Lessons and Challenges For Emerging Countries During The Crisis
Lessons and Challenges For Emerging Countries During The Crisis
Lessons and Challenges For Emerging Countries During The Crisis
Julio Velarde
Central Bank of Peru
1. Policy responses to the crisis: The Peruvian
experience.
2
Synchronized stimulation by all major governments
- Unconventional monetary easing (QE) across major economies.
- Support for financial stability.
- Fiscal policy.
- Low interest rates around the world.
0
0 1 2 3 4 5 6 7 8
Policy Interest Rate Variation, September 2008-August
-100
U.S.
-200 China
-300
-400
2009 (basic points)
-500 Peru
-600
-700
-800
-900
-1000
Announced Fiscal Stimulus, 2008-2010 (% GDP)
Actions Objectives
Precautionary build up of
internatinal reserves
Exchange
millions in 2007, US$ 8 733 millions in 2008 and Avoid undue volatility in the
US$ 77 millions in January-August 2009. foreign exchange market
Sterilization with CDs
To limit pervasive effects of
transitory shocks to terms of trade
Higher reserve requirements on both domestic and balance sheets
and foreign currency liabilitites in financial
market
Money
institutions
Avoid heating of economy activity
Monetary policy tightening through policy rate and inflationary pressures
increases and higher reserve requirements
mounting to inflation expectations
5
Monetary policy responses:
Since September 2008
Actions Objectives
•
year • Induce correction in asset prices.
• Purchases of Central Bank obligations •Reduce short-term funding
pressures in the banking system.
• New instruments such as Dollar
SWAPS
Avoid the yield curve to become
Capital
market
Reduction in marginal
rates in soles from 25
percent to 6 percent
Reduction in marginal
rates in dollars from 49
percent to 30 percent
7
Liquidity Provision
-Injection of liquidity (around 7.5
-Repo auctions percent of GDP)
extended up to 1 year.
-Dollar swaps -Exchange rate pressures
-Use of CDRs for repo
-Swaps facilitated liquidity
Lehman - Repo auction issued up provision to banks without
to 1 year
treasury bonds for collateral.
9
Exchange rate Management
Since September 2008
Actions Objective
Avoid transitory large exchange
Exchange
market
3.4
Central bank Interventions in the Foreign Exchange Market 500
3.3
(Millons de US$)
2.5 -500
Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09
Net purchases Exchange rate 10
Transitory Portfolio Shifts
The exchange market intervention were oriented to prevent large swings in the
exchange rate trigger by transitory portfolio shifts, particularly of domestic agents.
11
Monetary Policy Easing Cycle
6.50
6.06.0 6.0
Expected Inflation 1/
5.8
Once financial markets where stabilized and 6.00
5.50
5.4
5.6 5.5 2009
Feb-09
Apr-09
Nov-08
Jan-09
Dec-08
May-09
Jun-09
Jul-09
Mar-09
7.0
Policy rate of the central bank 7.0
6.5 6.5
5.5 5.5
Inflation rate
5.0 5.0 (annual rate)
4.5 4.5
6.65 6.53
6.22
4.0 4.0
5.49
3.5 3.5 4.78 4.64
4.21
3.0 3.0 3.93
3.06
2.5 2.5 2.68
2.0 2.0 1.49
1.14
1.5 1.5 0.70
1.0 1.0
Oct-07
Oct-08
Jan-07
Mar-07
Jun-07
Jan-08
Mar-08
Jun-08
Jan-09
Mar-09
Jun-09
May-07
Aug-07
Sep-07
Nov-07
Dec-07
May-08
Aug-08
Sep-08
Nov-08
Dec-08
May-09
Aug-09
Jul-07
Jul-08
Jul-09
Feb-07
Apr-07
Feb-08
Apr-08
Feb-09
Apr-09
2005 2006 2007 Sep-08 2008 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 2009*
* Forecasted.
12
-Stable banking credit flows
Monetary Policy Achievements: -Rapid and sizeable reductions in market interest rates
-Lower exchange rate volatility
Cumulative reductions of market interest rates in pbs
(february 2009 - august 2009)
270
February March
Exchange rate volatility
170 April May
2007 2008 2009* June July
70 August
Real/Dolar 6,36 14,99 8,49 5 2
-30 -7
British Pound/Dolar 1,97 9,73 6,28 -18
-49 -41
-130
Chilean Peso/Dolar 2,81 14,26 5,17 -100
-124
-149 -163 -171
Peruvian Nuevo Sol/Dolar 2,44 4,16 3,18 -230 -220
-225
-258 -241 -234
-264
* Up to Aug 18, 2009 -330 -283
-381
-430
-473
-530
-529
Three month prime rate One year comercial loans Consumer loans
140
130
120
110
100
90
Real/ Dolar
80
British Pound/ Dolar
Jun-07
Dec-05
Sep-06
Dec-06
Sep-07
Dec-07
Aug-08
Nov-08
Aug-09
Mar-06
Mar-07
Mar-08
Feb-09
May-08
May-09
13
1. Policy responses to the crisis: The Peruvian experience.
14
Recessions associated with financial crises are deeper
and last longer. Recovery is slower and weaker.
c. Higher expansion in
housing markets during
boom period.
