Lessons and Challenges For Emerging Countries During The Crisis

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“Lessons and Challenges for Emerging Countries

During the Crisis”


Central Bank of Argentina-Money and Banking Conference
September 2009

The length of the Crisis and its


Implications for Emerging Economies

Julio Velarde
Central Bank of Peru
1. Policy responses to the crisis: The Peruvian
experience.

2. Recent global developments: A V-shaped recovery?

3. A V-shaped recovery and the emerging economies.

4. Concerns regarding a V-shaped recovery.

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.

Policy Interest Rate Variation and Fiscal Stimulus

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)

Advanced Economies Latin America Emerging EMEA Other Emergent

Source: IMF, Central banks 3


Monetary policy framework in Peru
• Inflation target : 2 per cent
Inflation Targeting
• Short term interest rate as
(IT) operational target

+ • High reserve requirements on


foreign currency liabilities to:
- Preventively, accumulate
Macro Prudential International Reserves
- Diminish credit cycles associated
Actions
to capital inflows.
Control of financial • Forex Interventions to:
dollarization risks - Reduce extreme exchange rate
volatilities, particularly those
associated to transitory portfolio
shifts of domestic agents. 4
Preventive Monetary policy Actions:

Actions Objectives
Precautionary build up of
internatinal reserves
Exchange

Purchase of foreign currency by US$ 10 306


market


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

Recover the effectiveness of the


Credit easing before cutting policy transmission of monetary policy
rates actions.
• Rapid and drastic cuts in reserve
requirements ratios is Soles and USSD
•Provide liquidity to markets
Maturity extensions of REPOS up to a
market
Money


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

Purchase in the secundary market of


CDBCPR and BTP bids. steeper and avoid illiquidity in the
credit market
6
Reserve requirements Management

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.

-From Oct-08, Repos were


extended up to one year to
maintain liquidity of the system.

-Central Bank CDs repurchase

-Since March 2009, demand for


repo operations has fallen
continuously reflecting the
improvement of liquidity
conditions.
8
Liquidity Provision

Financial Purchases of Central


uncertainty Bank CDs and bids
for BTPs in the
secondary market

9
Exchange rate Management
Since September 2008

Actions Objective
Avoid transitory large exchange
Exchange
market

 Sales of foreign currency by US $ 7 483 millions rate depreciations that could


damage the balance sheets of
 Central bank issued Dollar-indexed CD’s firms and families associated to
liability dollarization.
Net Purchases of Foreign Currency by the Central bank and exchange rate
3.5 700

3.4
Central bank Interventions in the Foreign Exchange Market 500
3.3
(Millons de US$)

Millions of US$ dollars


Purchases Sales Net Purchases Soles by Dollar
3.2
300
2006 4 299 355 3 944 3.1
2007 10 306 10 306
2008 8 733 5 979 2 754 3 100

20091/ 77 1 149 -1 072 2.9


Total 23 415 7 483 15 932 -100
1/ 2.8
As of August 20
2.7
-300
2.6

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

5.0 5.1 2010


inflation expectations started to decline, the central 5.00
4.5
4.9
4.5
4.50
bank reduced its policy rate from 6,5 percent in 4.00
4.0 4.0

January to 1,25 percent in August. 3.50


3.4
3.2
3.00 2.6
2.50
2.0
2.00
1.50

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

6.0 6.0 1/ Central Bank Survey

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

INDEX OF EXCHANGE RATE


150 (December 2005=100)

140
130
120
110
100
90
Real/ Dolar
80
British Pound/ Dolar

70 Chilean Peso/ Dolar


Peruvian Nuevo Sol/ Dolar
60
Jun-06

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.

2. Recent global developments: A V-shaped


recovery?

3. A V-shaped recovery and the emerging economies.

4. Concerns regarding a V-shaped recovery.

14
Recessions associated with financial crises are deeper
and last longer. Recovery is slower and weaker.

FMI: World Economic Outlook, April 2009


15
Why do financial crises lead to higher costs?

a. More significant credit


growth during boom
period.

b. Higher pressures on labor


and goods markets.

c. Higher expansion in
housing markets during
boom period.
Contractions during the
crisis are deeper.

d. The current recession has


already lasted 20 months
(the longest since 1933).

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.

Bloomberg US Financial Condition Index


2

-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.

