Latin America and the Global Crisis

1
Latin America and the Global Crisis

• Mauricio Cárdenas
• Director, Latin America Initiative
• The Brookings Institution
• Inter-American Development Bank
• Advances in debt management under current
• international financial crisis framework
• October 31, 2008

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Agenda

• Global trends
• Key channels of transmission
• Is Latin America well prepared?
• Policy options
• Conclusions

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Agenda

• Global trends
• Key channels of transmission
• Is Latin America well prepared?
• Policy options
• Conclusions

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With inventories of unsold homes at near-record
highs and unemployment still rising, house prices
are expected to continue dropping
Source IMF.
5
Global financial markets are on the brink
Source IMF.
6
Given negative growth in Q3, and prospects for
Q4, few doubt that the US has entered a recession
Source IMF.
7
And large risks to the forecast
Source IMF.
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Agenda

• Global trends
• Key channels of transmission
• Is Latin America well prepared?
• Policy options
• Conclusions

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Financial Markets taking refugee in the
Treasuries
Source Bloomberg
10
The crisis has now spread to emerging markets
Source IMF.
11
And asset prices are falling
Source IMF.
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Global EMBI Spreads increasing without exception
Source LAC Chief Economist Office Daily Report,
October 30, 2008.
13
Exchange rates in selected LAC countries
National currency per U.S. dollar, January
2008100
1/ U.S. dollar per Euro.
Source IMF.
14
International Reserves for selected LAC countries
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Commodities exposure Wide variation
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Commodity prices have retreated
Source LAC Chief Economist Office Daily Report,
World Bank, October 24, 2008.
17
Domestic financial intermediation is not immune
Source IMF, Western Hemisphere coping with the
global financial crisis. October, 2008.
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So credit to the private sector is expected to
decelerate
Source IMF, Regional Economic Outlook, Western
Hemisphere coping with the global financial
crisis. October, 2008.
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Agenda

• Global trends
• Key channels of transmission
• Is Latin America well prepared?
• Policy options
• Conclusions

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Saving, Investment and the Current Account in LAC
LCRCE staff calculations. Source WDI, DECPG
Source World Bank.
21
Relation between the regions growth and Chinas
Note Solid colours reflect statistically
significant correlations with and confidence
interval of 10. LCRCE calculations. Source
National Authorities.
Source World Bank.
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Given all these considerations, growth is now set
to slow
Source IMF, Western Hemisphere coping with the
global financial crisis. October, 2008.
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Agenda

• Global trends
• Key channels of transmission
• Is Latin America well prepared?
• Policy options
• Conclusions

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Inflation accelerated in the region but it seems
to be stabilizing
LAC Bolivia, Brazil, Chile, Colombia, Costa
Rica, Ecuador, El Salvador, Guatemala, Mexico,
Panama, Peru, Trinidad y Tobago, Uruguay and
VenezuelaLCRCE staff calculations. Source
National data sources and Bloomberg.
25
Inflation is still high, but expected to slow in
response to external shocks
Inflation has exceeded targets in many emerging
markets
Inflationary expectations are easing
Source IMF.
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Can monetary policy be countercyclical?
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The role of fiscal policy
Source IMF, Western Hemisphere coping with the
global financial crisis. October, 2008.
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Can fiscal policy be more expansionary?
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Agenda

• Global trends
• Key channels of transmission
• Is Latin America well prepared?
• Policy options
• Conclusions

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And emerging economies have decelerated
Real GDP Growth Rates (percent change)
Real GDP Growth Rates (percent change)
07 08 09 10 Emerging Asia
07 08 09 10 Emerging Europe
07 08 09 10 Africa
07 08 09 10 Latin America
07 08 09 10 Middle East
Source IMF.
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Inflation rose and current accounts weakened
Source IMF.
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Economic prospects for Latin America

• Leaving the financial panic but entering the
  economic recession
• Latin America is not immune
• Growth will slow down, as well as social progress
• Limited capacity to offset the negative shocks
• Monetary policy is more likely to respond than
  fiscal policy
• Keep an eye on China
• Trend growth will return soon

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Latin America and the Global Crisis

• Thank you