World Economic and Financial Outlook

Juan José Echavarría, Governor, ColombiaCVIII Meeting of Central Bank Governors - CEMLA

* The opinions contained in this presentation are the sole responsibility of the author and do not represent the Banco de la República or its Board of Directors.

1

2

Lower global growth

Trade tensions and uncertainty

Risks and vulnerabilities

Monetary stimulus

Asset prices

Short-term effects

3

• Trade tensions are an important source of uncertainty in the global economy.

Source: Ahir, H, N Bloom, and D Furceri (2018), “World Uncertainty Index”, Stanford mimeo.

0

10

20

30

40

50

60

70

80

90

100

110

1995q1 1997q1 1999q1 2001q1 2003q1 2005q1 2007q1 2009q1 2011q1 2013q1 2015q1 2017q1 2019q1

World Trade Uncertainty Index

A series of tariffs by the US and

China goes into effect.

A tariff truce between the US and the

China is annouced.

Tariff increase on US$200 billion of imports

from China is scheduled to go into effect on

March 1. But a delay is announced on

February 24.

Uncertainty related to US-China trade

tension

Uncertainty related to US-China trade

tension

The US imposes Safeguard Tariffs as well as steel

and aluminium tariffs.

A seies of tariffs by the US and China goes into effect. The US also ends

tariff exemptions for EU, Canada, and Mexico. EU and Canada imposes

tariff on the US.

The US and China agree to resume trade

talks.

World Trade Uncertainty Index

• Trade tensions are affecting international trade flows.

5Fuente: Bureau for Economic Policy Analysis. Annual growth rate for imports and exports volume.

-2%

0%

2%

4%

6%

8%

jul.-11 jul.-12 jul.-13 jul.-14 jul.-15 jul.-16 jul.-17 jul.-18 jul.-19

International Trade Volume – Annual Growth Rate

Imports Exports

6

• Furthermore, brexit and geopolitical developments add to the current uncertain environment.

0

50

100

150

200

250

300

350

Global Economic Policy Uncertainty Index*

Source: Davis, Steven J., 2016. “An Index of Global Economic Policy Uncertainty,” Macroeconomic Review * The GEPU index is a GDP-weighted average of national EPU indices for 16 countries that account for two-thirds of global output. Each national EPU index reflects the relative frequency of own-country newspaper articles that contain a trio of terms pertaining to the economy, uncertainty and policy-related matters.

Source: Bloomberg

0

5

10

15

20

25

30

35

40

VIX Index

7

Lower global growth

Trade tensions and uncertainty

Risks and vulnerabilities

Monetary stimulus

Asset prices

Short-term effects

17/1

0/2

019

88

2.8

2.5

0.7

Source: IMF – World Economic Outlook 9

• The global economy is decelerating, and growth forecasts are lower.

• Trade tensions and uncertainty might be the reason behind lower growth.

-1,4

-1,2

-1

-0,8

-0,6

-0,4

-0,2

0

0,2

0

1

2

3

4

5

6

7

Per

cen

tage

po

ints

%

IMF Growth Forecasts

Difference from July 2019 WEO Update Projection (RHS)Difference from April 2019 WEO Projection (RHS)October 2019 WEO Projection

0

1

2

3

4

5

6

7

8

9

United States Eurozone Japan China India

GDP - Annual Growth Rate

2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2

(%)

10

• The signs of global deceleration are clear in the manufacturing sector. On the other hand, consumption remains strong.

Fuente: Bloomberg, St. Louis Fed and ECB. For the United States, growth of the Personal Consumption Expenditure (PCE).

-0,5

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II

2013 2014 2015 2016 2017 2018 2019

%

Consumption – Annual Growth Rate

United States Euro Area

40

42

44

46

48

50

52

54

56

58

60

62

64

Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19

PMI index

Germany Euro area

UK United States

Source: Bloomberg.

And unemployment very low(%)

3,73,8

2,2

7,5

0

2

4

6

8

10

12

14

ago

.-6

5

ago

.-6

8

ago

.-7

1

ago

.-7

4

ago

.-7

7

ago

.-8

0

ago

.-8

3

ago

.-8

6

ago

.-8

9

ago

.-9

2

ago

.-9

5

ago

.-9

8

ago

.-0

1

ago

.-0

4

ago

.-0

7

ago

.-1

0

ago

.-1

3

ago

.-1

6

ago

.-1

9

EEUU UK JAPÓN EURO

11

Fuente: FMI12

• The lower growth rate in China is of particular concern. A profound deceleration could have consequences on the region through the trade and investment channels.

