LatinMacroWatch
Special Analysis
LatinMacroWatch
Special Analysis
LMW: the Big Picture on a Small Screen
A new RES feature
October 23October 23rdrd, 2002, 2002
Between Financial Distress and Lackluster Performance:
A Regional Assessment
Between Financial Distress and Lackluster Performance:
A Regional Assessment
Prepared for presentation at The World Bank, Prepared for presentation at The World Bank, WashingtonWashington, DC, DC
OUTLINE
I. Capital Flight in LAC: Back to the Eighties?I. Capital Flight in LAC: Back to the Eighties?
II.II. LAC in the Aftermath of External Adjustment: LAC in the Aftermath of External Adjustment: A Triple “Whammy”A Triple “Whammy”
IV.IV. External Adjustment and Financial Distress: External Adjustment and Financial Distress: The Case of BrazilThe Case of Brazil
V.V. Argentina’s Public Debt: Yet Another Argentina’s Public Debt: Yet Another Restructuring?Restructuring?
III.III. External Adjustment, Financial Distress and External Adjustment, Financial Distress and Outuput Collapses: The Debt ConnectionOutuput Collapses: The Debt Connection
LAC-7 Capital Flows(4 quarters, millions of US dollars and average in % of GDP)
Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
0
20000
40000
60000
80000
100000
1997
-I
1997
-III
1998
-I
1998
-III
1999
-I
1999
-III
2000
-I
2000
-III
2001
-I
2001
-III
2002
-I
-1%
0%
1%
2%
3%
4%
5%
6%
Millions of US dollars
% of GDP
LAC-7 Foreign Direct Investment(4 quarters, millions of US dollars and average in % of GDP)
Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
0
10000
20000
30000
40000
50000
60000
70000
8000019
97-I
1997
-III
1998
-I
1998
-III
1999
-I
1999
-III
2000
-I
2000
-III
2001
-I
2001
-III
2002
-I
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Millions of US dollars
% of GDP
LAC-7 Foreign Direct Investment(Annual FDI flows, 2002.II)
Others16%
Brazil40%
Mexico44%
LAC-7 Non-FDI Capital Flows(4 quarters, millions of US dollars and and average in % of GDP)
Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
-80000
-60000
-40000
-20000
0
20000
40000
6000019
97-I
1997
-III
1998
-I
1998
-III
1999
-I
1999
-III
2000
-I
2000
-III
2001
-I
2001
-III
2002
-I
-4%
-3%
-2%
-1%
0%
1%
2%
Millions of US dollars
% of GDP
Financial Flows to LAC: Back to the Eigthies?(Billions of real US dollars of May 2002, deflated by US CPI)
-60
-40
-20
0
20
40
60
80
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
0
5000
10000
15000
20000
25000
3000019
97-I
1997
-III
1998
-I
1998
-III
1999
-I
1999
-III
2000
-I
2000
-III
2001
-I
2001
-III
2002
-I
Total Capital Flows (4 quarters, millions of US dollars)
Financial Flows to Emerging Asia:A Panoramic View(Billions of real US dollars of May 2002, deflated by US CPI)
-120
-100
-80
-60
-40
-20
0
20
40
60
80
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Private Capital Flows to Emerging Asia: A Panoramic View(Billions of real US dollars of May 2002, deflated by US CPI)
-70
-20
30
80
130
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
FDI to Emerging Asia: A Panoramic View(Billions of real US dollars of May 2002, deflated by US CPI)
-10
0
10
20
30
40
50
60
70
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Korea: Capital Flows (Total capital flows, 4 quarters)
-10000
-8000
-6000
-4000
-2000
0
2000
40001
99
6-I
19
96
-III
19
97
-I
19
97
-III
19
98
-I
19
98
-III
19
99
-I
19
99
-III
20
00
-I
20
00
-III
20
01
-I
20
01
-III
20
02
-I
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
Millions of US dollars
% of GDP
FDI to Emerging Europe: A Panoramic View
(Billions of real US dollars of May 2002, deflated by US CPI)
-5
0
5
10
15
20
25
30
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Financial Flows to Emerging Europe: A Panoramic View (Billions of real US dollars of May 2002, deflated by US CPI)
-30
-20
-10
0
10
20
30
40
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
OUTLINE
I. Capital Flight in LAC: Back to the Eighties?I. Capital Flight in LAC: Back to the Eighties?
II.II. LAC in the Aftermath of External Adjustment: LAC in the Aftermath of External Adjustment: A Triple “Whammy”A Triple “Whammy”
IV.IV. External Adjustment and Financial Distress: External Adjustment and Financial Distress: The Case of BrazilThe Case of Brazil
V.V. Argentina’s Public Debt: Yet Another Argentina’s Public Debt: Yet Another Restructuring?Restructuring?
