LAC-7 MACROECONOMIC LAC-7 MACROECONOMIC OUTLOOKOUTLOOK

LAC-7 MACROECONOMIC LAC-7 MACROECONOMIC OUTLOOKOUTLOOK

Ernesto TalviErnesto Talvi

Prepared for Presentation at the XXIII Meeting of the Latin American Prepared for Presentation at the XXIII Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington DCNetwork of Central Banks and Finance Ministries, IDB, Washington DC

April 20April 20thth, 2006, 2006

CERESCERES

OUTLINE

I.I. External FactorsExternal Factors

II.II. Macroeconomic Outcomes in LACMacroeconomic Outcomes in LAC

III. On LAC’s Current Account SurplusIII. On LAC’s Current Account Surplus

OUTLINE

I.I. External FactorsExternal Factors

II.II. Macroeconomic Outcomes in LACMacroeconomic Outcomes in LAC

III. On LAC’s Current Account SurplusIII. On LAC’s Current Account Surplus

World Output & DemandWorld Output & Demand

(G-12 World Output Index*,annual variation of industrial production, weighted by PPP adjusted GDP)

World Output

G-8 includes Canada, France, Germany, Italy, Japan, Spain, UK and US. EM-4 includes China, India, Korea and Russia. The countries included in the G-12 World Output Index (G-12 WOI) represent 68% of world output.*excluding Brazil and Mexico

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

-4%

-2%

0%

2%

4%

6%

8%

10%

12% EM-4

G-8

0%

1%

2%

3%

4%

5%

6%

7%

8%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

World Output

Average: 4.6%

Correlation: 61%

World Demand: Imports

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

EM-4

G-8-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

(G-12 Import Demand Index*, annual variation of imports, weighted by PPP adjusted GDP)

World Demand

G-8 includes Canada, France, Germany, Italy, Japan, Spain, UK and US. EM-4 includes China, India, Korea and Russia. The countries included in the G-12 World Imports Index represent 68% of world output.*excluding Brazil and Mexico

Average: 13.0%

Correlation: 62%

World Demand: Investment

-4%

-2%

0%

2%

4%

6%

8%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Investment Gross Foreign Direct Investment

(Investment Index* annual variation, weighted by PPP adjusted GDP)

* includes Canada, France, Germany, Italy, Japan, Spain, UK and US.

Average: 3.2%

Average: 9.9%

(GDP, annual growth)

Growth Forecasts for World Output

*Source of GDP growth forecasts: JP Morgan

20062007

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Italy

France

Germany

UK

Spain

Japan

Canada

US

Korea

Russia

India

China

G-12 WOI 2007: 4.6% G-12 WOI 2006: 4.8%

Korea

Canada

Spain

Russia

Italy

France

UK

Germany

India

Japan

China

US

World Output Ranking(PPP adjusted GDP)

1.8%

1.8%

1.9%

2.5%

2.9%

3.1%

3.3%

4.2%

6.0%

6.7%

12.7%

20.8%

68%

66%

64%

62%

60%

57%

54%

50%

46%

40%

34%

21%

Share Cumulative Share

Commodity Prices & Commodity Prices &

Terms of TradeTerms of Trade

Commodity Prices & Terms of Trade

Terms of TradeBy Country

(from I-2002 to IV-2005)

Commodity Prices

70

80

90

100

110

120

130

1997

.II

1998

.I

1998

.IV

1999

.III

2000

.II

2001

.I

2001

.IV

2002

.III

2003

.II

2004

.I

2004

.IV

2005

.III

38.5%

21.3% *

*excluding Venezuela

LAC-7

-10% 0% 10% 20% 30% 40% 50% 60% 70%

Brazil

Mexico

Colombia

Argentina

Peru

Chile

Venezuela 122%

FoodsMetals

60

80

100

120

140

160

180

200

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

153%

Avg 90-97

Oil

40

90

140

190

240

290

340

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

229%Avg 90-97

70

80

90

100

110

120

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Jan-

04

Jan-

06

35%

Avg 90-97

International Financial International Financial

Conditions for EMsConditions for EMs

150

350

550

750

950

1150

1350

Jan-

02

Mar

-02

May

-02

Jul-0

2

Sep

-02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep

-03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep

-04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep

-05

Nov

-05

Jan-

06

Mar

-06

(EMBI+, bp over US Treasury bonds)External Financial Conditions for EMs

Greenspan’s “conundrum”

testimony

Fears of FED tightening

ENRON Effect

Beginning of improvement in international financial conditions

Pre-Asian Crisis EM Spreads

* assuming an 11% coupon and 10-year maturity

Spreads

Yields

Pre-Asian Crisis EM Yields

=-42.4%

=-26.8%

EMBI+ Price*

118

161

36.2%% Change

Apr-06

Oct-97

FED Tightening & EM Spreads(EMBI+, FED fund target rate and 12-month forward rate)