1. Consumer and investor confidence are rising.

Bloomberg Global Confidence Index


50
45
40
35
30
25
20
15
10
5
0
Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09

18
The length of the crisis: V-shape outlook

60
JPMorgan Global Manufacture PMI Index

Expansion (→)
65

60

50
55

PMI Total SA Index (July 2009)


50 50.0
47.0

(←) 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

across the globe: 45

synchronicity in global 40

35
upturn. 30

25

20
Global PMI Output New orders Employment Input prices Inventories

Sep-08 Dec-08 Mar-09 Jul-09 Neutral level

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

Euro zone China


2009 2010 2009 2010
0,8 0,5 0,6
1 10,0 9,3
0 9,0 8,4 8,3 8,3
-1 8,0 7,4
-2 7,0
-1,4
7,0
-3
-2,6
6,0
-4
-5 -4,3 5,0
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

United Kingdom Eurozone Developed Economies

4 6
6

3 3
1

0 0

-2

-3 -3

-5

-6 -6

-8
-9 -9

-11 -12 -12


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

Stockbuilding contribution GDP Source: JP Morgan


21
1. Policy responses to the crisis: The Peruvian experience.

2. Recent global developments: A V-shaped recovery?

3. A V-shaped recovery and the emerging economies.

4. Concerns regarding a V-shaped recovery.

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

External Vulnerability Coefficient: 1999- 2010 1/


600 Asia Eastern Europe Latin America

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.

4 International syndicated debt


securities (excluding preferred shares); announced issuance by non-financial corporates, in billions of US dollars. 5 In per
cent. 6 China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines and Singapore. 7 The Czech Republic,
Hungary, Estonia, Poland, Latvia, Lithuania, Russia and Turkey. 8 Argentina, Brazil, Chile, Colombia, Mexico, Peru and
Venezuela.
Sources: Bloomberg; Datastream; Dealogic; JPMorgan Chase; Markit; Standard & Poor’s; BIS calculations.
27
Emerging markets’ recovery from sudden stops
After rising to 891 bps in October 2008, borrowing costs for emerging debt have fallen in
recent months. Current performance of sovereign bonds is encouraging.
EMBIG

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

Latin America Europe Asia Brazil Chile Colombia Mexico Peru


Latin America: Stock Exchanges Stock Exchange: Other emerging economies
index
Index 2007=100
Jan2006=100
160 600

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

Brazil Chile Colombia Mexico Peru Malaysia China Russia Poland


Source: Bloomberg 29
1. Policy responses to the crisis: The Peruvian experience.

2. Recent global developments: A V-shaped recovery?

3. A V-shaped recovery and the emerging economies.

4. Concerns regarding a V-shaped recovery.

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

CHINA: ACTIVITY MAIN INDICATORS

Indicator Prior Survey Actual


Real GDP (var% 2Q09/2Q08) 2Q09 6,1% 7,8% 7,9%
Real GDP (var% q. s.a.) 2Q09 8,3 -.- 14,9
PMI manufacturing Jul. 53,2 -.- 53,3
Industrial production (12 month var.%) Jun. 8,9% 9,5% 10,7%
Investment in fixed assets (12 month var.%) Jun. 32,9% 34,0% 32,6%
Leading indicator Jun. 101,7 -.- 102,6
Retail sales (12 month var.%) Jun. 15,2% 15,3% 15,0%
Bussiness Confidence index 2Q09 105,6 -.- 115,9
Exports (12 month var%.) Jun. -26,4% -21,0% -21,4%
Imports (12 month var.%) Jun. -25,2% -20,0% -13,2%
Source: Bloomberg 31
Two concerns regarding China’s recovery:

Is China’s growth sustainable?


• Risk of “supply driven” growth in China:
“They’re still relying too much on net exports rather than on domestic
demand for their own kind of economic growth”. (Nouriel Roubini).
• Stimulus through consumption seems to be still low.
• Consumption represents only 35% of GDP.
• Lack of social reforms to boost consumption.
Housing sector: residential mortgages and prices
• Risk of an asset bubble. (montly % change)
Prices Residential mortgages (right)
2.0 5.0

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:

Is China enough to boost the global economy?


• The U.S. remains emerging economies’ main trade partner (particularly for
Latin America).
• China’s consumption is six times lower than in the U.S.
• A recoupling occurred after the collapse of U.S. consumption.
United States: Importsand domesticconsumption
Import Annualized quarterly percent change Consumption
20,0 5,0
4,0
10,0
3,0
0,0 2,0
1,0
-10,0
0,0
-20,0 -1,0
-2,0
-30,0
-3,0
-40,0 -4,0

Recession Import Consumption Source: BEA 33


Two concerns regarding China’s recovery:

Is China enough to boost the global economy?

