Based on the
Latin American Economic Outlook 2009
V Annual Meeting Group of LAC Debt
Montevideo
April 2009
Public Debt Management in
Latin America:
Recent Events and Outlook
Sebastián Nieto Parra
Research Associate
OECD Development Centre
The financial crisis and Latin America
Historically , when the U.S. sneezes, Latin America catches cold
Effect of US Recessions on Latin American growth
(Median for Region)
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
1974-75 1980 1982 1991 2001 All
RecessionsSource: IM F , 2007
United States
Latin America
Export Exposure to the US
(change in average output gap during recessions)
-3
-2,5
-2
-1,5
-1
-0,5
0
Least exposed Most exposed Least exposed Most exposed
Industrial Countries Emerging Markets
Source: Lane and M ilesi-Ferreti, 2006
GDP growth forecasts are on the downside for 2009
Differences among regions and countries
GDP forecasts for 2009 and 2010 (% annual growth)
Source: OECD Development Centre, based on Consensus Forecasts, 2009Source: OECD Development Centre, based on Consensus Forecasts, 2009
GDP forecasts for 2009 in Latam (% annual growth)
-4
-3
-2
-1
0
1
2
3
4
5
Latin
America
North
America
Western
Europe
Asia/Pacific Eastern
Europe
2009 2010-4
-3
-2
-1
0
1
2
3
4
5
Argentina M exico Venezuela Chile Colombia Brazil Latam
September 08 October 08 November 08
January 09 February 09 March 09
The impact is worsening...
Equity market (basis 100 = April.08)Industrial production (% y-o-y)
Source: OECD Development Centre, based on Thomson Datastream, 2009Source: OECD Development Centre, based on Thomson Datastream, 2009
and it remains highly vulnerable to international capital markets’ volatility…
35
45
55
65
75
85
95
105
115
125
Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09
Brazil Mexico Colombia S&P500 Chile
-18
-13
-8
-3
2
7
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Brazil Chile United States Mexico
…but – at least for the public sector –sensitivity is lower now than in the past
Sovereign bond spreads and “global risk aversion”
Source: OECD Development Centre based on Thomson Datastream, 2009
Spreads are now much less sensitive to external shocks
The VIX index (CBOE Volatility Index) is the implied volatility of S&P500 index options.
E MB I G loba l L a tAm vs. VIX (1998-2004)
0
200
400
600
800
1 000
1 200
1 400
1 600
5 15 25 35 45 55 65 75
VIX index
EM
BI G
lob
al L
atA
m (
bp
)
average
E MB I G loba l L a tAm vs. VIX (2005-2009)
0
200
400
600
800
1 000
1 200
1 400
1 600
5 15 25 35 45 55 65 75
VIX index
EM
BI G
lob
al L
atA
m (
bp
)
average
today
Sovereign bond ratings continue to be favourable in the region
Source: OECD Development Centre based on Avendano, Gaillard and Nieto Parra (2009 forthcoming)
Perception of agencies with respect to fundamentals differs among countries
Mex ic o (S &P 's )
0
2
4
6
8
10
12
14
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
20
07
Obs erved
P redicted
B B B -
B B
B +
B -
C C C
C
B B B +P eru (S &P 's )
0
2
4
6
8
10
12
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
20
07
Obs erved
P redicted
B B B -
B B
B +
B -
C C C
C
Why such confidence? Public debt management has improved
Source: OECD Development Centre calculations based on World Bank and Consensus Forecast, 2009.
“Original Sin Index”External Public Debt in Latin America (% of GDP)
Source: OECD Development Centre calculations based on Dealogic, 2009.
