Latin Americas economic outlook to infinity and beyond

Latin America’s economic outlook to infinity and beyond Juan Carlos Moreno Brid Deputy Director ECLAC - Mexico JAWAHARLAL NEHRU UNIVERSITY, New Delhi, January 2012

Global growth has slowed sharply after the recovery from the crisis WORLD GDP GROWTH RATES, 2009 -2012 (Percentages) e/ Estimate. p/ Projection.

4000 3500 2000 1500 0 Portugal Ireland Greece 2009 II Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 And volatility and uncertainty increased in 2011 EUROPE (SELECTED COUNTRIES): FIVE-YEAR CREDIT DEFAULT SWAP RISK PREMIUMS, 2009 -2011 (Basis points) 600 500 3000 400 2500 300 200 100 500 0 Italy Spain France Germany

Latin America’s export growth of volumes is slowing VOLUME OF WORLD EXPORTS BY REGION, 2007 -2011 (Annual growth rates, three-month moving average)

And also the prices for its main exports GLOBAL COMMODITY PRICE INDEXES, 2002 -2001 (Index: annual average price for 2002=100)

In LA Terms of trade were favorable for much of 2011 LATIN AMERICA: TERMS OF TRADE, 2005 -2011 (Index: 2005=100) 150 140 130 120 110 100 90 2005 2006 2007 Latin America Exporters of mineral products Central America 2008 2009 2010 2011 MERCOSUR Exporters of hidrocarbons Mexico

Import volumes and prices grew fast LATIN AMERICA: ESTIMATED VARIATION IN THE VALUE OF IMPORTS BY VOLUME AND PRICE, 2011 (Percentages) 10. 3% Latin America 12. 9% 11. 2% MERCOSUR 15. 9% Exporters of mining products 14. 4% Exporters of hydrocarbons 14. 2% 12. 9% 14. 5% 11. 3% Central America 7. 0% Mexico 0% 5% 12. 1% 9. 8% 10% Volume 15% 20% Price 25% 30% 35% 40%

And international reserves soar LATIN AMERICA AND THE CARIBBEAN: INTERNATIONAL RESERVES (Millions of dollars) 800, 000 700, 000 600, 000 500, 000 400, 000 300, 000 200, 000 100, 000 0 2001 2002 2003 2004 2005 Brazil 2006 2007 2008 Regional total 2009 2010 2011 -Oct

Fiscal deficit shrunk due to less G more T LATIN AMERICA (19 COUNTRIES): CENTRAL GOVERNMENT FISCAL INDICATORS, 2000 -2011 (Simple averages as percentages of GDP) 28 10. 0 26 8. 0 24 6. 0 22 4. 0 20 2. 0 18 0. 1 0. 3 0. 0 16 -0. 4 -1. 0 14 -1. 8 -2. 5 12 -3. 1 -2. 8 -2. 9 2002 2003 -1. 9 -1. 5 -2. 9 -2. 0 -4. 0 10 -6. 0 2001 Overall balance (Right axis) 2004 2005 2006 2007 Total revenues (left axis) 2008 2009 2010 Total expenditure (left axis) 2011

Public debt came down again and its composition continued to shift LATIN AMERICA (19 COUNTRIES): CENTRAL GOVERNMENT PUBLIC DEBT BALANCE, DOMESTIC AND EXTERNAL (Percentages of GDP)

Inflation rose but it is still low LATIN AMERICA: COMPONENTS OF INFLATION, JANUARY 2007 – NOVEMBER 2011 (12 -month inflation rate, simple averages) 14% 12% 10% 8% 6% 4% 2% 0% January March May July September November January March May July September November -2% 2007 2008 Food 2009 Core inflation 2010 2011 Others

And what happens to output and the current account?

In the third quarter, the slowdown in growth began to steepen LATIN AMERICA: QUARTER-ON-QUARTER GROWTH IN GDP, SEASONALLY ADJUSTED SERIES (Percentages)

All demand components slack since mid 2010 LATIN AMERICA: GDP AND DOMESTIC DEMAND COMPONENTS, 2010 -2011ª (Dollars at constant 2005 prices, change over year-earlier period) a/ Estimate.