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

China’s global trade (Bill. US$)

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

a. The V-shaped 8.0

recovery could soon 6.0

run its course if it is 4.0

not reinforced by 2.0

consumption growth. 0.0


Income
-2.0 Expenditures

-4.0
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

Employment (change in nonfarm payrolls, thousands)


and Unemployment rate (%)
thousands
Consumption is %
10 500
affected by 9
Employment (right) 400
300

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?

b. A greater fall in house prices is another risk to growth.


Millons %YoY
8.0 Housing Market: Prices and stocks 20
16
7.0
12
6.0 8
5.0 Stocks 4
0
4.0 Prices
-4
3.0 -8

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

c. No clear strategy for toxic assets.

40
Length of the crisis: What could happen after the inventory
effect vanishes?

d. Exit strategy implies risk for growth


and inflation:

• Too early -or too fast-


withdrawal can affect growth
(like Japan in the 1990s and
the U.S. in the late 1930s,
when the timing was not right).
Source: Kroszner (2009) “Central Banks must time a good exit”
Financial Times.

• Late withdrawal can affect inflation, asset prices (bubble), and long-term
interest rates.

If fiscal stimulus is concentrated in 2011, when private sector demand will


likely be growing, inflationary pressures could arise.

Monetary tightening could be easier than a reversion of fiscal stimulus.


41
Exit Strategy: Federal Reserve tools
FED's Balance Sheet
a. Short-term facilities can be rolled off. Problem: 2500000
(Millons of US$)
markets need to recover before Fed withdraws 2300000

support. 2100000 GSEs

TA F
1900000
b. Sell tradable assets (Treasuries, MBS). Problem: 1700000
Other Credit

significant sales may affect interest rates in 1500000


CP

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

public debt sustainability: 0.3


0.0
-0.5
Could increase Treasury yields -2.0

(negative impact on housing -4.0


-3.9
-2.9

markets). -6.0 -5.3

-8.0

Fiscal policy should remain -10.0

supportive through 2010 (keeping -12.0


-12.0
in mind the need to reverse the -14.0
Advanced Industrial Countries United States of America
deterioration of fiscal balances and
General Government Debt/GDP
to ensure debt sustainability). (change respect previous year)

United States of America Advanced Industrial Countries


The pace of fiscal consolidation 110
99,9
should depend on overall 100
97,1

economic developments. More 90


80 73,2
adjustment would be needed over 70 63,1
57,0
the medium term. 60
50
50,6

40
30
20
2008 2009 2010

Source: Moody´s (May 2009). 43


Length of the crisis: What could happen after the inventory
effect vanishes?

Aizenman:
Possible U.S. exit strategy: replay of 1945-1955 with fiscal adjustment?

Source: Aizenman (2009) 44


Length of the crisis: What could happen after the inventory
effect vanishes?
General Government Financial Balance/GDP
2007 2008 2009

Exit strategy for fiscal policy 2.0 1.5


0.8
and public debt sustainability: 1.0
0.0
-1.0 -0.4 -0.4

Emerging economies were -2.0 -1.4

-3.0
able to implement fiscal -4.0 -3.4
-2.7

stimulus packages, even -5.0

though their sizes were -6.0


-5.0
-5.9
lower than in industrialized -7.0
Asia Eastern Europe Latin America
economies due to lower
financial exposures. General Government Debt/GDP
(change respect previous year)
Asia Latin America Eastern Europe

10,0 9,1 9,0

8,0 6,5
6,0

4,0 3,0 2,8

2,0 1,2
0,8
0,0

-2,0 -0,7

-4,0 -2,7
2008 2009 2010

Source: Moody´s (May 2009). 45


Concluding remarks

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.

4. However, several risks remain:


i. Is China’s recovery enough to boost global recovery?
ii. Can U.S. consumption lead growth after the “inventory effect” vanishes?
iii. Further correction in house prices.
iv. Exit strategy implies risk for growth (and inflation).
v. No clear strategy for toxic assets.

46
“Lessons and Challenges for Emerging Countries
During the Crisis”
Central Bank of Argentina-Money and Banking Conference
September 2009

The length of the Crisis and its


Implications for Emerging Economies

Julio Velarde
Central Bank of Peru

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