External debt is falling and countries can increasingly borrow abroad in local currency
0,0
0,2
0,4
0,6
0,8
1,0
2002 2003 2004 2005 2006 2007 - 2008
Brazil Colombia Peru Uruguay
0
5
10
15
20
25
30
35
40
45
50
2003 2004 2005 2006 2007 2008 2009 2010
Brazil Chile Colombia Mexico Venezuela
The development of the domestic market is not new
Source: OECD Development Centre based on Flandreau and Zumer (2004) and Flores (2008)
Service of gold denominated debt over total debt service (%)Domestic debt over total debt (%)
Source: OECD Development Centre based on Flandreau and Zumer (2004) and Flores (2008)
But its drivers have changed. What is completely new is to place local currency abroad
0
10
20
30
40
50
60
70
80
1869 1874 1879 1884 1889 1894 1899 1904 1909 1914
M exico Uruguay Brazil Chile
30
40
50
60
70
80
90
100
1880 1885 1890 1895 1900 1905 1910
Chile Brazil Argentina
Capital markets differentiate between countries and with respect to past sovereign debt crises
Markets do not appear to be anticipating a crisis for ‘credible’ countries
EMBI sovereign bond and US HY spreads (bp)
Source: OECD Development Centre based on Thomson Datastream, 2009
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
1,6
1,8
0 100 200 300 400 500 600 700 800 900
Bond s pre ad (bas is points )
Un
de
rwri
tin
g s
pre
ad
(%
) Argentina (T-3)Argentina (T-2)
Argentina(T-1)
Brazil (T-2)
Brazil (T-1)
Russia (T-2)
Russia (T-1)
Turkey (T-3)
Turkey (T-2)
Turkey (T-1)
Source: OECD Development Centre based on Latin American Economic Outlook, 2009
today
Fees and Sovereign bond spreads (Primary market)
0
500
1000
1500
2000
Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09
Argentina Brazil Chile
Colombia Mexico Venezuela
US High Yield Peru
Refinancing costs, central banks and capital markets
In some countries the cost of the debt is actually closer to before the crisis
Yields (bp). Public external debt (EMBI spread + US 10 year Gov. Bond) and Public domestic debt (Yield 10 years)
Source: OECD Development Centre based on Thomson Datastream and Bloomberg, 2009
0
500
1000
1500
2000
2500
May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09
Brazil external Brazil domestic
400
450
500
550
600
650
700
750
800
850
May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09
Chile external Chile domestic
400
600
800
1000
1200
1400
may-07 ago-07 nov-07 feb-08 may-08 ago-08 nov-08 feb-09
Colombia external Colombia domestic
400
600
800
1000
1200
may-07 ago-07 nov-07 feb-08 may-08 ago-08 nov-08 feb-09
Mexico external Mexico domestic
Partially supported by a reduction of interest rates in Latin America and in US
Interest rates (%) Inflation (% y-o-y)
Source: OECD Development Centre, based on Thomson Datastream, 2009Source: OECD Development Centre, based on Thomson Datastream, 2009
Room for monetary stimulus in some Latin American countries
1
2
3
4
5
6
7
8
9
10
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Brazil Chile Mexico
0
2
4
6
8
10
Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09
10
11
12
13
14
Mexico (Cetes28 dias) Chile (TPM)
Colombia (Interbank rate) Brazil (rhs; Selic rate)
Foreign exchange rate volatility remains an issue
Source: OECD Development Centre based on Thomson Datastream, 2009
However foreign exchange risk is still present
Nominal exchange rate (basis 100 = April.08)
80
90
100
110
120
130
140
150
160
Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Brazil Chile Mexico Colombia Peru
Refinancing risks exist in a context of illiquidity in international markets
Source: OECD Development Centre based on Dealogic, 2009.
Corporate Bond High-Yield Issuance (US$ mill.)Global Issuance (US$ mill.)
Source: OECD Development Centre based on Dealogic, 2009.
This is above all true for the Latin Corporates (External maturities reach $32bn in 2009)
500 000
750 000
1 000 000
1 250 000
1 500 000
1 750 000
2 000 000
2003
Q1
2003
Q3
2004
Q1
2004
Q3
2005
Q1
2005
Q3
2006
Q1
2006
Q3
2007
Q1
2007
Q3
2008
Q1
2008
Q3
2009
Q1
2 000
3 000
4 000
5 000
6 000
7 000
8 000
Value $(m) No of deals (rhs)
0
20 000
40 000
60 000
80 000
100 000
120 000
2003
Q1
2003
Q3
2004
Q1
2004
Q3
2005
Q1
2005
Q3
2006
Q1
2006
Q3
2007
Q1
2007
Q3
2008
Q1
2008
Q3
2009
Q1
0
50
100
150
200
250
300
350
400
450
Value $(m) No of deals (rhs)
Democratic Consolidation in Latin America: Experts’ and Citizens’ Views
Sources: BTI Index (2008) and Latinobarómetro (2007).
Political context: democratic consolidationand elections
Source: OECD Development Centre based on Nieto Parra and Santiso (2008)
Number of presidential elections in Latin America
The Latin American countries covered are Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru and Venezuela. For elections with a second (run-off) round, the date of the final round is used.