III.III. External Adjustment, Financial Distress and External Adjustment, Financial Distress and Outuput Collapses: The Debt ConnectionOutuput Collapses: The Debt Connection
LAC-7 Business Cycle: 1997-2002(s.a. GDP, mean annualized quarterly growth rate)
Includes: Argentina Brazil, Chile, Colombia, Mexico, Peru and Venezuela
Deceleration Recession Recovery Recession?
-7%
-5%
-3%
-1%
1%
3%
5%
7%
9%1
997
.I
199
7.II
I
199
8.I
199
8.II
I
199
9.I
199
9.II
I
200
0.I
200
0.II
I
200
1. I
200
1.II
I
200
2.I
Business Cycle: 1997-2002(s.a. GDP, mean annualized quarterly growth rate, excluding Argentina)
Deceleration Recession Recovery Recession?
-7%
-5%
-3%
-1%
1%
3%
5%
7%
9%1
997
.I
199
7.II
I
199
8.I
199
8.II
I
199
9.I
199
9.II
I
200
0.I
200
0.II
I
200
1. I
200
1.II
I
200
2.I
Includes: Brazil, Chile, Colombia, Mexico, Peru and Venezuela
LAC-7 Business Cycle and Capital Flows (GDP and Non FDI Capital Flows, last four quarters)
-3%-2%-1%0%1%2%3%4%5%6%7%
Ma
r-9
6
Se
p-9
6
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
GD
P (
yoy
% c
han
ge)
-4%
-3%
-2%
-1%
0%
1%
2%
No
n F
DI C
apit
al F
low
s (%
GD
P)
GDP
Non FDI Capital Flows
-14000
-12000
-10000
-8000
-6000
-4000
-2000
019
97-I
1997
-III
1998
-I
1998
-III
1999
-I
1999
-III
2000
-I
2000
-III
2001
-I
2001
-III
2002
-I
-6%
-5%
-4%
-3%
-2%
-1%
0%
LAC 7: Current Account (4 quarters)
Mill
ions
of U
S d
olla
rs
% o
f GD
P (
ave
rage
)
Millions of US dollars
% of GDP
4.8
1998.II 2002.II Change(1) (2) (2)-(1)
Venezuela 2.0 4.1-2.1
Chile -0.9 5.7-6.6
Colombia -1.5-6.3Peru -1.7 5.2-6.9
Argentina 2.1 6.8-4.7
Mexico -2.6 0.4-3.0
Brasil -4.1 -3.5 0.6
Average -4.9 -0.9 4.0
Current Account Balance by Country(4 quarters, % of GDP)
Current Account Adjustment by Country(in percentage of annual imports of 1998.II)
-10% 0% 10% 20% 30% 40% 50%
Mexico
Venezuela
Chile
Brazil
Colombia
Peru
Argentina
average
Real Exchange Rate by Country(vis-à-vis the US dollar, August 2002 vs. June 1998)
25%
37%
49%
54%
130%
198%
-15%
-20% 30% 80% 130% 180%
México
Perú
Venezuela
Chile
Colombia
Brazil
Argentina
75
80
85
90
95
100
1051
99
7.I
19
97
.II
19
97
.III
19
97
.IV
19
98
.I
19
98
.II
19
98
.III
19
98
.IV
19
99
.I
19
99
.II
19
99
.III
19
99
.IV
20
00
.I
20
00
.II
20
00
.III
20
00
.IV
20
01
.I
20
01
.II
20
01
.III
20
01
.IV
20
02
.I
20
02
.II
-1%
0%
1%
2%
3%
4%
5%
6%
External Adjustment and Investment (S.a. investment and annual capital flows)
Investment
Total Capital Flows
Inve
stm
en
t (1
99
8.I
I =
10
0)
To
tal
Ca
pita
l Flo
ws
(% G
DP
)
70
80
90
100
110
120
130
19
98
.II
19
98
.III
19
98
.IV
19
99
.I
19
99
.II
19
99
.III
19
99
.IV
20
00
.I
20
00
.II
20
00
.III
20
00
.IV
20
01
. I
20
01
.II
20
01
.III
20
01
.IV
20
02
.I
20
02
.II
Exports
Consumption
Investment
Recession StallingRecovery
LAC-7 Components of Demand(1998.II = 100)
Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru
Recession?
