
80
100
120%
Keep High Liquid Assets / Short Term Liabilities
28
3832 32
22
3
0
20
40
Bra
zil
So
uth
Ko
rea
Ru
ssia
Tu
rke
y
US
Me
xic
o
Ja
pa
n
Ca
na
da
Ch
ina
Arg
en
tin
a
Au
str
alia UK
Ind
on
esia
So
uth
Afr
ica
Ind
ia
Ita
ly
Source: IMF
2012 Q2 or latest available data
So that Credit / GDP grows at sustainable pace
25,8 26,0 25,728,3
30,9
35,2
40,543,7
45,2
49,051,0
35
45
55
GD
P2009-2011: 18.3%(average growth of nominal credit)
2005-2008: 25.2%(average growth of nominal credit)
29Source: BCB
25,8 26,024,6 25,7
28,3
-5
5
15
25
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
*
% o
fG
DP
*Aug 12
Keep High International Reserves as Self-Insurance
US
$ b
illio
n
180194
239
289
352
379
200
250
300
350
400
30Source: BCB
US
$
4 512 12 7 7 9 10 10 9
2432 39
5260
5245
36 33 36 3849 53 54
86
0
50
100
150
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
*
as of Sep 27th
Becoming a Net External CreditorU
S$
bill
ion
7987 88 92
103 10696 97
105 108100 99
88 92101
131
182190 190
163 165
151
136
101
75
50
90
130
170
210
31Source: BCB
US
$
*estimate Jun 12
-12
-28
-62-51
-73
-94-110
-70
-30
10
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
*
Maintaining Strong External Debt Ratios
120,6%
63,4%
60
80
100
120
140
%
32Source: BCB
38,8%
21,7%16,1%
12,6%
0
20
40
60
short term debt/intl. reserves
debt services/exports external debt/GDP
Dec 03 Jun 12**estimate
66
105118
13
23 29
100
150
200E D C A/B
Growing Middle Class → Domestic Market & Stability
mill
ion
pe
op
le
Social Stratification
7.6%
37.6%
11.8%
55.1%
14.9%
60.2%
33
49
2517
47
39
32
118
0
50
100
2003 2011 2014*
Source: FGV
mill
ion
pe
op
le
26.7%
28.1%
20.3%
12.9%
16.4%
8.6%
*FGV forecast
Declining Poverty and Inequality
0,57
0,58
0,59
0,60
0,61
0,62
0,63
0,64
0,65
10
12
14
16
18
20%
of
ho
use
ho
lds
34Source: IPEA
0,50
0,51
0,52
0,53
0,54
0,55
0,56
0,57
0
2
4
6
8
19
81
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
92
19
93
19
95
19
96
19
97
19
98
19
99
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
% o
f h
ou
se
ho
lds
Extreme Poverty Gini Index (RHS)
4. Macro-Financial Stability in a “New Normal” environment
with Sudden Stops and Floods
35
Capital Inflows, Real Credit Growth, and Real Equity Prices, 1996-2010 (z scores)
0,0
0,5
1,0
1,5
2,0
0,5
1,0
1,5
2,0
2,5Asia
real credit
real equity prices
capital flows (right scale)
0,0
0,5
1,0
1,5
0,5
1,0
1,5
2,0Latin America
capital flows
real equity prices
real credit (right scale)
36Source: International Monetary Fund, Global Financial Stability Report (April 2011)
-2,5
-2,0
-1,5
-1,0
-0,5
-2,0
-1,5
-1,0
-0,5
0,0
96 98 00 02 04 06 08 10
-1,5
-1,0
-0,5
0,0
-1,5
-1,0
-0,5
0,0
96 98 00 02 04 06 08 10
Pbs in Post-QEs: Dealing with Excessive K Flows
Unusually Intense & Volatile Capital Flows to EMEs
Exacerbate Financial Pro-Cyclicality (Boom and Bust Cycles) in Local Credit and Asset
Markets (Including FX)
37
Markets (Including FX)
⇒ Policy Response(s)?
Financial (Ins) Stability Economic (Price) Stability
• Prevention Better than Cure, against excessive financial pro-cyclicality: (some) prevention (leaning against the financial cycle) better than “mopping-up” (cleaning) financial-credit bubbles after they burst
Pragmatic Policy Responses in EMEs (Brazil)
38
• To “lean against the cycle” and prevent bubbles, use a combination of instruments (Macroprudential or MaP & MP+FP) to reach objectives of financial & price stability; it works well (Brazil’s experience)
• Keep Existing Frameworks that are Working Well (e.g., Fiscal Responsibility institutional arrangements, Floating ERR with minimal interventions, Inflation Targeting Framework)
• Strengthen Prudential Regulation and Financial
Pragmatic Policy Responses in EMEs (Brazil)
39
• Strengthen Prudential Regulation and Financial Infrastructure (e.g., G20-FSB, Basel 3 agenda �higher level & quality of K, counter-cyclical buffers, strong supervision, comprehensive resolution frameworks, etc.)
5. Conclusions
40
Lessons for the G20: difficult time for coordination
• Can the G20 strengthen macro policy coordination?
- Initial G20 Role (in 2008-2009) supporting counter-cyclical policies was important but faded
- Structural reforms issues under Mutual Assessment Process & G20 Framework for Countries Policies has faced national biases to protect domestic policy room for maneuver (e.g., US, Eurozone, Japan, UK QEs, China’s ER policy, etc.) � little progress on Global Imbalances, etc.
41
� little progress on Global Imbalances, etc.
- Legitimacy & representation issues (e.g., Quotas at IMF-WB, binding decisions?, etc.)
• Continue Financial Sector Reform with the FSB & Basel Cmte:
- Implementation of Basel III Accord; TBTF-SIFI Agenda
- Cross-border flows & Spillovers
Lost Decade for AEs Can Be Used by EMEs, Brazil
• 5-6 Years Window of Opportunity to:
- Add More Credibility to Macro-Financial Framework
- Grow Credit & Financial Markets at Sustainable Pace
- Remove Bottlenecks (H & Infra K)
- Work on Regional Integration (BRICS, Mercosul, Unasul)
- Work on each of your idiosyncratic problems (e.g., high interest rates, urban-rural inequality & divide, etc.)
42
interest rates, urban-rural inequality & divide, etc.)
• Begin Addressing LT Issues With Other EMEs:
- More Balanced Growth Sources (Commod. / Manufact., Domestic / Foreign)
- CC & Endowments (Energy, Natural Resources, etc.)
- Social & Political Stability
Thank you
43
Thank you