Latin America
Comments on: “Managing Abundance to Avoid a Bust in Latin America”
LILIANA ROJAS-SUÁREZ Washington, DC, May 2011
• Great Report: Adequately identifies main macroeconomic vulnerabilities faced by Latin America in the current context of cheap external financing and high commodity prices. • Two main comments: 1. Somehow too timid in presenting the nature of the problem 2. Important to recognize (at least some of) the existing work on this issue (outside the IMF)
While the document mentions that Latin America has particular features, the concept is not fully carried through in the analysis Financial Openness Indexa 2008 Latin America Emerging Asia Emerging Europe
1.1 0.6 2.2
Trade Openness Indicatorb (X+M)/GDP 2009 48 163 113
Savings/GDP c (average 2009-2010) 22 34 21
Sources: a. Chinn and Ito, b. WDI and c. WEO
Indeed, Latin America is: 1) A highly-financially-open region 2) The least-open region in terms of trade 3) Displays extremely low rate of savings On these characteristics, Asia stands opposite to Latin America These features imply that Latin America is highly vulnerable to an external financial shock: neither export earnings nor domestic savings could make up for a sudden reversal of capital inflows.
While the document mentions that "current global circumstances COULD be conducive to the build up of substantial vulnerabilities… I would argue that those vulnerabilities HAVE ALREADY BEEN BUILT UP Ex. Asset prices are at or above the pre-crisis levels of 2007 (when the issue of asset bubbles in the region was on the table) Brazil: BOVESPA Index
Source: Bloomberg
Colombia: IGBC General Index
Source: Bloomberg
Peru: Lima General Index
Source: Bloomberg
Chile: Stock Market Select Index
Source: Bloomberg
How Vulnerable is Latin America Today Relative to the Pre-Crisis Period? Vulnerability to External Shocks Index -- 2007 (a large number denotes greater vulnerability) Vulnerability Ranking
Vulnerability Index
Current Account/GDP (scaled)
External Debt/GDP (scaled)
National Savings/GDP (scaled)
La tvi a
1
5.24
1.87
2.57
0.80
Bul ga ry
2
3.65
1.58
0.67
1.40
Es toni a
3
3.26
1.56
2.08
-0.38
Hunga ry
4
2.44
0.76
1.61
0.08
Li thua ni a
5
2.42
1.00
0.58
0.84
Roma ni a
6
2.20
1.01
-0.02
1.20
Pol a nd
7
0.97
0.12
0.19
0.65
Phi l i ppi nes
8
0.34
-0.66
-0.38
1.37
Col ombi a
9
-0.26
-0.07
-0.78
0.59
Ecua dor
10
-0.39
-0.39
-0.28
0.28
Czech Republ i c
11
-0.48
0.23
-0.19
-0.52
Mexi co
12
-0.65
-0.19
-0.87
0.41
Bra zi l
13
-0.78
-0.43
-0.90
0.55
Peru
14
-0.91
-0.40
-0.46
-0.04
Argentina
15
-0.95
-0.67
0.07
-0.35
Indones i a
16
-1.69
-0.55
-0.50
-0.64
Chi l e
17
-1.77
-0.60
-0.38
-0.78
Indi a
18
-1.85
-0.24
-0.90
-0.71
Tha i l a nd
19
-2.09
-0.49
-0.68
-0.92
Ma l a ys i a
20
-3.47
-2.24
-0.31
-0.93
Chi na
21
-5.22
-1.22
-1.13
-2.88
Countries
A simple Index of vulnerability to external shocks indicates that in 2007 (the pre-crisis year) Latin American countries were stronger than those in Eastern Europe and some as strong as Asian countries.