Growth slowed from 5. 9% in 2010 to 4. 3% in 2011 and will … LATIN AMERICA AND THE CARIBBEAN: GDP GROWTH RATES, 2011 (Percentages) Panama 10. 5 Argentina 9. 0 Ecuador 8. 0 Peru 7. 0 Chile 6. 3 Colombia 5. 5 Uruguay 5. 5 Bolivia(Plur. State of) 5. 1 South America (10 countries) 4. 6 Dominican Republic 4. 5 Nicaragua 4. 5 Haiti 4. 5 Latin America and the Caribbean 4. 3 Venezuela(Bol. Rep. of) 4. 2 Central America (9 countries) 4. 1 Paraguay 4. 0 Mexico 4. 0 Costa Rica 3. 8 Guatemala 3. 3 Honduras 3. 2 Brazil 2. 9 Cuba 2. 5 El Salvador 1. 4 Caribbean 0. 7 0 2 4 6 8 10 12

But the current account deficit widens CURRENT ACCOUNT STRUCTURE (Percentages of GDP) 4. 0 3. 0 2. 0 1. 0 0. 0 -1. 0 -2. 0 -3. 0 2006 2007 2008 2009 2010 Goods balance Services balance Current transfers balance Current account balance 2011 Income balance 2012

Short term capital and FDI finance current account deficit LATIN AMERICA (SELECTED COUNTRIES): CURRENT ACCOUNT BALANCE AND COMPONENTS OF THE FINANCIAL ACCOUNT, 2011 (Miillions of dollars) 85, 000 65, 000 45, 000 25, 000 -15, 000 -35, 000 -55, 000 Argentina Brazil Chile Colombia Current account balance Net prtfolio flows Mexico Peru Venezuela (Bol. Rep. of) Central America, Dominican Rep. , Haiti Net foreign direct investment Change in international reserves Other South American countries

Currency appreciation continued… LATIN AMERICA AND THE CARIBBEAN: REAL EFFECTIVE EXTRAREGIONAL EXCHANGE RATES, 20082011 (Index: average for 1990 -2009 = 100)

Scenario for infinity and beyond • In 2012 • ECLAC’s baseline scenario: economic growth will continue to slacken, now o 3. 7% in 2012)

And to infinity (-2012) and beyond?

Two visions on long term growth’s determinants • As long as inflation, fiscal deficits and stae interventions are under control, low and preferably zero. . Growth will eventually boom • Above conditions are necessary but insufficient. Key and somewhat different constraints bind the various Latin American countries’ growth. In

One lens: the BPC growth model • Harrod, Prebisch, Thirlwall, Gap models – Long term growth must be consistent with a sustainable balance of payments • (vs Lawson, Corden at al Does the Current Account matter? ) • BPC Specifications: levels or ratios, trade and factor payments from abroad • X – M = 0, (X – M) / Y ≤ k, interest, remittances • GNP = GDP + Net Factor Payments from abroad and terms of trade effects

Thirlwall’s model of BPC growth Income elasticity of imports External demand Effect of real exchange rate cum price elasticities of trade

When Z slows down the BPC becomes more binding. Plan A Deflate and devalue …and stagnate some time Plan B i) Diversify external demand ii) Rely more on domestic market…change trade elasticities (composition of X and Q) industrial/trade policy, Y-distribution + investment private and public iii) Shift real exchange rate 24

Plan C Apply the BPCC model B ring in, P ray for, C onvince C apital inflows to increasingly keep coming to finance your current account, maybe default 25

But if PLAN A, B and C (combined or not) fail and the current account deficit keeps increasing as a share of GDP…then wait for

The Casablanca Conclusion “…You will regret it, maybe not today, maybe not tomorrow but soon and for the rest of your life…” Rick Blaise (Humphrey Bogart) to Ilsa Lund (Ingrid Bergman) at –nearly- the end of Casablanca the film

Shukriya ! Dhanyavaad !