EM

BI

spre

ad

FE

D f

und

targ

et a

nd 1

2-m

onth

for

war

d ra

tes

Spread

FED Funds Target Rate

Greenspan’s “conundrum”

testimony FED Funds 12-Month Rate

Fears of FED tightening

150

200

250

300

350

400

450

500

0,5

1,5

2,5

3,5

4,5

5,5

Jan-

04F

eb-0

4M

ar-0

4

Apr

-04

May

-04

Jun-

04Ju

l-04

Aug

-04

Sep

-04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb

-05

Mar

-05

Apr

-05

May

-05

Jun-

05Ju

l-05

Aug

-05

Sep

-05

Oct

-05

Nov

-05

Dec

-05

Jan-

06F

eb-0

6M

ar-0

6

Apr

-06

0.0

0.5

1.0

1.5

Jan-

04F

eb-0

4M

ar-0

4A

pr-0

4M

ay-0

4Ju

n-04

Jul-0

4A

ug-0

4S

ep-0

4O

ct-0

4N

ov-0

4D

ec-0

4Ja

n-05

Feb

-05

Mar

-05

Apr

-05

May

-05

Jun-

05Ju

l-05

Aug

-05

Sep

-05

Oct

-05

Nov

-05

Dec

-05

Jan-

06F

eb-0

6M

ar-0

6A

pr-0

6

Spr

ead

(12-

Mon

th F

orw

ard

– T

arge

t)

Greenspan’s “conundrum” testimony

Fears of FED tightening

Spread

(12- Month Forward – Target)

FED Tightening & EM Spreads FED Fund Forward Differential

US Long Term Interest Rate & EM Spreads(EMBI+, 10-year Treasury Bonds and Fed Fund Target Rate)

10-y

ear

Tre

asur

y ra

te

EM

BI s

prea

d

10-Year Treasury Bond

FED Funds Target Rate

Emerging Markets

Fears of FED tightening

Greenspan’s “conundrum”

testimony

150

200

250

300

350

400

450

500

550

Jan

-04

Fe

b-0

4

Ma

r-0

4

Ap

r-0

4

Ma

y-0

4

Jun

-04

Jul-0

4

Au

g-0

4

Se

p-0

4

Oct

-04

No

v-0

4

De

c-0

4

Jan

-05

Fe

b-0

5

Ma

r-0

5

Ap

r-0

5

Ma

y-0

5

Jun

-05

Jul-0

5

Au

g-0

5

Se

p-0

5

Oct

-05

No

v-0

5

De

c-0

5

Jan

-06

Fe

b-0

6

Ma

r-0

6

Ap

r-0

6

0,5

1,5

2,5

3,5

4,5

5,5

US Interest Rate Yield CurveIn

tere

st

Ra

te

-1,5%

-1,0%

-0,5%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3 Month 6 Month 1 Year 3 Year 5 Year 10 Year

Historic Yield Curve (1960-2006)

Pre Fed Tightneing Yield Curve (Jun-04)

Maturity

1.1%

(“perfect foresight” real ex-ante interest rate)

Current Yield Curve (Mar-06)

4.5%*4.6%

4.8% 4.7%

4.7%

4.7%

* nominal rate

US Interest Rate: A Long Term View

-6

-4

-2

0

2

4

6

8

10

12

19

55

19

57

19

59

19

61

19

63

19

65

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

Average: 1.9 Average: 1.9

1.5

(“perfect foresight” real ex-ante interest rate, 10-year US Treasury Bond, Jan-55 – Mar-06)

-0.3

5.6

3.8

G-7 Interest Rates: A Long Term View (“perfect foresight” real ex-ante rates for long term instruments)