Contractions during the
crisis are deeper.
16
The length of the crisis: V-shape outlook
• Progress in the implementation of the financial, monetary, and fiscal policies has
resulted in continuous financial recovery: credit markets have improved and credit
risk is receding.
-2
-4
-6
-8
-10
-12
Jan-00 May-01 Sep-02 Jan-04 May-05 Sep-06 Jan-08 May-09
17
The length of the crisis: V-shape outlook
Improved credit markets and renewed risk appetite can accelerate confidence
restoration and promote real sector recovery.
18
The length of the crisis: V-shape outlook
60
JPMorgan Global Manufacture PMI Index
Expansion (→)
65
60
50
55
(←) Contraction
45
40
40
35
30
30
Oct-03 Jul-04 Apr-05 Jan-06 Oct-06 Jul-07 Apr-08 Jan-09
China
South Africa
Singapure*
Euro zone
Greece*
Poland*
Netherlands
Germany
India
France
Austria
Switzerland
Australia
Czech Rep.
Turkey
UK
Denmark
Ireland
Italy
Japan
Spain
USA
Brazil
Source: Bloomberg
Global PMI- Components *June 2009
65
2. Recent manufacturing 60
sector indicators 55
50
synchronicity in global 40
35
upturn. 30
25
20
Global PMI Output New orders Employment Input prices Inventories
Fuente: JPM
19
The length of the crisis: V-shape outlook
3. Growth expectations for 2010 have been rising since June.
World USA
2009 2010 2009 2010
3 2,3 3 2,3 2,3
2,0 2,1 1,7
2 2
1
1
0
0
-1
-1 -0,2
-2
-1,8
-2 -1,6 -3
-2,8 -2,6
-3 -2,5 -4
Jan. 09 Mar. 09 Aug. 09 Jan. 09 Mar. 09 Aug. 09
20
The length of the crisis: V-shape outlook
driven by inventory cycle
Stockbuilding contribution to GDP growth
United States Japan Canada
6 10 6
5 4
3
0 2
-5 0
-3
-10 -2
-6
-15 -4
-9 -20 -6
I Q 2009 II Q 2009 IIIQ 2008 IV Q2009 I Q 2010 II Q 2010 IIIQ 2008 IV Q2010 I Q 2009 II Q 2009 IIIQ 2008 IV Q2009 I Q 2010 II Q 2010 IIIQ 2008 IV Q2010 I Q 2009 II Q 2009 IIIQ 2008 IV Q2009 I Q 2010 II Q 2010 IIIQ 2008 IV Q2010
4 6
6
3 3
1
0 0
-2
-3 -3
-5
-6 -6
-8
-9 -9
22
V-shape outlook and its implications for emerging economies:
considerable trade recovery
Baltic Dry Index
12000
10000
8000
6000
4000
2000
0
CRB Commodity Index Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09
500
450
400
350
300
250
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09
Source: Bloomberg
23
Emerging Markets: Openness and Vulnerability
500
400
300
200
100
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010*
1/ (Short-term external debt+currently maturing long-term external debt+total nonresident deposits over 1 year) / Official reserves
(*) Estimated
Source: Moody´s (May 2009).
24
Implications for emerging markets: V-shape outlook
Mexico: Manufacturing PMI and GDP Brazil: Manufacturing PMI and GDP %q/q
%q/q
60 4
60 8
PMI
6
56 55 2
4 GDP
52 2 50 0
0 PMI
48 45 -2
-2
-4
44 40 -4
GDP -6
40 -8 35 -6
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09
China: Manufacturing PMI and GDP %y/y Singapore: Manufacturing PMI
70
14 %q/q
8
65 GDP
58 GDP
9 6
60
4
54
55 4 2
50 0
50
-1 PMI -2
PMI
45 46
-4
-6 -6
40 42
-8
35 -11
38 -10
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09
Source: Bloomberg, GDP seasonal adjusted except for China. 25
Emerging markets’ recovery from sudden stops
26
Emerging markets’ recovery from sudden stops
Financial inflows reflect a return of risk appetite. Investor confidence in emerging
markets more broadly was also bolstered by the G-20 agreement to increase IMF aid
resources.
1800
1600 1631
1400
1200
1000 1040
938 891
800
600
400
200
0
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Source: Bloomberg
JP Morgan revised its year-end target for the EMBIG to 300 bps (from 400 bps) as the continued
strong performance of commodities remains supportive and EMBIG yields remain attractive to other
credit markets. 28
Emerging markets’ recovery from sudden stops
Emerging market currencies index (MSCI)
Latin America: Currencies
Index 2007=100
140
125
130 115
120 105
110 95
100 85
90 75
80 65
Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09
140
500
120
400
100
80 300
60
200
40
20 100
0
0
Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09
30
The current recovery has relied heavily on
developments in China and other emerging economies.
