Tale of two cities Lessons from the recent commodity price cycle - PowerPoint PPT Presentation

´Tale of two cities´ Lessons from the recent commodity price cycle Guillermo Perry Inaugural Lecture UNIFI November 8, 2017

´All happy families are alike; each unhappy family is unhappy in its own way´ Ana Karenina, Leon Tolstoi.

Recent economic slowdown in all developing regions, especially in South America and, less so, in Mexico GDP growth rate (%) 16,0 8 14,0 6 12,0 10,0 4 3,7 8,0 6,8 2,1 2 6,0 6,5 0,9 4,0 0 2,6 2,2 2,0 1,2 -2 0,0 -2,0 -4 -4,0 -6 Emerging and developing Asia Latin America and the Caribbean Middle East and North Africa* Sub-Saharan Africa Mexico Central America South America China *Also includes Afghanistan and Pakistan Source: World Economic Outlook database, IMF projections, WEO October 2017

Mainly explained by the slump in commodity prices, Monthly indices based on nominal US dollars 2010=100 Source: World Bank 100 120 140 160 180 20 40 60 80 Sep-00 Mar-01 Sep-01 Mar-02 minerals Other metals and Agriculture Energy Sep-02 after a long boom since 2003 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Commodity Price Index Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17

That led to a boom and bust in Terms of Trade Terms of Trade Index (2002=100) 220 140 300 Chile Colombia Mexico 200 Peru 130 250 180 120 200 160 110 140 150 100 120 100 Argentina Venezuela 90 100 Brazil 80 50 80 2000 2003 2006 2009 2012 2015 2000 2003 2006 2009 2012 2015 Source: Citi Bank.

We see today quite unhappy and less unhappy countries: differences are not fully explained by TOT GDP growth rates (simple averages, %)* 15 Less unhappy countries Quite unhappy countries 10 5 0 -5 -10 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 *Less unhappy: Chile, Colombia, Mexico and Peru; Quite unhappy: Argentina, Brazil and Venezuela Source: World Economic Outlook database, IMF projections, WEO October 2017

GDP growth: The less unhappy ones look quite alike GDP growth rate (%) 15 10 5 0 -5 -10 Chile Colombia Mexico Peru -15 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: World Economic Outlook database, IMF projections, WEO October 2017

GDP growth: The more unhappy ones look much less alike GDP growth rate (%) 25 20 Argentina Brazil Venezuela 15 10 5 0 -5 -10 -15 -20 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: World Economic Outlook database, IMF projections, WEO October 2017

An early symptom of unhappiness in Venezuela and Argentina: loss of reserves International Reserves (includes gold, % of GDP) 40 30 35 25 30 25 20 20 15 15 10 10 5 5 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Chile (includes Gov's Funds) Colombia Brazil Mexico Argentina Venezuela, RB Peru Source: World Development indicators, World Bank, Ministry of Finance of Chile

And sovereign risk hikes EMBI stripped spreads; end of period (simple averages, basis points) 3.500 3.000 Less unhappy countries Quite unhappy countries 2.500 2.000 1.500 1.000 500 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Bloomberg, JP Morgan

Spreads: The less unhappy bunch look again quite alike EMBI stripped spreads; end of period (basis points) 800 Chile Colombia Mexico Peru 600 400 200 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Bloomberg, JP Morgan

Spreads: The very unhappy ones again look less alike EMBI stripped spreads; end of period (basis points) 7.000 6.000 Argentina Brazil Venezuela 5.000 4.000 3.000 2.000 1.000 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Bloomberg, JP Morgan

A closer look to the less unhappy bunch and Brazil: Credit Default Swaps 5-Year Credit Default Swaps (basis points) 530 Colombia 480 Brasil 430 México Chile 380 Perú 330 280 230 180 170,2 130 111,9 105,7 80 77,0 54,2 30 dic 11 mar 12 giu 12 set 12 dic 12 mar 13 giu 13 set 13 dic 13 mar 14 giu 14 set 14 dic 14 mar 15 giu 15 set 15 dic 15 mar 16 giu 16 set 16 dic 16 mar 17 giu 17 set 17 Source: Bloomberg

Two factors behind differences in unhappiness (in addition to micro-policies and politics): Fiscal deficits and exchange rate regimes and interventions