LAC 7 Investment (1998.II =100)
38
48
58
68
78
88
98
108
118
128
1998
.II
1998
.III
1998
.IV
1999
.I
1999
.II
1999
.III
1999
.IV
2000
.I
2000
.II
2000
.III
2000
.IV
2001
.I
2001
.II
2001
.III
2001
.IV
2002
.I
2002
.II
Brazil Chile Argentina Colombia Mexico Peru
LAC-7 Trend Growth(annualized quarterly growth rate, 1998.II=100)
Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
25
35
45
55
65
75
85
95
1998.II 1999.II 2000.II 2001.II 2002.II
Emerging Asia: Current Account (4 quarters)
Includes: Malaysia, Philippines, Thailand, Indonesia and Korea
-80000
-60000
-40000
-20000
0
20000
40000
60000
8000019
96-I
1996
-III
1997
-I
1997
-III
1998
-I
1998
-III
1999
-I
1999
-III
2000
-I
2000
-III
2001
-I
2001
-III
2002
-I
Mill
ions
of U
S d
olla
rs
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
% o
f GD
P (
ave
rage
)
Millions of US dollars
% of GDP
60
70
80
90
100
110
120
Mar
-96
Jul-9
6
Nov
-96
Mar
-97
Jul-9
7
Nov
-97
Mar
-98
Jul-9
8
Nov
-98
Mar
-99
Jul-9
9
Nov
-99
Mar
-00
Jul-0
0
Nov
-00
Mar
-01
Jul-0
1
Nov
-01
Mar
-02
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Emerging Asia: External Adjustment and Investment (S.a. investment and annual capital flows)
Investment
Total Capital Flows
Inve
stm
en
t (1
99
7.I
V =
10
0)
To
tal
Ca
pita
l Flo
ws
(% G
DP
)
50
70
90
110
130
150
Jun
-97
Se
p-9
7
Dic
-97
Ma
r-9
8
Jun
-98
Se
p-9
8
Dic
-98
Ma
r-9
9
Jun
-99
Se
p-9
9
Dic
-99
Ma
r-0
0
Jun
-00
Se
p-0
0
Dic
-00
Ma
r-0
1
Jun
-01
Se
p-0
1
Dic
-01
Ma
r-0
2
Jun
-02
Emerging Asia: Components of Demand (1997.II =100)
Exports
Consumption
Investment
Includes Korea, Philippines, Malaysia, Thailand and Indonesia
Emerging Asia: Trend Growth(annualized quarterly growth rate, 1996.II=100)
Includes Indonesia, Korea, Philippines, Thailand, Malaysia
1998.II 1999.II 2000.II 2001.II 2002.II1997.II1996.II
0
20
40
60
80
100
In In ssummaryummary,, the reduction of capital inflows the reduction of capital inflows to LAC to LAC was a triple was a triple ““whammywhammy” since it was associated with:” since it was associated with:
A rise in the cost of creditA rise in the cost of credit
A substantial depreciation of the real A substantial depreciation of the real exchange rateexchange rate
A decline of investment and slower growthA decline of investment and slower growth
OUTLINE
I. Capital Flight in LAC: Back to the Eighties?I. Capital Flight in LAC: Back to the Eighties?
II.II. LAC in the Aftermath of External Adjustment: LAC in the Aftermath of External Adjustment: A Triple “Whammy”A Triple “Whammy”
IV.IV. External Adjustment and Financial Distress: External Adjustment and Financial Distress: The Case of BrazilThe Case of Brazil
V.V. Argentina’s Public Debt: Yet Another Argentina’s Public Debt: Yet Another Restructuring?Restructuring?
III.III. External Adjustment, Financial Distress and External Adjustment, Financial Distress and Outuput Collapses: The Debt ConnectionOutuput Collapses: The Debt Connection
External Adjustment & Financial Distress: The Debt Connection
Brazil ChileArgentina Uruguay
Financial Mismatches of the Private Sector
= High vulnerability
= Medium vulnerability
= Low vulnerability
Financial mismatches of the Public Sector
Public Debt to GDP
Banking System Exposure to the Public Sector
Sudden Stop in Argentina and Chile(Capital flows, last 4 quarters, % of GDP)
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%I
98
II 9
8
III
98
IV 9
8
I 99
II 9
9
III
99
IV 9
9
I 00
II 0
0
III
00
IV 0
0
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Arg
enti
na
Ch
ile
Argentina
Chile
External Adjustment(Current Account, 4 quarters, %GDP)
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
Chi
le
-5.5%
-5.0%
-4.5%
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
Arg
entin
a
Argentina
Chile
Contraction and Recovery: GDP and Investment(s.a., 1998.II=100)
GDP Investment
80
85
90
95
100
105
110
199
8.II
199
8.IV
199
9.II
199
9.IV
200
0.II
200
0.IV
200
1.II
200
1.IV
200
2.II 35
45
55
65
75
85
95
1998
.II
1998
.IV
1999
.II
1999
.IV
2000
.II
2000
.IV
2001
.II
2001
.IV
2002
.II
Beginning of bankrun in Argentina
Chile
Argentina
Chile
Argentina
Sudden Stop and the Real Exchange Rate
Required % change in RERto eliminate the CAD
25
30
35
40
45
50
55
60
Chile Argentina
Source: Calvo, Izquierdo, Talvi (2002)
32.4
46.2
379
178
100
150
200
250
300
350
400
450
ChileArgentina
Relative Openness, 1998(External Debt to Exports Ratio)
Fiscal Sustainability in Argentina after the Sudden Stop in 1998
Debt toGDPratio(%)
Req. Prim.SurplusAdjust.