-4,0

-3,0

-2,0

-1,0

0,0

1,0

2,0

3,0

4,0

5,0

6,0

US UK FRANCE GERMANY ITALY CANADA JAPAN

0,0

1,0

2,0

3,0

4,0

5,0

60s 70s 80s 90s 00s

Average Rate

Standard Deviation

1.4*

-0.3

5.1

4.0

2.3

*weighted by PPP adjusted GDP

1.7Standard deviation

2.3Standard deviation* 0.6Standard

deviation 1.2Standard deviation

0.4Standard deviation

Excluding Japan 2.3

1.6

3.0

2.4

1.3

0.9

Excluding Japan 1.2

Global Current Account Adjustment 1997-2005 (in % of US Current Account Adjustment)

2%

4%

6%

13%

14%

28%

32%

-100%

-100% -30% -20% -10% 0% 10% 20% 30% 40%

USA

Industrialized

Stat. Discrepancy

Africa

Eastern Europe

Latin America

Asia (excl. Jap)

Middle East

Source: WEO Sep-05

OUTLINE

I.I. External FactorsExternal Factors

II.II. Macroeconomic Outcomes in LACMacroeconomic Outcomes in LAC

III. On LAC’s Current Account SurplusIII. On LAC’s Current Account Surplus

95

145

195

245

295

345

395

445

495

Sep

-02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep

-03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep

-04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep

-05

Nov

-05

Jan-

06

Mar

-06

Asset Prices in LAC-7 (Stocks & Bonds, Oct-02=100)

Bond Prices

Stock Prices in US$

Stock Prices in domestic

currency

Geenspan’s “conundrum”

testimony

Beginning of easing in external financial conditions

Fears of Fed Tightening

Variation

Stock prices in domestic currency 336%

Stock prices in US$ 429%

Oct-02 – Apr-06

Bond prices* 97%

*assuming an 11% coupon and 10-year maturity

50

150

250

350

450

550

650

750

850

950

1050

1150

Oct

-02

Dec

-02

Feb

-03

Apr

-03

Jun-

03

Aug

-03

Oct

-03

Dec

-03

Feb

-04

Apr

-04

Jun-

04

Aug

-04

Oct

-04

Dec

-04

Feb

-05

Apr

-05

Jun-

05

Aug

-05

Oct

-05

Dec

-05

Feb

-06

Apr

-06

Stock Prices in LAC-7 (stock indices in US$, Oct 02 = 100)

Colombia

Peru

Argentina

Chile

Mexico

Venezuela

Brazil

887%

644%

482%

417%

205%201%

170%

% Change Oct 02 – Mar 06

Fears of FED tightening due to

stream of positive US economic dataBeginning of easing in

external financial conditions

Greenspan’s “conundrum”

testimony

Colombia

Peru

Argentina

ChileMexico

Venezuela

Brasil

LAC-7 429%

90

140

190

240

290

Oct

-02

Dec

-02

Feb

-03

Apr

-03

Jun-

03

Aug

-03

Oct

-03

Dec

-03

Feb

-04

Apr

-04

Jun-

04

Aug

-04

Oct

-04

Dec

-04

Feb

-05

Apr

-05

Jun-

05

Aug

-05

Oct

-05

Dec

-05

Feb

-06

Apr

-06

Colombia

Peru

Chile

Mexico

Brazil

Venezuela

LAC-7

ArgentinaEMBI

Bond Prices in LAC-7(LAC-7, Oct-02 = 100)

Beginning of easing in external financial conditions

Fears of FED tightening

Greenspan’s “conundrum”

testimony

Colombia

Peru

Chile

Mexico

Brazil

87%

202%

78%

20%36%

% Change Oct 02 – Apr 06

Venezuela 113%

LAC-7 88%

Argentina 79%

EMBI 83%

20%

37%

18%

6%9%

24%

20%

18%

19%

Annual Return

UST10 10% 3%

72

75

78

81

84

87

90

93

96

99

102

105

108

Jan

-98

Ma

y-9

8

Se

p-9

8

Jan

-99

Ma

y-9

9

Se

p-9

9

Jan

-00

Ma

y-0

0

Se

p-0

0

Jan

-01

Ma

y-0

1

Se

p-0

1

Jan

-02

Ma

y-0

2

Se

p-0

2

Jan

-03

Ma

y-0

3

Se

p-0

3

Jan

-04

Ma

y-0

4

Se

p-0

4

Jan

-05

Ma

y-0

5

Se

p-0

5

Jan

-06

-12%

-7%

-2%

3%

8%

13%

18%

LAC-7: Domestic Bank Credit(Real credit to the private sector, Jun-98=100 and yoy variation)

