XXV MEETING OF THE LATIN AMERICAN NETWORK OF CENTRAL BANKS AND FINANCE MINISTRIES

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XXV MEETING OF THE LATIN AMERICAN NETWORK OF
CENTRAL BANKS AND FINANCE MINISTRIES
U.S. Monetary Policy and its Implications for
Latin American Economies

• Adrián Armas

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When America sneezes, the world catches a cold.
If America gets a cold, the world gets influenza
and pneumonia
GDP Growth ()
USA
World
Projections for 2007 and 2008 Source World
Economic Outlook, IMF, April 2007
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Historically, slowdowns in the U.S. economy and
increases in Fed rates have been followed by
lower growth in Latin American countries
Source Bloomberg and World Economic Outlook,
IMF, April 2007
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Why is the impact of increases in Fed interest
rates currently less significant? The financial
channel

• Long-term rates (bonds and home mortgages) have
  not followed the same trend (conundrum).
• Better communication of U.S. monetary policy
  Through its statements, the Fed announces policy
  changes before they take place, leading to a
  gradual adjustment in markets.
• Despite Fed rate increases, investor risk
  aversion has not changed dramatically.
• There has been a notorious improvement in
  emerging markets fundamentals.
• Investors have started to differentiate among
  emerging countries.

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Why is the impact of a US slowdown less
significant? The commercial channel

• U.S. GDP slowdown is still moderate and
  concentrated in U.S. specific sectors
  (construction).
• Growth in emerging markets has offset U.S.
  slowdown.
• Commodity prices are explained not only by demand
  but also by supply factors.

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Stronger fundamentals put Latin America in a
better position to face external shocks (I)
2002 2006
Short-term External Debt currently maturing
Long-Term External Debt Total Nonresident
Deposits over One Year/Official Foreign Exchange
Reserves ()
Source Moodys, November 2006
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Stronger fundamentals put Latin America in a
better position to face external shocks (II)
2002 2006
Source Moodys, November 2006
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The turbulence episode of May-June 2006
reinforces the importance of better fundamentals
for emerging economies
SourceReuter, IMF
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Despite the improvement in fundamentals, some
risks remain

• A reversal of capital flows cannot be ruled out
  in emerging economies.
• Countries with a currency mismatch need
• Accumulation of international reserves.
• Increase in the share of domestic-currency-denomin
  ated public debt.
• Availability of resources from international
  institutions.

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The accumulation of international reserves is
needed to build a buffer stock
In billions of US
As percentage of GDP
Source IMF, Central Banks and others
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The share of public debt in domestic currency has
increased over the last years, leading to a lower
currency mismatch
Includes foreign-currency-indexed debt
Source Moodys, November 2006
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On the other hand, export market diversification
reduces vulnerability of the export sector to
U.S. slowdown
Latin American Exports, by Market ()
2006
2000
Source Direction of Trade, IMF
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The recent boom in the prices of Peruvian
commodities seems to be more related to Asian
growth, international liquidity and supply
factors, rather than U.S. growth
Terms of Trade ( change)
U.S. GDP Growth ()
U.S. Growth
Terms of Trade
Source BEA and Central Bank of Peru
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Diversification and low correlation among key
export prices diminish external vulnerability
Copper and gold are Perus main export goods
Source Central Bank of Peru
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Adjusting for the effect of high prices, the
current account deficit remains at a moderate
level
Source Central Bank of Peru
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Peru has taken advantage of recent growth and
high commodity prices to improve the fiscal
position
Source Central Bank of Peru
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The fiscal surplus was reflected in higher public
sector deposits with the central bank
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Monetary policy has been conducted according to
domestic conditions
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XXV MEETING OF THE LATIN AMERICAN NETWORK OF
CENTRAL BANKS AND FINANCE MINISTRIES
U.S. Monetary Policy and its Implications for
Latin American Economies

• Adrián Armas