0
1
2
3
4
5
6
7
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Public spending on education and performance in PISA
Argentina
Brazil
Chile
Colombia
Finland
Korea
Lithuania
Macao-China
Mexico
Portugal
Spain
Uruguay
300
400
500
600
0 5,000 10,000 15,000 20,000 25,000
Ave
rage
pe
rfo
rman
ce
Public spending per pupil in primary and secondary education in equivalent USD
Notes: a) Public spending is calculated as average of available data since 2000.
b) Countries performance average on the PISA science scale
Source: OECD Development Centre 2008 based on PISA 2006 Science Competences for Tomorrow’s World and OECD and UNESCO World Educational Indicators, UNESCO's Institute of Statistics database.
Education spending per pupil is still five times lower in Latin America than in OECD countries... But quality is as big a problem as quantity
Public spending: Quantity - and quality -
Fiscal policy does little to reduce inequality in Latin America
0
10
20
30
40
50
60
Arg
enti
na
Bra
zil
Ch
ile
Co
lom
bia
Mex
ico
Peru
Au
stri
a
Bel
giu
m
Den
mar
k
Fin
lan
d
Fran
ce
Ger
man
y
Gre
ece
Irel
and
Ital
y
Luxe
mb
ou
rg
Net
her
lan
ds
Pola
nd
Port
uga
l
Spai
n
Swed
en
Un
ited
…
Inequality before taxes and transfers
While taxes and transfers reduce the inequality by 19 Gini points in Europe, the difference is less
than two Gini points in Latin America
Taxes, transfers and income inequality
Source: OECD Development Centre (2008), based on Euromod (2008) for OECD countries and Goñi et al. (2008) for Latin America.
Capital Markets, Democracyand the Cost of Debt
There are clear links between political processes, particularly elections, and instability in the debt and currency markets
Source: Nieto Parra and Santiso (2008a), based on Datastream database.
The political cycle and capital markets
Real Exchange Rates around ElectionsCorrelation Between Exchange Rate and
Sovereign- bond Spreads During Elections
Capital Markets, Democracyand the Cost of Debt
Source: Nieto Parra and Santiso (2008a), based on Datastream database.
Investment banks’ recommendations and portfolio allocation to bonds
Latin America (2002-2007) Brazil (2002-2007)
Capital Markets, Democracy
and the Cost of Debt
Bank recommendations are downgraded prior to elections, but tend to move positively again once the uncertainty has passed
Source: Nieto Parra and Santiso (2008a), based on Datastream database.
The political cycle and capital markets
Investment-Bank recommendations
around elections
Brazil 2002 and 2006:
From Lula Preta to Lula de Mel
Capital Markets, Democracyand the Cost of Debt
The market’s fears have some justification: elections are indeed associated with fiscal volatility
Note: The impact of elections on fiscal policy is calculated as the difference between the fiscal variable (as percentage of GDP) during the election year and non-election years.
Source: Nieto Parra and Santiso (2009, forthcoming)
Are Capital-market Jitters around Elections Justified?
P rimary ex penditure
-0,1
0,0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
OECD Latin America
Impact of Elections on Fiscal Policy, 1990-2006 (% of GDP)
P rimary balanc e
-0,8
-0,7
-0,6
-0,5
-0,4
-0,3
-0,2
-0,1
0,0
0,1
OECD Latin America
Capital Markets, Democracy
and the Cost of Debt
Across Latin American, considerable variation in electoral fiscal expansion
Note: The impact of elections on fiscal policy is calculated as the difference between the fiscal variable (as percentage of GDP) during the election year and non-election years.
Source: Nieto Parra and Santiso (2009, forthcoming)
Are Capital-market Jitters around Elections Justified?
Impact of Elections on Fiscal Policy, 1990-2006 (% of GDP)
Is Latin American Democracy Maturing In the eyes of the Capital Markets?
The election effect has been much less marked since 2006 than before partially supported by higher primary surplus due to high GDP growth rather than spending restraint. There has been no decrease in non-credible policy pronouncements.
Note: The impact of 2005 and 2006 elections on fiscal policy is calculated as the difference between the fiscal variable (as a proportion of GDP) during the election year and prior non-election years.
Source: Nieto Parra and Santiso (2009, forthcoming)
Impact of Presidential Elections on Fiscal Variables (% of GDP)
2006 saw elections in all large Latin America countries other than Argentina
Public debt management in Latin America
• Debt levels still high, but considerable progress has been made.
• Good public debt management is linked to healthy development of the domestic bond markets in the region
• Risks remain for the public bond market and above all for the private bond market:
- Foreign exchange volatility
- Liquidity problems in international capital markets
- Political events
Conclusions
Based on the
Latin American Economic Outlook 2009
V Annual Meeting Group of LAC Debt
Montevideo
April 2009
Public Debt Management in
Latin America:
Recent Events and Outlook
Gracias! Thank you!
www.oecd.org/dev/leo