27,5826,28

21,81

9,69

7,41

1,64

0

5

10

15

20

25

30

Chile Perú Brasil Colombia Argentina México

%

Exports to China as a percentage of total exports

Fuente: UNCOMTRADE y DANE

6,8% 6,8%

6,7% 6,7%

6,8%

6,7%

6,5%

6,4% 6,4%

6,2%

5,0%

5,2%

5,4%

5,6%

5,8%

6,0%

6,2%

6,4%

6,6%

6,8%

7,0%

2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2

China - GDP Annual Growth rate

Source: Banrep, IMF – Direction of Trade Statistics and Bloomberg. Based on a graph for the BIS June meeting of Governors. 13

• Trade tensions could be behind lower growth. Countries more exposed to international trade, and to the regions involved in trade tensions, have seen a larger deceleration in manufacturing activity.

AUS

AUT

BRA

CAN

HKGCOL

FRA

GER

GRC

IND

IDN

IRE

ITA

JAP

KORMYSMEX

NLD

PHL

POL

RUS

SAU

SGP

ZAF

ESP

THA

TUR

ARE

GBRUSA

VNM

-16

-12

-8

-4

0

4

0 20 40 60 80

Ch

ange

in m

anu

fact

uri

ng

acti

vity

Ch

ange

in P

MI i

nd

ex 2

01

9H

1 m

inu

s 2

01

8H

1

Exports to China and the Eurozone(% of total exports in 2018)

Exposure to international trade and changes in manufacturing activity

Y = -0.0997x+0.6512R² = 0.2195P-value = 0.0078

Lower economic activity

Higher exposure to international trade

Source: Banco de la República. Coefficients are obtained from the following IGARCH(1,1)-M model with a sample from Jan 2003 to Sep 2019:

14

COP volatility BRL volatility CLP volatility MXN volatility PEN volatility

Trade Uncertainty

0.000022**(0.000011)

0.0059***(0.0030)

0.0027***(0.0010)

0.000012(0.000013)

0.0017***(0.0003)

Interest rate differential volatility

-0.0221**(0.0106)

0.0478*(0.0258)

0.0630***(0.0204)

-0.0064(0.0061)

0.0072***(0.0026)

Oil volatility 0.0019**(0.0080)

0.0042**(0.0020)

Soy volatility 0.0055***(0.0021)

Copper volatility

0.0024**(0.0011)

0.0000(0.0000)

• Besides affecting growth levels, the highly uncertain environment could cause higher volatility in Latam currencies through more volatile commodity prices.

𝑅𝑒𝑡𝑢𝑟𝑛𝑠 = 𝛽0 + 𝛽1𝑅𝑒𝑡𝑢𝑟𝑛𝑠𝑡−1 + 𝛽2Δ𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡𝑖𝑎𝑙𝑡 + 𝛽3Δ𝐶𝐷𝑆 + 𝛽4𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑖𝑒𝑠 𝑅𝑒𝑡𝑢𝑟𝑛𝑠 + 𝛽5 𝜎𝑡2 + 𝜀𝑡

𝜎𝑡2 = 𝛼1𝜀𝑡−1

2 + 𝛼2𝜎𝑡−12 + 𝛼3𝑇𝑟𝑎𝑑𝑒 𝑈𝑛𝑐𝑒𝑟𝑡𝑎𝑖𝑛𝑡𝑦 + 𝛼4𝑉𝑜𝑙 𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑖𝑒𝑠 𝑅𝑒𝑡𝑢𝑟𝑛𝑠 + 𝛼5𝑉𝑜𝑙𝑎𝑡𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡𝑖𝑎𝑙, 𝑤ℎ𝑒𝑟𝑒 𝛼1 + 𝛼2 = 1

Results of a IGARCH (1,1) model

16

Surveys in Colombia: manufacturing, trade and consumption

Source: Fedesarrollo

17

Consumption surveys in Latin America

18

Lower global growth

Trade tensions and uncertainty

Risks and vulnerabilities

Monetary stimulus

Asset prices

Short-term effects

19

• Global liquidity continues to be strong, and given the lower growth and higher uncertainty, markets expect monetary policy easing in the future.

