Latin America along the commodity price cycle: performance ......Latin America along the commodity price cycle: performance and challenges ... Ana Karenina, Leon Tolstoi. Recent economic

´Tale of two cities´

Latin America along the commodity price cycle: performance and challenges

Guillermo Perry

Áll happy families are alike; each unhappy family is unhappy in its own way´

Ana Karenina, Leon Tolstoi.

Recent economic slowdown in all developing regions, especially in South America and, less so, in Mexico

*Also includes Afghanistan and PakistanSource: World Economic Outlook database, IMF projections, WEO April 2018

GDP growth rate (%)

Actualizada

6,5

2,0

3,4

3,4

6,6

-3.5

-1.5

0.5

2.5

4.5

6.5

8.5

10.5

12.5

14.5

Emerging and developing AsiaLatin America and the CaribbeanMiddle East, North Africa, Afghanistan, and PakistanSub-Saharan AfricaChina

2.31.91.5

-6

-4

-2

0

2

4

6

8

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

p

Mexico Central America South America

Mainly explained by the slump in commodity prices, after a long boom since 2003

Source: World Bank

0

20

40

60

80

100

120

140

160

180

Jan-

00Ap

r-00

Jul-0

0O

ct-0

0Ja

n-01

Apr-0

1Ju

l-01

Oct

-01

Jan-

02Ap

r-02

Jul-0

2O

ct-0

2Ja

n-03

Apr-0

3Ju

l-03

Oct

-03

Jan-

04Ap

r-04

Jul-0

4O

ct-0

4Ja

n-05

Apr-0

5Ju

l-05

Oct

-05

Jan-

06Ap

r-06

Jul-0

6O

ct-0

6Ja

n-07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8Ja

n-09

Apr-0

9Ju

l-09

Oct

-09

Jan-

10Ap

r-10

Jul-1

0O

ct-1

0Ja

n-11

Apr-1

1Ju

l-11

Oct

-11

Jan-

12Ap

r-12

Jul-1

2O

ct-1

2Ja

n-13

Apr-1

3Ju

l-13

Oct

-13

Jan-

14Ap

r-14

Jul-1

4O

ct-1

4Ja

n-15

Apr-1

5Ju

l-15

Oct

-15

Jan-

16Ap

r-16

Jul-1

6O

ct-1

6Ja

n-17

Apr-1

7Ju

l-17

Oct

-17

Jan-

18Ap

r-18

Mon

thly

indi

ces

base

d on

nom

inal

US

dolla

rs (2

010=

100)

Commodity Price Index

Energy

Agriculture

Other Metals andMinerals

Actualizada

That led to a boom and bust in Terms of Trade

Source: Citi Bank-World Bank

Terms of Trade Index (2002=100)

80

100

120

140

160

180

200

220

2000 2004 2008 2012 2016

ChileColombiaMexicoPeru

80

90

100

110

120

130

140

2000 2004 2008 2012 2016

Argentina

Brazil

50

100

150

200

250

300

Venezuela

Actualizada

We see today quite unhappy and less unhappy countries: differences are not fully explained by TOT

GDP growth rates (simple averages, %)*

*Less unhappy: Chile, Colombia, Mexico and Peru; Quite unhappy: Argentina, Brazil and Venezuela Source: World Economic Outlook database, IMF projections, WEO October 2017

-10

-5

0

5

10

15

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Less unhappy countries Quite unhappy countries

GDP growth: The less unhappy ones look quite alike

GDP growth rate (%)

Source: World Economic Outlook database, IMF projections, WEO October 2017

-15

-10

-5

0

5

10

15

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Chile Colombia Mexico Peru

GDP growth: The more unhappy ones look much less alike


GDP growth rate (%)

-20

-15

-10

-5

0

5

10

15

20

25

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Argentina Brazil Venezuela

An early symptom of unhappiness in Venezuela and Argentina: loss of reserves (ACT)

International Reserves (includes gold, % of GDP)

Source: World Development indicators, World Bank, Ministry of Finance of Chile

0

5

10

15

20

25

30

35

40

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Chile (includes Gov's Funds) ColombiaBrazil MexicoPeru