yoy

varia

tion

Rea

l Ban

k C

redi

t

real bank credit

yoy variation

21.1%

-18%

-13%

-8%

-3%

2%

7%

12%

17%

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

-18%

-13%

-8%

-3%

2%

7%

12%

17%

22%

27%

32%

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

-40%

-30%

-20%

-10%

0%

10%

20%

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Argentina Brazil

Domestic Bank Credit in LAC’s G-3

Mexico

(real credit to the private sector, yoy variation)

18.4% 18.8%26.4%

-10%

-5%

0%

5%

10%

15%

20%

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

-18%

-13%

-8%

-3%

2%

7%

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

-30%

-20%

-10%0%

10%

20%

30%

40%50%

60%

70%

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Chile

Domestic Bank Credit in the Rest of LAC-7(real credit to the private sector, yoy variation)

Colombia

VenezuelaPeru

12.4%

12.3%

9.4%

49.8%

LAC-7: Investment(s.a. FKF, 1990.I=100)

2005-2006 Forecasts

Source: Latin Focus

0% 3% 6% 9% 12% 15% 18% 21% 24%

Brazil

Mexico

Peru

Colombia

Argentina

Chile

Venezuela

2005

2006

Average: 16.3%

Average: 10.0%

90

100

110

120

130

140

150

160

170

180

190

200

210

220

19

90.I

19

91.I

19

92.I

19

93.I

19

94.I

19

95.I

19

96.I

19

97.I

19

98.I

19

99.I

20

00.I

20

01.I

20

02.I

20

03.I

20

04.I

20

05.I

Russian Crisis

Annualized growth rate

1990.I-1998.II: 7.7%

Annualized growth rate 1998.II-2002.IV:

-4.6%

Annualized growth rate 2002.IV-2005.IV: 13.1%

LAC-7: Economic Activity(s.a. GDP, 1990.I=100)

Source: Latin Focus

2005-2006 Forecasts

98

108

118

128

138

148

158

168

178

1990

.I

1991

.I

1992

.I

1993

.I

1994

.I

1995

.I

1996

.I

1997

.I

1998

.I

1999

.I

2000

.I

2001

. I

2002

.I

2003

.I

2004

.I

2005

.I

Annualized growth rate

1990.I-1998.II: 4.4%

Annualized growth rate 1998.II-2002.IV:

0.4%

Annualized growth rate 2002.IV-2005.IV: 5.7%

Russian Crisis

2% 3% 4% 5% 6% 7% 8% 9% 10%

Brazil

Mexico

Colombia

Chile

Peru

Argentina

Venezuela

2005

2006

Average: 6.0%

Average: 5.0%

54.23

61.75

September 2005

September 2005

46.50

43.75

30

35

40

45

50

55

60

652005 2006

Note: The Fund’s September 2005 World Economic Outlook (WEO) envisages world oil prices averaging US$54.2/bbl in 2005 and US$61.8/bbl in 2006, some 17 percent and 40 percent higher, respectively, than projected in the April 2005 WEO.

Source: Singh, Anoop. Global Context and Regional Outolook for Latin America and the Caribbean. IMF. October 2005.

Oil Price Impact on Economic Activity (LAC, in % )

Estimates of the impact of the change of WEO oil price assumptions in the LAC Region

0.0%

-0.8%

-1.0%

-0.6%

-0.4%

-0.2%

0.2%2005 2006

Net oil Exporters

South America

Central America

The Caribbean

Latin America and the Caribbean

WEO Oil Price Estimates

April 2005

April 2005

Average spot price of U.K. Brent, Dubai, and West Texas Intermediate, US dollars per barrel

Current Average Oil Price: 67.3

Oil Prices

0

10

20

30

40

50

60

70

80

90

100

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

US$ 99

US$ 49

US$ 58*

US$ 12

* March-06

45

50

55

60

65

70

75

Spot 1 Month 3 Months 6 Months 1 year

11-Apr-2006

01-Sep-2005

19-May-2005

21-Jul-2005

Oil Future Prices (WTI)