(a) Baseline 36.5 0.3
(b) Change in Relative Prices to close the CA deficit (RER depreciation of 46,2%)
49.7 0.7
(c): (b) + 200 BPS Increase in Real Interest Rate
49.7 1.7
(d): (c) + 1% Reduction in GDP growth 49.7 2.2
(e): (d) + Contingent Liabilities 58.6 2.7
Source: Calvo, Izquierdo, Talvi (2002)
Note: The observed primary surplus for 1998 was 0.9 percent of GDP. The baseline scenario assumes a long run rate of growth of 3,8% and a 7,1% interest rate
25.6
45.4
66.0
71.7
75.9
Debt Reductio
n(%)
ArgentinaArgentina’s Collapse in a Nutshell’s Collapse in a Nutshell
RER depreciation:RER depreciation: revaluation of public sector debt revaluation of public sector debt relative to GDP + deterioration of corporate balance relative to GDP + deterioration of corporate balance sheets (contingent liabilities). The proposed fiscal sheets (contingent liabilities). The proposed fiscal adjustments were clearly insufficient for a substantially adjustments were clearly insufficient for a substantially higher RER.higher RER.
Deterioration of public and private sector balance sheetsDeterioration of public and private sector balance sheets: : Worsened quality of bank assets and run on banks due Worsened quality of bank assets and run on banks due to the fear that losses might be partially financed by to the fear that losses might be partially financed by confiscating depositors.confiscating depositors.
The run against banks was accommodated by The run against banks was accommodated by credit credit expansion of the CBexpansion of the CB, leading to a collapse in , leading to a collapse in international reserves and an acceleration of the run on international reserves and an acceleration of the run on banks.banks.
OUTLINE
I. Capital Flight in LAC: Back to the Eighties?I. Capital Flight in LAC: Back to the Eighties?
II.II. LAC in the Aftermath of External Adjustment: LAC in the Aftermath of External Adjustment: A Triple “Whammy”A Triple “Whammy”
IV.IV. External Adjustment and Financial Distress: External Adjustment and Financial Distress: The Case of BrazilThe Case of Brazil
V.V. Argentina’s Public Debt: Yet Another Argentina’s Public Debt: Yet Another Restructuring?Restructuring?
III.III. External Adjustment, Financial Distress and External Adjustment, Financial Distress and Outuput Collapses: The Debt ConnectionOutuput Collapses: The Debt Connection
-30000
-20000
-10000
0
10000
20000
30000
40000
500001
997
-I
199
7-I
II
199
8-I
199
8-I
II
199
9-I
199
9-I
II
200
0-I
200
0-I
II
200
1-I
200
1-I
II
200
2-I
-6%
-4%
-2%
0%
2%
4%
6%
8%
% GDP
millions of US dollars
Capital Flows: A Panoramic View (Excluding IMF disbursements, last 4 quarters)
Non FDI Capital Flows: A Panoramic View (Excluding IMF disbursements, last 4 quarters)
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
1997
-I
1997
-II
1997
-III
1997
-IV
1998
-I
1998
-II
1998
-III
1998
-IV
1999
-I
1999
-II
1999
-III
1999
-IV
2000
-I
2000
-II
2000
-III
2000
-IV
2001
-I
2001
-II
2001
-III
2001
-IV
2002
-I
2002
-II -60000
-50000
-40000
-30000
-20000
-10000
0
10000
20000
30000
40000
% GDP
millions of US dollars
5000
10000
15000
20000
25000
30000
35000
40000
450002
000
-I
200
0-I
I
200
0-I
II
200
0-I
V
200
1-I
200
1-I
I
200
1-I
II
200
1-I
V
200
2-I
200
2-I
I
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
% GDP
millions of US dollars
Capital Flows: Recent Developments (Excluding IMF disbursements, last 4 quarters)
-15000
-10000
-5000
0
5000
10000
1500020
00-I
2000
-II
2000
-III
2000
-IV
2001
-I
2001
-II
2001
-III
2001
-IV
2002
-I
2002
-II -2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
% GDP
millions of US dollars
Non FDI Capital Flows: Recent Developments (Excluding IMF disbursements, last 4 quarters)
Trade Credit Lines (Outstanding, in millions of US$)
9 500
10 500
11 500
12 500
13 500
14 500
15 500
16 500E
ne-
01
Ma
r-0
1
Ma
y-0
1
Jul-
01
Se
p-0
1
No
v-01
En
e-0
2
Ma
r-0
2
Ma
y-0
2
Jul-
02
Se
p
Jan-Aug 2001 Jan-Aug 2002
Disbursements
Notes and Commercial Papers 5,535 1,798
Direct Loans 4,058 1,468
Amortizations
Notes and Commercial Papers 6,147 4,371
Direct Loans 2,113 2,409
Rollover Rate
Notes and Commercial Papers 90% 41%
Direct Loans 192% 61%
Medium and Long Term External Financing (Private Sector, in millions of US$)
FDI Flows: Recent Developments (4 quarters, millions of US dollars and % of GDP)
10000
15000
20000
25000
30000
3500020
00-I
2000
-II
2000
-III
2000
-IV
2001
-I
2001
-II
2001
-III
2001
-IV
2002
-I
2002
-II
2002
-III
2002
-IV
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
% GDPMillions of US dollars
Official Projections
-28000
-26000
-24000
-22000
-20000
-18000
-16000
-14000
-12000
-100002
000
-I
200
0-I
I
200
0-I
II
200
0-I
V
200
1-I
200
1-I
I
200
1-I
II
200
1-I
V
200
2-I
200
2-I
I -5.2%
-5.0%
-4.8%
-4.6%
-4.4%
-4.2%
-4.0%
-3.8%
-3.6%
-3.4%
% of GDPMillions of US dollars
Current Account Adjustment(4 quarters, millions of US dollars and % of GDP)
Trade Balance Adjustment(Last 12 months, in millions of US dollars)
45000
47000
49000
51000
53000
55000
57000
59000
61000
Ene
-00
Abr
-00
Jul-0
0
Oct
-00
Ene
-01
Abr
-01
Jul-0
1
Oct
-01
Ene
-02
Abr
-02
Jul-0
2
Exp
. /
Imp.