0

5

10

15

20

25

30

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Argentina Venezuela, RB

And sovereign risk hikesEMBI stripped spreads; end of period

(simple averages, basis points)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Less unhappy countries Quite unhappy countries

*Less unhappy: Brazil, Chile, Colombia, Mexico and Peru; Quite unhappy: Argentina and Venezuela Source: Banco de Bogotá, JP Morgan

Spreads: The less unhappy bunch look again quite alike

Source: Bloomberg, JP Morgan

EMBI stripped spreads; end of period (basis points)

0

200

400

600

800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Chile Colombia Mexico Peru

Spreads: The very unhappy ones again look less alike

Source: Bloomberg, JP Morgan

EMBI stripped spreads; end of period (basis points)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Argentina Brazil Venezuela

A closer look to the less unhappy bunch and Brazil: Credit Default Swaps (ACT)

Source: Bloomberg

5-Year Credit Default Swaps (basis points)

93,7

146,3

100,3

44,566,9

30

80

130

180

230

280

330

380

430

480

530

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep-

16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep-

17

Nov

-17

Jan-

18

Colombia Brasil México Chile Perú

Two macroeconomic factors behind differences in unhappiness:

Fiscal deficits andexchange rate regimes and interventions

Behind deep unhappiness: fiscal deficitsGeneral Government Net Lending/Borrowing

(% of GDP)

*Less unhappy: Brazil, Chile, Colombia, Mexico and Peru; Quite unhappy: Argentina and Venezuela Source: World Economic Outlook database, IMF Projections, WEO April 2018

-20

-15

-10

-5

0

5

2001 2003 2005 2007 2009 2011 2013 2015 2017

Happy countries Unhappy countries

Actualizada

Some differences in fiscal deficits among the less unhappy

General Government Net Lending/Borrowing (% of GDP)

Source: World Economic Outlook database, IMF Projections, WEO April 2018

-8

-6

-4

-2

0

2

4

6

8

10

2001 2003 2005 2007 2009 2011 2013 2015 2017

Chile Colombia México Perú

Actualizada

Wider fiscal deficits and differences among the very unhappy

General Government Net Lending/Borrowing (% of GDP)

Source: World Economic Outlook database, IMF Projections, WEO April 2018

-35

-30

-25

-20

-15

-10

-5

0

5

10

2001 2003 2005 2007 2009 2011 2013 2015 2017

Argentina Brasil Venezuela

Actualizada

Sovereign debt levels are also a concern in Brazil

Source: World Economic Outlook database, IMF projections, WEO April 2018

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Argentina Brasil Chile

Colombia México Perú

Venezuela

General Government Gross Debt (% of GDP)

Actualizada

Argentina and Venezuela attempted to keep nominal exchange rates constant but had sharp recent devaluations

Source: Banco de Bogotá, author’s calculations

Nominal Exchange Rate (year-on-year variation, %)

-200

0

200

400

600

800

1,000

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Argentina Venezuela

Both had inflationary pressures since the beginning of the boom; Venezuela has hyperinflation now

Source: Bloomberg. *Data for Argentina is extracted from independent sources

Inflation, end of period (year-on-year variation, %)

0

200

400

600

800

1,000

1,200

0

5

10

15

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Argentina* Venezuela (right axis)

Their Real Exchange Rates did not appreciate much during the early boom but showed significant

appreciation latter, even during the bust.

Source: FRED-BIS.

Real Exchange Rate Index (2010=100)

30

50

70

90

110

130

Apr-0

2

Apr-0

3

Apr-0

4

Apr-0

5

Apr-0

6

Apr-0

7

Apr-0

8

Apr-0

9

Apr-1

0

Apr-1

1

Apr-1

2

Apr-1

3

Apr-1

4

Apr-1

5

Apr-1

6

Apr-1

7

Apr-1

8

Brazil Argentina

0

500

1000

1500

2000

2500

3000

3500

Apr-0

2

Apr-0

3

Apr-0

4

Apr-0

5

Apr-0

6

Apr-0

7

Apr-0

8

Apr-0

9

Apr-1

0

Apr-1

1

Apr-1

2

Apr-1

3

Apr-1

4

Apr-1

5

Apr-1

6

Apr-1

7

Apr-1

8

Venezuela

Actualizada

Major differences in Real Exchange Rate performance between Inflation Targetting and non-IT countries