69.1

71.272.0 72.0

69.2

70.369.5

69.969.2

67.7

59.0

54.9

58.8 58.557.8

50.6

46.9

50.4 50.149.4

A Historical Perspective(USD per barrel in 2004 prices, average of U.K. Brent, Dubai, and WTI)

LAC-7: Unemployment (Unemployment rate)

2% 4% 6% 8% 10% 12%

Mexico

Chile

Peru

Brazil

Venezuela

Argentina

Colombia

Source: Latin Focus

By Country (2005)

Average: 9.3%

8,0

8,5

9,0

9,5

10,0

10,5

11,0

11,5

12,0

12,5

jun

-97

dic

-97

jun

-98

dic

-98

jun

-99

dic

-99

jun

-00

dic

-00

jun

-01

dic

-01

jun

-02

dic

-02

jun

-03

dic

-03

jun

-04

dic

-04

jun

-05

dic

-05

Pre-Russian Crises Levels

12,4%

9,3%

LAC-7: Fiscal Balance(SPNF, in % of GDP)

*Central Government

By Country (2005)

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

-3.0*%

+0.3%

-4% -2% 0% 2% 4% 6%

Brasil

Colombia

Peru*

México

Venezuela*

Argentina*

Chile*

Source: Latin Focus

LAC-7: Inflation(CPI annual variation)

Source: Latin Focus

2006 Forecasts

Median

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

0% 3% 6% 9% 12% 15%

Peru

Mexico

Chile

Colombia

Brazil

Argentina

Venezuela

2005

2006

Average: 6.5%

Average: 6.3%4.9%

LAC-7: Real Exchange Rate (Oct-02 = 100)

(variation Oct-02 - Mar-06)

LAC-7 By Country

-29%

45

55

65

75

85

95

105

115

oct-

02di

c-02

feb-

03ab

r-03

jun-

03ag

o-03

oct-

03

dic-

03fe

b-04

abr-

04ju

n-04

ago-

04oc

t-04

dic-

04

feb-

05ab

r-05

jun-

05ag

o-05

oct-

05di

c-05

feb-

06

65

70

75

80

85

90

95

100

105

jun-

98

dic-

98

jun-

99

dic-

99

jun-

00

dic-

00

jun-

01

dic-

01

jun-

02

dic-

02

jun-

03

dic-

03

jun-

04

dic-

04

jun-

05

dic-

05

Mexico (1.6%)

Peru (-6,5%)

Venezuela (-9,5%)

Colombia (-29,0%)

Argentina (-25,9%)

Chile (-27,4%)

Brazil (-53,9%)

LAC-7: International Reserves(millions of US$)

Russian Crisis

Colombia 1.7

Brazil 0.8*

Peru 1.3

Argentina 0.9*

Chile 1.0

Mexico 2.3

Venezuela 1.9

In % of Jun-98

LAC-7 1.3

15000

45000

75000

105000

135000

165000

195000

225000

255000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

* after IMF Repayment

20%

30%

40%

50%

60%

70%

80%

90%

Pre-Repayment Post-Repayment

Pre-Repayment Post-Repayment

Arg

en

tin

aB

raz i

lRepayment to the IMF: Argentina & Brazil

(International Reserves in % of PSBR+MB)International Reserves

-40%

5%

10%

15%

20%

25%

30%

35%

-35%

8,000

13,000

18,000

23,000

28,000

Oct

-02

Dec

-02

Feb

-03

Apr

-03

Jul-0

3

Sep

-03

Nov

-03

Feb

-04

Apr

-04

Jun-

04

Aug

-04

Nov

-04

Jan-

05

Mar

-05

Jun-

05

Aug

-05

Oct

-05

Jan-

06

Mar

-06

28,078

21,769

Pre-IMF Repayment

Post-IMF Repayment

35000

40000

45000

50000

55000

60000

65000

Oct

-02

Dec

-02

Feb

-03

Apr

-03

Jul-0

3

Sep

-03

Nov

-03

Feb

-04

Apr

-04

Jun-

04

Aug

-04

Nov

-04

Jan-

05

Mar

-05

Jun-

05

Aug

-05

Oct

-05

Jan-

06

Mar

-06

67,935

60,090

Pre-IMF Repayment

Post-IMF Repayment

Liquidity Ratio

Repayment:

9.5 bn

Repayment:

15.6 bn

Downward Pressures on the Real Exchange Rate

Monetary and Exchange Rate Policy Options

Current Dilemmas of Monetary & Exchange Rate Policy in LAC

No FX Intervention

Appreciation

Exchange Rate Policy & Inflation (CPI, bilateral XR and RER vis à vis the US dollar , Jun-04 = 100)

BrazilCPI

XRRER65

70

75

80

85

90

95

100

105

jun-

04

jul-0

4

ago-

04

sep-

04

oct-

04

nov-

04

dic-

04

ene-

05

feb-

05

mar

-05

abr-

05

may

-05

jun-

05

jul-0

5

ago-

05

sep-

05

oct-

05

nov-

05

dic-

05

ene-

06

feb-

06

mar

-06

Downward Pressures on the Real Exchange Rate

Monetary and Exchange Rate Policy Options

Current Dilemmas of Monetary & Exchange Rate Policy in LAC

No FX Intervention

Appreciation

FX Intervention

Inflation

Exchange Rate Policy & Inflation (CPI, bilateral XR and RER vis à vis the US dollar , Jun-04 = 100)

BrazilCPI

XRRER65

70

75

80

85

90

95

100

105

jun-

04

jul-0

4

ago-

04

sep-

04

oct-

04

nov-

04

dic-

04

ene-

05

feb-

05

mar

-05

abr-

05

may

-05

jun-

05

jul-0

5

ago-

05

sep-

05

oct-

05

nov-

05

dic-

05

ene-

06

feb-

06

mar

-06

Chile

RERXR

CPI

80

83

86

89

92

95

98

101

104

jun-

04

jul-0

4

ago-

04

sep-

04

oct-

04

nov-

04

dic-

04

ene-

05

feb-

05

mar

-05

abr-

05

may

-05

jun-

05

jul-0

5

ago-

05

sep-

05

oct-

05

nov-

05

dic-

05

ene-

06

feb-

06

mar

-06

Colombia

RER

XR

CPI

80

84

88

92

96

100

104

108

jun-

04

jul-0

4

ago-

04

sep-

04

oct-

04

nov-

04

dic-

04

ene-

05

feb-

05

mar

-05

abr-

05

may

-05

jun-

05

jul-0

5

ago-

05

sep-

05

oct-

05

nov-

05

dic-

05

ene-

06

feb-

06

mar

-06

ArgentinaCPI

XR

RER90

93

96

99

102

105

108

111

114

117

jun-

04

jul-0

4

ago-

04

sep-

04

oct-

04

nov-

04

dic-

04

ene-

05

feb-

05

mar

-05

abr-

05

may

-05

jun-

05

jul-0

5

ago-

05

sep-

05

oct-

05

nov-

05

dic-

05

ene-

06

feb-

06

mar

-06

Exchange Rate Policy & Real Exchange Rate Adjustment(Jun-04=100)

Nominal Exchange Rate

Argentina (3.9%)

Chile (-17.8%)

Brazil (-31.2%)

Colombia (-16.7%)

65

70

75

80

85

90

95

100

105

110

jun

-04

jul-

04

ag

o-0

4

sep-

04

oct

-04

no

v-0

4

dic

-04

en

e-0

5

feb

-05

ma

r-0

5

ab

r-0

5

ma

y-0

5

jun

-05

jul-

05

ag

o-0

5

sep-

05

oct

-05

no

v-0

5

dic

-05

en

e-0

6

feb

-06

ma

r-0

6 65

70

75

80

85

90

95

100

105

jun

-04

jul-

04

ag

o-0

4

sep-

04

oct

-04

no

v-0

4

dic

-04

en

e-0

5

feb

-05

ma

r-0

5

ab

r-0

5

ma

y-0

5

jun

-05

jul-

05

ag

o-0

5

sep-

05

oct

-05

no

v-0

5

dic

-05

en

e-0

6

feb

-06

ma

r-0

6

Real Exchange Rate

Chile (-17.8%)

Argentina (-7.8%)

Colombia (-18.7%)

Brazil (-33.5%)