Source: Bloomberg

-180 -160 -140 -120 -100 -80 -60 -40 -20 0

Switzerland

Norway

Poland

Denmark

Eurozone

United Kingdom

Japan

Czech Republic

Canada

Australia

Korea

India

New Zealand

Chile

United States

Brazil

Mexico

One-Year Ahead Market Implied Changes in Monetary Policy Rate(bp, as of oct. 10 2019)

Source: Bloomberg and IIF. 20

• Emerging markets could benefit from monetary easing through higher capital flows. However, an increase in international uncertainty could alter the financing conditions for these economies.

0

100

200

300

400

500

600

bp

s

5-Year CDS

Colombia

Brazil

Chile

Peru

Mexico

-25

-15

-5

5

15

25

35

45

55

65

75

USD

bill

ion

Portfolio Flows to Emerging Markets

Debt Equity Total

21

Lower global growth

Trade tensions and uncertainty

Risks and vulnerabilities

Monetary stimulus

Asset prices

Short-term effects

Source: Bloomberg

• Changes in monetary policy expectations, lower growth, and higher international uncertainty have influenced long-term yields in advanced economies.

22

-0,75

-0,25

0,25

0,75

1,25

1,75

2,25

2,75

3,25

-0,75

-0,25

0,25

0,75

1,25

1,75

2,25

2,75

3,25

Oct-17 Apr-18 Oct-18 Apr-19 Oct-19

%%

10-year yields

UK Germany Canada United States

This change could have consequences on local yields and financial conditions.

23Source: Hoek, Jasper, Steven B. Kamin, and Emre Yoldas, 2019. “When Is Good News Bad News? U.S. Monetary Policy, Macro Surprises, and Financial Conditions in Emerging Markets,” Federal Reserve Board, unpublished manuscript. The sample spans Jan. 2010 – Aug. 2018 (69 FOMC meetings). *The monetary policy surprise measure is the change in 8-quarter ahead yield implied by Eurodollar futures contract in 1-hour window around FOMC statements. Standard deviation of this surprise measure is about 7 bps. All EME asset prices are measured from day before to day after FOMC statements.

121,0

103,4

79,5

76,5

70,0

68,5

68,4

46,3

42,5

29,1

27,1

19,8

15,9

4,0

-1,7

-20 0 20 40 60 80 100 120 140

Indonesia

Brazil

Mexico

Turkey

South Africa

USA

Colombia

EME Average

AE Average

Korea

India

Malaysia

Thailand

Chile

China

Change in 10-year Local Currency Sovereign Yields after a 100 bp Monetary Policy Surprise* in the United States (bp)

Source: Banrep and Hoek, Jasper, Steven B. Kamin, and Emre Yoldas, 2019. “When Is Good News Bad News? U.S. Monetary Policy, Macro Surprises, and Financial Conditions in Emerging Markets,” Federal Reserve Board, unpublished manuscript. *Change in 10-year Local Currency Sovereign Yields after a 100 bp Monetary Policy Surprise* in the United States

24

• Some countries might be more sensitive to this spillover given the participation of foreign investors in their financial markets.

Australia

Canada

DenmarkFrance

Germany

Italy

Japan

Korea

Norway

Spain

Sweden

Switzerland

Brazil

ChileChina

Colombia

India

Indonesia

Mexico

Peru

Poland

Romania

Russia

South Afica

Thailand

TurkeyUkraine

-0,1

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0% 10% 20% 30% 40% 50% 60%

Sen

siti

vity

of

loca

l yie

ld t

o U

S 1

0-y

ear

yiel

ds*

Foreign participation in the local public debt market

y=0.465x+0.1056R² = 0.1261P-value = 0.0691

Higher participation of foreigners in the local market.

Higher sensitivity to Interest rates in the U.S

Source: Bloomberg

• Some currencies in the region are experiencing a decoupling from their traditional fundamental factors.

25

0

20

40

60

80

100

1201500

2000

2500

3000

3500

4000

Colombian Peso and Oil prices

Colombian Peso Oil price (RHS, inverted)

0

20

40

60

80

100

12

13

14

15

16

17

18

19

20

21

22

Mexican peso and Oil prices

Mexican Peso Oil price (RHS, inverted)

26

Thank you