LATIN AMERICA

Inflationary Pressures Rising/Currencies Appreciating: To Tighten or not to Tighten?

Carnegie International Economics Program

February 16, 2011

2

Policy Stimulus Resulted in Record Recovery from Global Recession

-4

-2

0

2

4

6

8

2008 2009 2010 2011f

GDPDomestic Demand

Latin America

f = IIF forecast

Percent change over a year ago

3

Fiscal and Quasi-fiscal Stimulus were Driving Forces

0

1

2

3

4

5

6

Argentina Brazil Chile Mexico Peru

20092010

Latin America

f = IIF forecast

Percent of GDP

4

0

2

4

6

8

10

12

14

Jan 09 Jul 09 Jan 10 Jul 10 Jan 11

Latin America

Monetary Policy: Tightening Cycle Beginning in Some Countries, but Rates Remain Accommodative

percent

*US$ / local currency

Brazil

Mexico

ColombiaChile

5

Food Prices Adding to Inflationary Pressure

135

155

175

195

215

235

Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11

Trade weighted average price

Latin America

Source: UN Food and Agriculture World Food Price Index

6

Inflation Above Mid-Point of Target Band in Most Countries

0

1

2

3

4

5

6

7

Brazil Chile Colombia Mexico Peru

Percent change over a year ago

Latin America

Actual Inflation

Target Band

Mid-Point

7

High and Rising Inflation in Argentina and Venezuela

10

15

20

25

30

35

40

Argentina Venezuela

2009 2010 2011f

Latin America

f = IIF forecast

Percent change over a year ago

8

Higher Commodity Prices Continue Strengthening Terms of Trade

-7

-5

-3

-1

1

3

5

7

2007 2008 2009 2010f 2011f

310

340

370

400

430

460

490

520

550

Percent change over a year ago Reuters commodity price index

Commodity Prices (RHS)

f = IIF forecast

Latin America

Terms of Trade (LHS)

9

Capital Inflows Close to Record Levels

0

50

100

150

200

250

2007 2008 2009 2010 2011f

Total Capital Inflows Private Inflows Official Inflows

Latin America

$ billion

f = IIF forecast

10

Latin America

Risk-adjusted Returns on Sovereign Bonds Have Risen…

200

250

300

350

400

450

500

Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10

0

10

20

30

40

50Return (LHS) Volatility (RHS)

(EMBIG Latin, 30-day volatility)

11

…and Bond Issuance has Increased

0

25

50

75

100

125

150

2004 2005 2006 2007 2008 2009 2010

Latin America

$ billion

f = IIF forecast

12

Equity Investment is Leading Private Capital Inflows

-5

70

145

220

2008 2009 2010 2011f 2012f

Total Private InflowsDirect Equity InflowsPortfolio Equity Inflows

Latin America

$ billion

f = IIF forecast

13

70

90

110

130

Feb 07 Aug 07 Feb 08 Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11

BrazilChileColombiaLatAm

Latin America

Currencies Have Appreciated Back Toward Pre-Crisis Levels

(January 2007 = 100)

*US$ / local currency

14

Real Effective Exchange Rates Have Appreciated Even More

95

100

105

110

115

2007 2008 2009 2010 2011f

Latin America

Index 2000=100

f = IIF forecast

15

Brazil: As Inflation has Increased REER has Appreciated

140

145

150

155

160

Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11

4.0

5.0

6.0

Jan 2006=100 percent change oya

Latin America

Inflation

REER

LATIN AMERICA

Inflationary Pressures Rising/Currencies Appreciating: To Tighten or not to Tighten?

Carnegie International Economics Program

February 16, 2011