Behind deep unhappiness: fiscal deficits General Government Net Lending/Borrowing (% of GDP) 6 Less unhappy countries Quite unhappy countries 4 2 0 -2 -4 -6 -8 -10 -12 -14 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: World Economic Outlook database, IMF projections, WEO October 2017

Some differences in fiscal deficits among the less unhappy General Government Net Lending/Borrowing (% of GDP) 10 8 Chile Colombia Mexico Peru 6 4 2 0 -2 -4 -6 -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: World Economic Outlook database, IMF projections, WEO October 2017

Wider fiscal deficits and differences among the very unhappy General Government Net Lending/Borrowing (% of GDP) 10 5 0 -5 -10 -15 Argentina Brazil Venezuela -20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: World Economic Outlook database, IMF projections, WEO October 2017

Sovereign debt levels are also a concern in Brazil General Government Gross Debt (% of GDP) 160 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016p 2017p Argentina Brazil Chile Colombia Mexico Peru Venezuela Source: World Economic Outlook database, IMF projections, WEO October 2017

Argentina and Venezuela attempted to keep nominal exchange rates constant but had sharp recent devaluations Nominal Exchange Rate (year-on-year variation, %) 1.000 Argentina Venezuela 800 600 400 200 0 -200 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Banco de Bogotá, author’s calculations

Both had inflationary pressures since the beginning of the boom; Venezuela has hyperinflation now Inflation, end of period (year-on-year variation, %) 45 1.200 40 Argentina* Venezuela (right axis) 1.000 35 30 800 25 600 20 15 400 10 200 5 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Bloomberg. *Data for Argentina is extracted from independent sources

Their Real Exchange Rates did not appreciate much during the early boom but showed significant appreciation latter, even during the bust. Real Exchange Rate Index (average Jan. 2001 – Dec. 2002=100) 200 1300 1200 1100 1000 150 900 800 700 100 600 500 400 50 300 200 100 0 0 Aug-01 Apr-02 Dec-02 Aug-03 Apr-04 Dec-04 Aug-05 Apr-06 Dec-06 Aug-07 Apr-08 Dec-08 Aug-09 Apr-10 Dec-10 Aug-11 Apr-12 Dec-12 Aug-13 Apr-14 Dec-14 Aug-15 Apr-16 Dec-16 Aug-17 Aug-01 Apr-02 Dec-02 Aug-03 Apr-04 Dec-04 Aug-05 Apr-06 Dec-06 Aug-07 Apr-08 Dec-08 Aug-09 Apr-10 Dec-10 Aug-11 Apr-12 Dec-12 Aug-13 Apr-14 Dec-14 Aug-15 Apr-16 Dec-16 Aug-17 Brazil Argentina Venezuela Source: BIS, Central Bank of Argentina, author’s calculations.

Major differences in Real Exchange Rate performance between Inflation Targetting and non-IT countries Real Exchange Rate Index 250 225 200 175 150 125 100 75 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 *Less unhappy: Brazil, Chile, Colombia, Mexico and Peru; Quite unhappy: Argentina and Venezuela Source: Banco de Bogotá, author’s calculations

Some differences in Real Exchange Rate performance among IT countries: Chile and Peru appreciated less than Brazil and Colombia during the boom , in spite of higher TOT gains. Real Exchange Rate Index (average Jan. 2001 – Dec. 2002=100) 200 150 100 50 Brazil Chile Colombia Mexico Peru Source: BIS, author’s calculations.

Due to the fact that Perú and Chile had both fiscal surpluses and higher accumulation of reserves General Government Net Lending (% of GDP) International Reserves as % of GDP 40 10 35 Chile 8 Colombia 30 Peru 6 Brazil 25 4 2 20 0 15 -2 10 -4 -6 5 -8 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -10 -12 2000 2002 2004 2006 2008 2010 2012 2014 2016 Chile (includes Gov's Funds) Colombia Brazil Peru

As a consequence, there were sharper recent compensatory nominal devaluations in Brazil and Colombia Nominal Exchange Rate (year-on-year variation, %) 60 Chile Colombia Mexico Peru Brazil 50 40 30 20 10 0 -10 -20 -30 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Banco de Bogotá, author’s calculations