-4000
-2000
0
2000
4000
6000
8000
10000
Bal
ance
imports
exports
balance
-30000
-20000
-10000
0
10000
20000
30000
40000
5000019
97-I
1997
-III
1998
-I
1998
-III
1999
-I
1999
-III
2000
-I
2000
-III
2001
-I
2001
-III
2002
-I
mill
ions
of U
S d
olla
rs
-6%
-4%
-2%
0%
2%
4%
6%
8%
yoy
Economic Activity and Capital Flowsindustrial production (3 mth. m.a. yoy) & annual capital flows excl. IMF disbursements
industrial production
capital flows
GDP and Investment (s.a index, II.1998=100)
80
85
90
95
100
105
110
II-1
998
IV-1
998
II-1
999
IV-1
999
II-2
000
IV-2
000
II-2
001
IV-2
001
II-2
002
GDP
Investment
Exchange Rate and Country Risk
1.7
2.2
2.7
3.2
3.7
4.2
02-
En
e-0
1
09-
Ma
r-01
15-
Ma
y-
20-
Jul-0
1
21-
Se
p-0
1
26-
Nov
-01
23-
En
e-0
2
25-
Ma
r-02
23-
Ma
y-0
2
22-
Jul-0
2
16-
Se
p-0
2
500
1000
1500
2000
2500
3000
R$
per
dolla
r
basi
s po
ints
exchange rate
country risk
Country Risk and Interest Rates(C-Bond Spread in b.p. and 360-day Interest Rate Swap in %)
300
800
1300
1800
02-E
ne-0
1
02-M
ar-0
1
02-M
ay-0
1
02-J
ul-0
1
02-S
ep-0
1
02-N
ov-0
1
02-E
ne-0
2
02-M
ar-0
2
02-M
ay-0
2
02-J
ul-0
2
02-S
ep-0
2
10
15
20
25
30
35
C-B
on
d S
pre
ad
Inte
res
t R
ate
interest rate
C-Bond spread
5%
7%
9%
11%
13%
15%
17%
19%
21%
23%
En
e-0
0
Ab
r-00
Jul-
00
Oct
-00
En
e-0
1
Ab
r-01
Jul-
01
Oct
-01
En
e-0
2
Ab
r-02
Jul-
02
10%
12%
14%16%
18%
20%
22%
24%26%
28%
30%
nominal interest rate
real (ex – ante) interest rate
Interest Rates(Nominal and Real 360-day Interest Rate Swap)
no
min
al
rea
l
In Summary...In Summary...