Source: own elaboration
How Vulnerable is Latin America Today Relative to the Pre-Crisis Period? Vulnerability to External Shocks Index -- 2010 (a large number denotes greater vulnerability)
A recalculation of the index using 2010 data indicates that most Latin American countries have increased their relative vulnerability
Increased relative vulnerability equal relative vulnerability decreased relative vulnerability
Vulnerability Ranking
Vulnerability Index
Current Account/GDP (scaled)
External Debt/GDP (scaled)
National Savings/GDP (scaled)
Hunga ry
1
2.42
-0.22
1.93
0.71
Roma ni a
2
2.08
1.24
0.47
0.37
Pol a nd
3
2.08
1.00
0.12
0.96
La tvi a
4
1.83
-0.72
2.42
0.13
Bul ga ry
5
1.77
0.37
1.25
0.14
Li thua ni a
6
1.31
-0.29
0.81
0.79
Czech Republ i c
7
1.29
0.79
-0.14
0.64
Ecuador
8
1.17
1.27
-0.63
0.53
Colombia
9
0.98
0.96
-0.70
0.72
Es toni a
10
0.92
-0.72
1.43
0.21
Brazil
11
0.91
0.75
-0.83
0.99
Peru
12
0.23
0.56
-0.54
0.22
Argentina
13
-0.19
-0.05
-0.43
0.29
Mexico
14
-0.43
0.31
-0.77
0.03
Phi l i ppi nes
15
-0.70
-0.95
-0.37
0.62
Chile
16
-0.89
-0.30
-0.26
-0.34
Indi a
17
-1.00
0.98
-0.86
-1.11
Indones i a
18
-1.64
-0.05
-0.63
-0.95
Tha i l a nd
19
-2.29
-0.99
-0.67
-0.63
Ma l a ys i a
20
-4.26
-2.80
-0.54
-0.92
Chi na
21
-5.60
-1.13
-1.07
-3.40
Countries
Source: own elaboration
As in the report, I agree that countries need to intensify the usage of countercyclical tools. I would emphasize 1. Increased exchange rate flexibility
2. Avoidance of pro-cyclical fiscal policies
Please don’t forget existing non-IMF literature: • CLAAF Reports No. 21 (December 2009) "Latin America in the Road to Global Recovery: Short—Term Macroeconomic Challenges" No. 22 (June 2010) "Latin America: Managing Capital Flows in the Wake of the European Debt Crisis" No. 23 (November 2010) "The Currency War: Risks for Latin America and the Role of Central Banks"
www.claaf.org
LILIANA ROJAS-SUÁREZ Washington, DC, May 2011
• Great Report: Adequately identifies main macroeconomic vulnerabilities faced by Latin America in the current context of cheap external financing and high commodity prices. • Two main comments: 1. Somehow too timid in presenting the nature of the problem 2. Important to recognize (at least some of) the existing work on this issue (outside the IMF)
While the document mentions that Latin America has particular features, the concept is not fully carried through in the analysis Financial Openness Indexa 2008 Latin America Emerging Asia Emerging Europe
1.1 0.6 2.2
Trade Openness Indicatorb (X+M)/GDP 2009 48 163 113
Savings/GDP c (average 2009-2010) 22 34 21
Sources: a. Chinn and Ito, b. WDI and c. WEO
Indeed, Latin America is: 1) A highly-financially-open region 2) The least-open region in terms of trade 3) Displays extremely low rate of savings On these characteristics, Asia stands opposite to Latin America These features imply that Latin America is highly vulnerable to an external financial shock: neither export earnings nor domestic savings could make up for a sudden reversal of capital inflows.