*Happy Countries: Brazil, Chile, Colombia, Mexico and Peru; Unhappy Countries: Argentina and Venezuela Source: FRED-BIS

Real Exchange Rate Index (2010=100)

75

80

85

90

95

100

105

110

0

200

400

600

800

1000

1200

1400

1600

1800Unhappy Countries (LHS) Happy Countries

Actualizada

Some differences in Real Exchange Rate performance among IT countries: Chile and Peru appreciated less than Brazil and Colombia during the boom, in spite of higher TOT gains.

Source: FRED-BIS.

Real Exchange Rate Index (2000 jan=100)

35

55

75

95

115

135

155

175 Brazil Chile Colombia Mexico Peru

Actualizada

Due to the fact that Perú and Chile had both fiscal surpluses and higher accumulation of reserves

International Reserves as % of GDPGeneral Government Net Lending/Borrowing (% of GDP)

-15

-10

-5

0

5

10

2001 2003 2005 2007 2009 2011 2013 2015 2017

Argentina Brasil Chile

Colombia Perú

0

5

10

15

20

25

30

35

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Brasil Chile

Colombia Perú

Source: FRED, Banco Central de Chile, Banco Central del Perú, Banco Central de Colombia, WEO April 2018 projections, IMF. Actualizada

As a consequence, there were sharper recent compensatory nominal devaluations in Brazil and Colombia

Source: Banco de Bogotá, FRED, Banco Central de Chile, Banco Central Perú y Banco de la República de Colombia

Nominal Exchange Rate (year-on-year variation, %)

-30

70

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Brasil Chile Colombia México Perú

Actualizada

That contributed to recent inflationary pressures

Inflation, end of period (year-on-year variation, %)

Source: Bloomberg

-2

0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Brasil Chile Colombia Mexico Peru

And led Brazil’s and (less so) Colombia’s Central Banks to adopt pro cyclical interest rate hikes (Mexico in 2016: Trump effect)

Monetary Policy Rate, end of period (%)

Source: Bloomberg

0

5

10

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Brasil Chile Colombia Mexico Peru

Not surprisinglyDUTCH DISEASE symptoms were

higher in COLOMBIA and BRAZIL than in PERU and CHILE:

Exports (% of total exports)

Source: WDI, World Bank

0

10

20

30

40

50

60

70

80

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Colombia

Manufactures exportsFuel and Mineral exportsAgricultural raw materials exports

0

10

20

30

40

50

60

70

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Brazil

Agricultural raw materials exports

Manufactures exports

Fuel and Mineral exports

0

10

20

30

40

50

60

70

80

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Chile




0

10

20

30

40

50

60

70

80

90

Mexico




0

10

20

30

40

50

60

70

80

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Perú



Fuel and Mineral exportsActualizada

Source: WDI, World Bank

Not surprisinglyDUTCH DISEASE symptoms were

higher in COLOMBIA and BRAZIL than in PERU and CHILE :Production (value

Added, %GDP)

29.4

32.6

15.0

12.6

0

10

20

30

40

50

60

70

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Colombia

Agriculture Industry

Manufacturing Services

26.721.2

15.3

11.7

0

10

20

30

40

50

60

70

80

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Brazil



34.9 32.7

20.3 19.1

0

10

20

30

40

50

60

70

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Mexico



34.631.3

18.6

12.0

0

10

20

30

40

50

60

70

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Chile



31.9 32.5

16.713.9

0

10

20

30

40

50

60

70

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Perú


Manufacturing ServicesActualizada

The key macro lessons• As expected, flexible exchange rate regimes operated as

important shock absorbers. Countries with fixed exchange rateregimes (Argentina and Venezuela) had higher variability of growth and inflation

• But significant Real Exchange Rate appreciations and depreciations created serious Dutch Disease, adjustment and inflationary costs during the commodity price cycle in Brazil and Colombia.