The capital inflows slowdown since IIQ-2001 has The capital inflows slowdown since IIQ-2001 has been associated with:been associated with:
Slowdown in economic activitySlowdown in economic activity
Higher interest rates on both domestic and Higher interest rates on both domestic and foreign financial assetsforeign financial assets
Substantial depreciation of the real exchange rateSubstantial depreciation of the real exchange rate
Public Debt(% of GDP)
45
47
49
51
53
55
57
59
61
63E
ne-
00
Ma
r-0
0
Ma
y-0
0
Jul-
00
Se
p-0
0
No
v-00
En
e-0
1
Ma
r-0
1
Ma
y-0
1
Jul-
01
Se
p-0
1
No
v-01
En
e-0
2
Ma
r-0
2
Ma
y-0
2
Jul-
02
58.3% of GDP
US$ 259 billion at end July XR
Public Debt StructureAugust 2002
Fixed
Rate 6%
Others
9%
External or FX indexed Public Debt
43%
Indexed to the Interest Rate
42%
Public Debt and the Exchange Rate (Public Debt in % of GDP and XR,
Reales per Dollar)
46%
48%
50%
52%
54%
56%
58%
60%
62%
64%E
ne-0
0
Mar
-00
May
-00
Jul-0
0
Sep
-00
Nov
-00
Ene
-01
Mar
-01
May
-01
Jul-0
1
Sep
-01
Nov
-01
Ene
-02
Mar
-02
May
-02
Jul-0
2
1.5
2.0
2.5
3.0
3.5
4.0
XR: 3.02 Reales per Dollar
Public Debt: 58.3% of GDP
Public Debt Dynamics
April 2002
Fiscal Impact of:
54.5% 10.9% 3.5% 3.9%
Public Debt (% of GDP)
Interest Rate
Growth Rate
Primary Balance that stabilizes Debt
10% real depreciation
57.2% 10.9% 3.5% +0.2%
10% real depreciation
57.2% 10.9% 3.5% +0.2%
Public Debt Dynamics
April 2002
Fiscal Impact of:
54.5% 10.9% 3.5% 3.9%
Public Debt (% of GDP)
Interest Rate
Growth Rate
Primary Balance that stabilizes Debt
1% increase in the domestic interest rate
54.5% 11.4% 3.5% +0.3%
10% real depreciation
57.2% 10.9% 3.5% +0.2%
1% increase in the domestic interest rate
54.5% 11.4% 3.5% +0.3%
April 2002
Fiscal Impact of:
54.5% 10.9% 3.5% 3.9%
Public Debt (% of GDP)
Interest Rate
Growth Rate
Primary Balance that stabilizes Debt
1% reduction in the growth rate
54.5% 10.9% 2.5% +0.6%
Public Debt Dynamics
Calculates default probabilities based on a Structural Model
Assumes risk neutrality
Setup: Consider a bond with:
Principal equal to $1
Expires T periods from now
The conditional (survival) probability that the bond does not default at time s given it has not defaulted as of time s – 1 is p.
At each coupon payment date, s {1,2, …, T}, there are two possible outcomes:
• No Default (with probability p) The bond-holder gets paid the coupon c (plus the principal $1 if s = T)
• Default (with probability 1-p) The bond-holder receives a payment stream with a present value of R (i.e the recovery value)
BBPM: Binomial Bond Pricing Model
Default Case:Recovery Rate (R)
No Default Case:Coupon (c)
Market Price V2
p
1-p
Default Case:Recovery Rate (R)
No Default Case:Coupon plus Ppal (1+c)
p
1-p
BBPM: Two Period Example
V2: Market Price of a Risky Bond payable two periods from now.
p • c + ( 1p) • R1+i
V2 p2• (1+c) + p • (1p) • R
(1+i) 2
Yield Curve of Default Probabilities implied by BBPM
0%
5%
10%
15%
20%
25%
30%
2004 2008 2020 2030
Apr. 2002
Sep.2002
Brazil
Global Bond
Def
ault
Pro
bab
ilit
y (1
-p)
(Recovery value: 25%)
Expected Loss (EL) : Calculation
VM VF • (1-EL)
where:
VM is the market value of a risky bond
VF is the discounted present value of the risky bond assuming both coupon and principal are fully paid
where i is the risk free interest rate.
Definition:
Example: Bond which pays constant coupon payments c until its maturity at time T:
VM
c
(1+i)s
s=1 (1+i)T
1EL 1 1
VM
VF
0%
10%
20%
30%
40%
50%
60%
70%
80%
2004 2008 2020 2030
Apr. 2002
Sep.2002
Yield Curve of EL’s on Brazilian Bonds
Global Bond
Exp
ecte
d L
oss
Net Public Debt Composition(in % of total, August 2002)
Domestic76%
External24%
Public Debt Securities by Holder (30th August, % of total)
Banks37%
Investment Funds32%
Other5%
Reserve Requirements
19 %
Non-financial private sector
7%
Banks’ Exposure to the Public Sector Public Bond Holdings
0%
50%
100%
150%
200%
250%
300%
350%
In % of Banks’ Assets In % of Banks’ Net Worth
Average Maturity of Outstanding Domestic Debt (issued at auction, in months)
17
19
21
23
25
27
Ene
-01
Mar
-01
May
-01
Jul-0
1
Sep
-01
Nov
-01
Ene
-02
Mar
-02
May
-02
Jul-0
2
117000
120000
123000
126000
129000
132000
135000
02
-En
e-0
2
02
-Fe
b-0
2
02
-Ma
r-0
2
02
-Ab
r-0
2
02
-Ma
y-0
2
02
-Ju
n-0
2
02
-Ju
l-0
2
02
-Ag
o-0
2
-25000
-20000
-15000
-10000
-5000
0
5000
10000
Ene
-02
Feb
-02
Mar
-02
Abr
-02
May
-02
Jun-
02
Jul-0
2
Unt
il 28
Aug
.