CHINA: PMI and Industrial production
(jan. 2005 - jul. 2009 )
PMI IP
65 25
60 20
55
15
50
10
45
40 5
38.8
35 0
Jan/05 Jul/05 Jan/06 Jul/06 Jan/07 Jul/07 Jan/08 Jul/08 Jan/09 Jul/09
1.5 4.0
1.0 3.0
0.5 2.0
0.0 1.0
-0.5 0.0
-1.0 -1.0
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
Source: Bloomberg 32
Two concerns regarding China’s recovery:
34
Is China enough to boost the global economy? Despite
China’s high growth, the U.S. remains the world’s largest
economy.
Share of world GDP
1990 2000 2008
PPP
China 4% 7% 11%
United States 23% 24% 21%
Current US dollars
China 2% 4% 7%
United States 25% 31% 24%
Source: IMF.
Other
developed
Rest of the Other economies
US
world developing 11%
24%
23% economies US
16% 24%
Brazil
3%
Japon Japon
8% Russia
3% 8%
Asia (exc.
India
Japon) 2%
15%
China United Eurozone
Europa 30%
7% Kingdom 22%
4%
Source: UBS
The shape of global recovery depends on how fast and sustainable US growth will be.
35
Is China enough to boost the global economy?
At least for Asia
Imports
Exports
$664
$538
CHINA
$652 $217
Exports Imports
Source: National Bureau of Statistics of China. Flows from june 2008 to june 2009
36
The US economy remains key for global recovery
Some predictions:
“The worst U.S. recession in at least five decades may be over at year’s
end.”
Nouriel Roubini
“It looks to me as if the markets are now pricing in a rapid recovery, that
they’re pricing in a V-shape recession, which I consider extremely
unlikely.”
Paul Krugman
37
Length of the crisis: What could happen after the inventory
effect vanishes?
Personal Income and Expenditures
% YoY
10.0
-4.0
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
contracting labor 8
200
100
0
markets and past 7
-100
-200
wealth losses. 6
-300
-400
5
-500
4 -600
Unemployment rate (left)
-700
3 -800
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Source: Bloomberg
38
Length of the crisis: What could happen after the inventory
effect vanishes?
Source: JP Morgan
39
Length of the crisis: What could happen after the inventory
effect vanishes?
2.0 -12
-16
1.0
-20
0.0 -24
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Source: Bloomberg
40
Length of the crisis: What could happen after the inventory
effect vanishes?
• Late withdrawal can affect inflation, asset prices (bubble), and long-term
interest rates.
TA F
1900000
b. Sell tradable assets (Treasuries, MBS). Problem: 1700000
Other Credit
Swaps-B Cs
underlying markets. 1300000
Other
1100000
c. Perform reverse repos in a broader range of
900000
collateral. Problem: scope limited by liquidity of
700000
relevant funding markets (particularly for MBS
500000
collateral).
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
d. Remuneration of bank reserve balances can set a floor for short-term interest rates. Problem: beyond a
certain level of excess reserves, may lead to persistent disintermediation (crowding out) of interbank
markets; may need a higher level of interest rates than would otherwise be appropriate.
e. Sterilization through Supplementary Funding Program (SPF) or issuance of Fed paper. Problem: the
latter would create a new tier of U.S. sovereign debt; congressional approval required for creation of Fed
paper or issuances under the SFP.
f. Transfer of Maiden Lane and AIG facilities to the Treasury would reduce excess reserves if the Fed is
compensated in cash.
Source: IMF
42
Length of the crisis: What could happen after the inventory
effect vanishes?
General Government Financial Balance/GDP
Exit strategy for fiscal policy and 2007 2008 2009
-8.0
40
30
20
2008 2009 2010
Aizenman:
Possible U.S. exit strategy: replay of 1945-1955 with fiscal adjustment?
-3.0
able to implement fiscal -4.0 -3.4
-2.7
8,0 6,5
6,0
2,0 1,2
0,8
0,0
-2,0 -0,7
-4,0 -2,7
2008 2009 2010
1. In light of recent economic and financial developments, a V- shape recovery seems a likely
scenario.
2. Determined financial, monetary, and fiscal policies contributed to recent developments.
3. The recent recovery has improved growth perspectives in developing economies:
i. Some improvement in manufacturing.
ii. Recovery in terms of trade.
iii. Higher risk appetite improved emerging economies’ financial conditions.
46
“Lessons and Challenges for Emerging Countries
During the Crisis”
Central Bank of Argentina-Money and Banking Conference
September 2009
Julio Velarde
Central Bank of Peru