While the document mentions that "current global circumstances COULD be conducive to the build up of substantial vulnerabilities… I would argue that those vulnerabilities HAVE ALREADY BEEN BUILT UP Ex. Asset prices are at or above the pre-crisis levels of 2007 (when the issue of asset bubbles in the region was on the table) Brazil: BOVESPA Index
Source: Bloomberg
Colombia: IGBC General Index
Source: Bloomberg
Peru: Lima General Index
Source: Bloomberg
Chile: Stock Market Select Index
Source: Bloomberg
How Vulnerable is Latin America Today Relative to the Pre-Crisis Period? Vulnerability to External Shocks Index -- 2007 (a large number denotes greater vulnerability) Vulnerability Ranking
Vulnerability Index
Current Account/GDP (scaled)
External Debt/GDP (scaled)
National Savings/GDP (scaled)
La tvi a
1
5.24
1.87
2.57
0.80
Bul ga ry
2
3.65
1.58
0.67
1.40
Es toni a
3
3.26
1.56
2.08
-0.38
Hunga ry
4
2.44
0.76
1.61
0.08
Li thua ni a
5
2.42
1.00
0.58
0.84
Roma ni a
6
2.20
1.01
-0.02
1.20
Pol a nd
7
0.97
0.12
0.19
0.65
Phi l i ppi nes
8
0.34
-0.66
-0.38
1.37
Col ombi a
9
-0.26
-0.07
-0.78
0.59
Ecua dor
10
-0.39
-0.39
-0.28
0.28
Czech Republ i c
11
-0.48
0.23
-0.19
-0.52
Mexi co
12
-0.65
-0.19
-0.87
0.41
Bra zi l
13
-0.78
-0.43
-0.90
0.55
Peru
14
-0.91
-0.40
-0.46
-0.04
Argentina
15
-0.95
-0.67
0.07
-0.35
Indones i a
16
-1.69
-0.55
-0.50
-0.64
Chi l e
17
-1.77
-0.60
-0.38
-0.78
Indi a
18
-1.85
-0.24
-0.90
-0.71
Tha i l a nd
19
-2.09
-0.49
-0.68
-0.92
Ma l a ys i a
20
-3.47
-2.24
-0.31
-0.93
Chi na
21
-5.22
-1.22
-1.13
-2.88
Countries
A simple Index of vulnerability to external shocks indicates that in 2007 (the pre-crisis year) Latin American countries were stronger than those in Eastern Europe and some as strong as Asian countries.
Source: own elaboration
How Vulnerable is Latin America Today Relative to the Pre-Crisis Period? Vulnerability to External Shocks Index -- 2010 (a large number denotes greater vulnerability)
A recalculation of the index using 2010 data indicates that most Latin American countries have increased their relative vulnerability
Increased relative vulnerability equal relative vulnerability decreased relative vulnerability
Vulnerability Ranking
Vulnerability Index
Current Account/GDP (scaled)
External Debt/GDP (scaled)
National Savings/GDP (scaled)
Hunga ry
1
2.42
-0.22
1.93
0.71
Roma ni a
2
2.08
1.24
0.47
0.37
Pol a nd
3
2.08
1.00
0.12
0.96
La tvi a
4
1.83
-0.72
2.42
0.13
Bul ga ry
5
1.77
0.37
1.25
0.14
Li thua ni a
6
1.31
-0.29
0.81
0.79
Czech Republ i c
7
1.29
0.79
-0.14
0.64
Ecuador
8
1.17
1.27
-0.63
0.53
Colombia
9
0.98
0.96
-0.70
0.72
Es toni a
10
0.92
-0.72
1.43
0.21
Brazil
11
0.91
0.75
-0.83
0.99
Peru
12
0.23
0.56
-0.54
0.22
Argentina
13
-0.19
-0.05
-0.43
0.29
Mexico
14
-0.43
0.31
-0.77
0.03
Phi l i ppi nes
15
-0.70
-0.95
-0.37
0.62
Chile
16
-0.89
-0.30
-0.26
-0.34
Indi a
17
-1.00
0.98
-0.86
-1.11
Indones i a
18
-1.64
-0.05
-0.63
-0.95
Tha i l a nd
19
-2.29
-0.99
-0.67
-0.63
Ma l a ys i a
20
-4.26
-2.80
-0.54
-0.92
Chi na
21
-5.60
-1.13
-1.07
-3.40
Countries
Source: own elaboration
As in the report, I agree that countries need to intensify the usage of countercyclical tools. I would emphasize 1. Increased exchange rate flexibility
2. Avoidance of pro-cyclical fiscal policies
Please don’t forget existing non-IMF literature: • CLAAF Reports No. 21 (December 2009) "Latin America in the Road to Global Recovery: Short—Term Macroeconomic Challenges" No. 22 (June 2010) "Latin America: Managing Capital Flows in the Wake of the European Debt Crisis" No. 23 (November 2010) "The Currency War: Risks for Latin America and the Role of Central Banks"
www.claaf.org