• Perú and Chile mitigated them through a combination of countercyclical fiscal and monetary policies and ágainst the windéxchange market interventions by central banks (´dirty´ floating) and thus suffered less DD and inflationary problems

Vulnerabilities to potential external shocks

FED interest rate hikes will impose threats to capital flows to Emerging Markets, with high external and fiscal vulnerabilities

Source: IMF, REO April 2017

Capital Flows in Emerging Markets (percent of trend GDP; median)

Though gross capital inflows are highly correlated with commodity prices in South America : a China

hard landing would impose huge risks.


Gross Inflows and Commodity Prices (percent of trend GDP; median)

Protectionist policies in the US would affect countries with high trade links: Mexico and Central A merica


South America has lower exposure to the US –mostly through commodities-, compared with Central America and Mexico

Brazil, Argentina and Chile export more manufactured goods to the US, compared to Peru and Colombia

Remittances and Direct Investment from the US are also quite high, especially to Mexico


A matrix of global risksfor Latin American Countries

Sources: Deutsche Bank, Bank of América, own estimates.36

Potentialimpact

Likely medium term impactLikely short run impact

A China hard landing and an additional fallin commodity prices

A showdown withCatalonia

Market turbulence due to FED hikesand balance sheet contraction

TerroristAttacks

Confrontation withNorth Corea

US protectionism

Market turbulencedue to a bank crisis

in Italy

Europeanslowdown due to

Brexit

US stock marketPrice collapse

Budget stalemate in US

Elections in LatinAmerica 2018

PolíticalRisks

EconomicRisks

Trump threats and actions1. Trade war against China

– Immediate effect: financial market volatility, postponment of investmentdecisions and reduction of capital flows to emerging markets

– Potential effects: slowdown of US and China trade and growth; slowdown of global trade; reduction of commodity prices; weakening of multilateralism(WTO, IMF)

2. Threats against Mexico, NAFTA, immigration– Observed effects in México: reduction of investment and capital flows ;

currency depreciation and rise in inflation; rise in interest rates; growthslowdown

– Potential effects: reduction of NAFTA trade; reduction in remittances to México; loss of competitiveness of some US manufacturing sectors; further growthslodown in México

3. Trump tax reform– US: higher short term investment but higher future uncertainty , due to higher

public debt– LA: reduction of FDI; some capital outflows; policy dilemmas (lower corporate

taxes vs fiscal sustainability)

The key challenge going forward:

productivity growth

The key long term challenge: closing the productivity gap

Source: Grazzi, M. & Pietrobelli, C., “Firm Innovation and Productivity in Latin America and the Caribbean”, IDB, June 2016

Growthin LatinAmericahas beendrivenbycapital and labor growth, not by total factor productivity growth

This will have to change: as investmentrates are already high in several countries..

5.0

10.0

15.0

20.0

25.0

30.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017p

Investment (% of GDP)

Argentina Brazil Chile Colombia Mexico Peru


And the demographic bonus will soon be over

0

10

20

30

40

50

60

70

Brazil Chile Colombia Mexico Peru Venezuela, RB Argentina

Population ages 15-64 (% of total population, averages)

1970-1979 1980-1989 1990-1999 2000-2009 2010-2016

Source: World Development Indicators, World Bank

Summing Up1. The growth boom and posterior slowdown in most Latin American countries is

basically explained by the cycle of commodity prices (plus high international liquidity and low international interest rates).

2. Countries that saved more in the boom (fiscal surplus and reserve accumulation), like Chile and Peru, had lower symptoms of Dutch Disease, have had to engage in less painful fiscal and monetary pro cyclical adjustments in the bust and have now lower vulnerabilities to additional shocks.

3. Venezuela and Argentina engaged in unsustainable macro policies (and anti private sector micro policies) and lost access to international capital markets (and had sharp reserve losses) well before the fall in commodity prices. Venezuela is in full implosion while the new regime in Argentina is trying to cope.

4. Brazil problems began after 2013 (fiscal relaxation and temper tantrum) and were then aggravated by the political crisis.

5. The key going forward are increases in productivity: no tale winds in the horizon and lower capital and labour growth!

Documents

Latin America along the commodity price cycle: performance ......Latin America along the commodity price cycle: performance and challenges ... Ana Karenina, Leon Tolstoi. Recent economic