The run from Investment Funds to Saving DepositsIn millions of R$
Saving Deposits (Caderneta de Poupança)
31st May: Marking to market of IF’s bonds
Net Flows to Investment Funds
Since 31st May: R$ 15.1 billionSince 31st May: -R$ 51.9 billion
31st May: Marking to market of IF’s bonds
15
17
19
21
23
25
27
29
31
1/2/
01
3/2/
01
5/2/
01
7/2/
01
9/2/
01
11/2
/01
1/2/
02
3/2/
02
5/2/
02
7/2/
02
9/2/
02
Interest Rates(Selic benchmark CB rate, 180 and 360-day Interest Rate Swaps, in %)
180-days
360-days
Selic
60
560
1060
1560
2060
2560
3060Ju
l-01
Au
g-0
1
Sep
-01
Oct
-01
No
v-01
Dec
-01
Jan
-02
Feb
-02
Mar
-02
Ap
r-02
May
-02
Jun
-02
Jul-
02
Au
g-0
2
Sep
-02
Oct
-02
Bp
sBrazilian Country Risk(EMBI+, bps over US Treasuries)
Lula risesIn the polls
U.S. Corporate Bonds Spreads(Bps over US Treasuries)
0
20
40
60
80
100
120
140
Jan
-01
Mar
-01
May
-01
Jul-
01
Sep
-01
No
v-01
Jan
-02
Mar
-02
May
-02
Jul-
02
Sep
-02
Bp
s
60
80
100
120
140
160
180
200
220
Jan
-01
Mar
-01
May
-01
Jul-
01
Sep
-01
No
v-01
Jan
-02
Mar
-02
May
-02
Jul-
02
Sep
-02
Bp
s
160
190
220
250
280
310
340
370
Jan
-01
Mar
-01
May
-01
Jul-
01
Sep
-01
No
v-01
Jan
-02
Mar
-02
May
-02
Jul-
02
Sep
-02
Bp
s
600
650
700
750
800
850
900
950
1000
1050
1100
Jan
-01
Mar
-01
May
-01
Jul-
01
Sep
-01
No
v-01
Jan
-02
Mar
-02
May
-02
Jul-
02
Sep
-02
Bp
s
AAA
BBB
A
High Yield
9-11 9-11
9-11 9-11
Lula risesIn the polls
Lula risesIn the polls
Lula risesIn the polls
Lula risesIn the polls
600
650
700
750
800
850
900
950
1000
1050
1100
Jul-
01
Au
g-0
1
Sep
-01
Oct
-01
No
v-01
Dec
-01
Jan
-02
Feb
-02
Mar
-02
Ap
r-02
May
-02
Jun
-02
Jul-
02
Au
g-0
2
Sep
-02
Oct
-02
Bp
s
500
1000
1500
2000
2500
3000
60
70
80
90
100
110
120
130
140
150
160
Jul-
01
Au
g-0
1
Sep
-01
Oct
-01
No
v-01
Dec
-01
Jan
-02
Feb
-02
Mar
-02
Ap
r-02
May
-02
Jun
-02
Jul-
02
Au
g-0
2
Sep
-02
Oct
-02
Bp
s
500
1000
1500
2000
2500
3000
Lula Effect? Look Again(EMBI+ and US corporate bonds, bps over US Treasuries)
A
High Yield
Brazil
Brazil
9-11
9-11
Lula risesIn the polls
Lula risesIn the polls
OUTLINE
I. Capital Flight in LAC: Back to the Eighties?I. Capital Flight in LAC: Back to the Eighties?
II.II. LAC in the Aftermath of External Adjustment: LAC in the Aftermath of External Adjustment: A Triple “Whammy”A Triple “Whammy”
IV.IV. External Adjustment and Financial Distress: External Adjustment and Financial Distress: The Case of BrazilThe Case of Brazil
V.V. Argentina’s Public Debt: Yet Another Argentina’s Public Debt: Yet Another Restructuring?Restructuring?
III.III. External Adjustment, Financial Distress and External Adjustment, Financial Distress and Outuput Collapses: The Debt ConnectionOutuput Collapses: The Debt Connection
Federal Public Debt: Current Status(in millions of US$, June 2002)
Federal Government Debt 114,575
Multilaterals 31,702
of which IMF 14,355
World Bank 8,708
IADB 8,606
Guaranteed Loans 18,513
Bonds 50,996
June 02 Dec. 01
144,453
42,258
32,362
14,776 13,363
55,057
Other
13,952
9,673
8,704
54% of GDP
159% of GDP
Note: The reduction of the debt stock since Dec. 2001 is mainly due to the pesoification of domestic debt at 1.4 Pesos per Dollar
Federal Public Debt: Contingent Liabilities (in millions of US$, March 2002)
Federal Government Debt 114,575
June 02
Contingent Liabilities
Asymetric indexation***
Compensation to Banks
Asymetric pesoification *
Amparos***
FX insurance to depositors (Canje I and II) and private sector external debtors **
Bond for restitution of 13% salary & pension cut*
28,077
2,609
13,642
9,491
1,542
NQ
825
Federalization of Provincial Debt *
Federal Government Debt including contingencies 142,652
* = already recognized ** = partially recognized *** = not yet recognized NQ = not quantified
13,610
Federal Government Debt June 2002
Bonds 44%
Guaranteed loans
16%
Multilaterals 28%
Other* 12%
Debt Structure
In default: US$ 64 billion*
* LMW estimate
Implied Expected Loss (EL) in Bond Prices
VM VF • (1-EL)
where:
VM is the market value of a risky bond
VF is the discounted present value of the risky bond assuming both coupon and principal are fully paid
where i is the risk free interest rate.