Downward Pressures on the Real Exchange Rate

Monetary and Exchange Rate Policy Options

Current Dilemmas of Monetary & Exchange Rate Policy in LAC

No FX Intervention

Appreciation

FX Intervention

InflationDilemma

Downward Pressures on the Real Exchange Rate

Monetary and Exchange Rate Policy Options

Current Dilemmas of Monetary & Exchange Rate Policy in LAC

No FX Intervention

Appreciation

FX Intervention

InflationDilemma

Capital Controls and/or Price Controls

OUTLINE

I.I. External FactorsExternal Factors

II.II. Macroeconomic Outcomes in LACMacroeconomic Outcomes in LAC

III. On LAC’s Current Account SurplusIII. On LAC’s Current Account Surplus

-6%

-5%

-4%

-3%

-2%

-1%

1%

2%

3%

4%19

91

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

-100000

-80000

-60000

-40000

-20000

0

20000

40000

60000

LAC-7: Current Account(Millions of US dollars; % GDP)

% G

DP

Millo

ns o

f US

do

llars

% GDP

Millions of US dollars

-20,000

0

20,000

40,000

60,000

80,000

100,000

Ma

r-9

7

Se

p-9

7

Ma

r-9

8

Se

p-9

8

Ma

r-9

9

Se

p-9

9

Ma

r-0

0

Se

p-0

0

Ma

r-0

1

Se

p-0

1

Ma

r-0

2

Se

p-0

2

Ma

r-0

3

Se

p-0

3

Ma

r-0

4

Se

p-0

4

Ma

r-0

5

Se

p-0

5

The Capital Flows Puzzle(Capital Flows to LAC-7; last 4 quarters, in millions of US dollars)

Russian Crisis

Demand for International Capital Flows

Supply of International Capital Flowsi*0

q0 q1

Positive Supply Shock

i*1

Positive Shock to TOT

i*

q

i* =International interest rate q =Volume of net international capital flows

where:

The Capital Flows Puzzle: A Graphical Analysis

-20,000

0

20,000

40,000

60,000

80,000

100,000

Ma

r-9

7

Se

p-9

7

Ma

r-9

8

Se

p-9

8

Ma

r-9

9

Se

p-9

9

Ma

r-0

0

Se

p-0

0

Ma

r-0

1

Se

p-0

1

Ma

r-0

2

Se

p-0

2

Ma

r-0

3

Se

p-0

3

Ma

r-0

4

Se

p-0

4

Ma

r-0

5

Se

p-0

5

The Capital Flows Puzzle(Capital Flows to LAC-7; last 4 quarters, in millions of US dollars)

TOT Adjusted Capital Flows*

Russian Crisis

5.6% of GDP

*value at I.2002

0

20000

40000

60000

80000

100000

120000

dic

-97

jun

-98

dic

-98

jun

-99

dic

-99

jun

-00

dic

-00

jun

-01

dic

-01

jun

-02

dic

-02

jun

-03

dic

-03

jun

-04

dic

-04

jun

-05

-15000

5000

25000

45000

65000

85000

105000

Net Flows

Inflows

Outflows

Gross Capital Flows(LAC-7; last 4 quarters, in millions of US dollars)

Inflo

ws

& O

utf

low

s

Ne

t flo

ws

LAC-7: Capital Flows & Terms of Trade(Millions of US dollars and Jan-87=100)

-5000

15000

35000

55000

75000

95000

115000

-10000

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

Outflows

Net

Inflo

ws

& O

utf

low

s

Ne

t flo

ws

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Inflows

1991-1993

Inflows

167

Outflows Net flows Ratio*

1991-1997

2003-2005

1990s

2000s

25 142 74%

499 119 380 62%

120 109 11 5%

(Billions of US dollars)

*ΔInflows - ΔOutflows

ΔInflows + ΔOutflows

Cumulative Flows

LAC-7: Capital Flows & Terms of Trade(Millions of US dollars and Jan-87=100)

-5000

15000

35000

55000

75000

95000

115000

-10000

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

Outflows

Net

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

80

90

100

110

120

130

140

150

ToT

Inflo

ws

& O

utf

low

s

Ne

t flo

ws

To

T (

Jan

-87

= 1

00

)

Inflows

LAC-7 MACROECONOMIC LAC-7 MACROECONOMIC OUTLOOKOUTLOOK

LAC-7 MACROECONOMIC LAC-7 MACROECONOMIC OUTLOOKOUTLOOK

Ernesto TalviErnesto Talvi

Prepared for Presentation at the XXIII Meeting of the Latin American Prepared for Presentation at the XXIII Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington DCNetwork of Central Banks and Finance Ministries, IDB, Washington DC

April 20April 20thth, 2006, 2006

CERESCERES