Outlook for (some) Emerging Economies Sebastián Claro Deputy Governor Central Bank of Chile 11th Asia Copper Conference, Shanghai, November 18, 215 Central Bank of Chile, November 215 1
The last 1 years were good years for emerging markets. Emerging economies: GDP per capita level relative to USA (*) (percent) Latin America 25 25 2 2 15 Emerging economies 15 1 9 94 98 2 1 14 1 (*) Gray area shows 215 21 forecast. Source: International Monetary Fund (WEO). 2
The growth differential relative to the United States peaked around 29. However, it has started to shrink rapidly. Emerging economies: GDP growth rate differential relative to USA (1) (2) (percentage points) 9 9 Emerging economies Latin America 9 94 98 2 1 14 (1) Three years moving average. (2) Gray area shows 215 21 forecast. Source: International Monetary Fund (WEO).
Chile is not different, although is had a much better performance since the mid 198s. Chile: GDP growth rate differential relative to USA (1) (2) (percentage points) 9 9 9 94 98 2 1 14 (1) Three years moving average. (2) Gray area shows 215 21 forecast. Source: International Monetary Fund (WEO). 4
A supportive global financial environment is one of the explanations for this success. External financial conditions (*) (Deviation from sample mean, percentage points) Latin America Emerging economies 28 28 24 24 Europe Brazil 21 21 18 18 14 14 12 12 7 Mexico Peru Latin America 7 Asia Colombia Chile 7 7 97 9 12 15 97 9 12 15 (*) Deviation from the average interest rate 2 215 measured by US 1 year Treasury yield plus EMBI. Source: Bloomberg. 5
Of course, high commodity prices driven in part by China s growth were also determinant. Commodity prices by group (*) (fixed base index: 199 215=1) 25 Energy 25 2 15 1 5 Grains and cereals Metals 2 15 1 5 9 94 98 2 1 14 (*) Goldman Sachs Index. Source: Bloomberg.
Good macroeconomic policies should also have some credit. Latin America: Current account (1) (percent of GDP, deviation from the sample mean) 7 5 Chile 7 5 1 1 1 1 5 7 Latin America (2) 9 94 98 2 1 14 5 7 (1) The area corresponds to the maximum minimum range among economies. (2) Latin America considers Brazil, Chile, Colombia, Mexico and Peru. Sources: Central Bank of Chile and International Monetary Fund.
However, conditions are changing, and fast. Latin America: GDP growth forecasts (annual change, percent) 215 21 4 Latin America average 21 21 4 4 4 2 2 2 2 2 2 2 2 4 14 Jul. 15 Jul. 4 4 15 Apr. Jul. Oct. 4 Brazil Colombia Mexico Chile Peru Source: Consensus Forecasts. 8
Should the economies adjust or accommodate to the new scenario? This is the question. 9
This new scenario is challenging on the fiscal front. Latin America: Fiscal balance (*) (percent of GDP, deviation from the sample mean) 9 Chile 9 Latin America (2) 2 4 8 1 12 14 (1) The area corresponds to the maximum minimum range among economies. (2) Latin America considers Brazil, Chile, Colombia, Mexico and Peru. Sources: Central Bank of Chile and International Monetary Fund.
Inflation of goods and services is running high, so room for further monetary policy accomodation is limited. Tradables (goods) Latin America inflation (annual change, percent) Non tradables (services) 18 18 12 12 12 12 8 8 4 4 4 9 12 15 9 12 15 Chile Peru (Lima) Colombia (Core) 4 Sources: Bloomberg, Central Bank of Chile, Bank of the Republic of Colombia, Central Reserve Bank of Peru and Instituto Nacional de Estadísticas (INE).
For good reasons, the debate on commodity prices is centered on the dynamics of China. But global financial conditions are very relevant, too. Copper price and dollar broad index (original series, fixed base index: January 1997=1) 448 Dollar index Copper 1 5 121 252 112 154 1 5 9 12 15 94 Source: Bloomberg.
We have seen a combination of strong dollar and low commodity prices before. Real copper price and dollar index (fixed base index: 21=1; US /lb, constant 21US$) 184 18 Dollar Copper 49 42 152 5 1 28 12 21 14 14 88 4 7 7 7 7 79 82 85 88 91 94 97 9 12 15 7 (*) Dollar corresponds to the narrow index estimated by BIS. Sources: Bank for International Settlements (BIS), Bloomberg and World Bank. 1
The last three dollar strength episodes have come together with an important downward correction in copper prices relative to trend. This time is not different. Real copper price and dollar index (*) (cumulative monthly change relative to 5 year MA trend, percent) 75% 75% 5% 25% % 25% Dollar Jun.8 Dollar Aug.14 Dollar Apr.95 Copper Aug.14 Copper Jun.8 5% 25% % 25% 5% Copper Apr.95 5% 75% 12 8 4 4 8 12 1 2 24 28 2 4 44 48 75% (*) Dollar corresponds to the narrow index estimated by BIS. Sources: Bank for International Settlements (BIS), Bloomberg and World Bank.
According to historical patterns, there is plenty of room for further widening of interest rate differentials. Monetary policy in Eurozone and US (*) (difference between Eurozone and US, percentage points; USD/EUR exchange rate) 8 1,9 4 USD/EUR 2Y gap 1, 1, 4 1Y gap 1 8 12 Monetary policy rate gap 75 79 8 87 91 95 99 7 11 15,7,4 (*) Quarterly moving average data. Sources: Bloomberg, Federal Reserve and Organisation for Economic Co operation and Development.
Thank you Banco Central de Chile 1