Definition:
Example: Bond which pays constant coupon payments c until its maturity at time T:
VM
c
(1+i)s
s=1 (1+i)T
1EL 1 1
VM
VF
65%
70%
75%
80%
85%
90%
2008 2010 2027
Yield Curve of EL on Argentina’s External Bonds
Global Bond
Exp
ecte
d L
oss
Weighted average
Argentina (September 2002)
Argentina’s Public Debt After a Hypothetical Restructuring(% of GDP)
127
106
80
67
0
20
40
60
80
100
120
140
3.8 3.0 2.0 1.5
Equilibrium Real Exchange Rate
Deb
t (%
)
At current real GDP
Argentina’s Interest Payments on Public Debt After a Hypothetical Restructuring(% of GDP)
8.9
7.4
5.6
4.7
0
1
2
3
4
5
6
7
8
9
10
3.8 3.0 2.0 1.5
Equilibrium Real Exchange Rate
%
At current real GDP
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%Ja
n-99
Apr
-99
Jul-9
9
Oct
-99
Jan-
00
Apr
-00
Jul-0
0
Oct
-00
Jan-
01
Apr
-01
Jul-0
1
Oct
-01
Jan-
02
Apr
-02
Primary Fiscal Deficit(Last 12 months, in % of GDP)
Financial Crisis
Assets of Argentina’s Financial SystemAugust 2002
Other net assets5%
Reserves6%
Loans32%
Claims on to the public sector
57%
Total assets: ARG$155.800 millions
4,579
-3,812-5,000
-4,000
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
4,000
5,000
At Face Value At Market Prices
Net Worth of Argentina’s Financial System(August 2002, in millions of US$)
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
IV T
rim
94
IV T
rim
95
IV T
rim
96
IV T
rim
. 9
7
IV T
rim
98
IV T
rim
. 9
9
IV T
rim
. 0
0
IV T
rim
. 0
1
-35000
-30000
-25000
-20000
-15000
-10000
-5000
0
5000
10000
15000
Capital Flows and Economic Activity Last 4 quarters in US$ millions, cyclical comp. of GDP
Private Sector Capital Flows
GDPRussian Crisis
Financial Crisis
Aggregate Demand and Supply Seasonally adjusted indices, II 98=100
35
50
65
80
95
110
Jun
-98
Dic
-98
Jun
-99
Dic
-99
Jun
-00
Dic
-00
Jun
-01
Dic
-01
Jun
-02
Components of Demand
Exports
Investment
Private Consumption
35
50
65
80
95
110
Jun
-98
Dic
-98
Jun
-99
Dic
-99
Jun
-00
Dic
-00
Jun
-01
Dic
-01
Jun
-02
Components of Supply
imports
GDP
Russian Crisis
Financial Crisis
Russian Crisis
Financial Crisis
Use of Installed Productive Capacity Industrial Sector, s.a. index June 1998=100
75
80
85
90
95
100
105Ju
n-9
8
Se
p-9
8
Dic
-98
Ma
r-9
9
Jun
-99
Se
p-9
9
Dic
-99
Ma
r-0
0
Jun
-00
Se
p-0
0
Dic
-00
Ma
r-0
1
Jun
-01
Se
p-0
1
Dic
-01
Ma
r-0
2
Jun
-02
Financial Crisis
Russian Crisis
Argentina’s Public Debt After a Hypothetical Restructuring(% of GDP)
127
106
80
6776 72
65 61
0
20
40
60
80
100
120
140
3.8 3.0 2.0 1.5
Equilibrium Real Exchange Rate
Deb
t (%
)
At current real GDP
At 2001 real GDP
Virtuous scenarios
Argentina’s Interest Payments on Public Debt After a Hypothetical Restructuring(% of GDP)
8.9
7.4
5.6
4.75.3 5.0
4.6 4.3
0
1
2
3
4
5
6
7
8
9
10
3.8 3.0 2.0 1.5
Equilibrium Real Exchange Rate
%
At current real GDP
At 2001 real GDP
Virtuous scenarios
Primary Surplus under Alternative Recovery Scenarios(% of GDP)
0.5
4.0
5.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
At Current RevenuesLevel
At 2001 RevenuesLevel
At 1998 RevenuesLevel