1 reactions to the sub-prime turmoil carlos hamilton v. araújo iadb, may 2008 reactions to the...
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1
Reactions to the Sub-Prime Turmoil
Carlos Hamilton V. AraújoIADB, May 2008
Reactions to the Sub-Prime Turmoil
Carlos Hamilton V. AraújoIADB, May 2008
2
I. Asset Prices
II. Banking System
III. Macroeconomic Developments
IV. Conclusion
Outline
3
I. Asset Prices
4
Jun
14
2007
=10
0
USD/BRL USD/CNY USD/JPY USD/EUR
78
88
98
108
Jun07
Jul07
Aug07
Sep07
Oct07
Nov07
Dec07
Jan08
Feb08
Mar08
US Dollar Spike
Source: Bloomberg
5
Sovereign Spread and Risk Aversion Index
Sources: JP Morgan Chase and Merrill Lynch
bas
is p
oin
ts
Embi+Br
Risk Aversion Index
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Jun07
Jul07
Sep07
Oct07
Nov07
Dec07
Feb08
Mar08
130
160
190
220
250
280
310
Ago07
Apr08
Jan08
May08
6
75
85
95
105
115
125
Jun07
Jul07
Aug07
Sep07
Oct07
Nov07
Dec07
Jan08
Feb08
Mar08
Mexbol MervalIbovespa IPSA IBVC
Jun
14
2007
=10
0Ibovespa x Latin American Stock Exchanges
Source: Bloomberg
7
Almost all IPOs, even those that had already been announced, were postponed
The cost of the international financing became prohibitive, even in case of well ranked corporations
There are reasons to believe that “this time is different”
Other Comments
8
II. Banking Sector
9
Mainly in the second half of the 90s, the Brazilian banking system passed through a huge clean-up process
In the last couple of years, the Congress approved some laws enhancing the protection of the creditors
The above improvements contributed decisively to strengthen the prospect for the system
Some Previous Developments
10
Ownership% System Assets
0
10
20
30
40
50
2003 2004 2005 2006 2007
Foreign Domestic Government
Assets Distribution
11
Past Due LoansPast Due Loans (90+ days) / Total Loans (%)
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
2003 2004 2005 2006 2007
Foreign Domestic Government System
Past Due Loans
12
Profitability
Return on Equity%
0
5
10
15
20
25
30
2003 2004 2005 2006 2007
Foreign Domestic Government System
13
Average Cost Deposits%
0
3
6
9
12
15
18
2003 2004 2005 2006 2007
Foreign Domestic Government System
Cost of Deposits
14
* Registered at the Central Bank Credit Information System
38,5% 43,0%44,8%
46,1% 45,6%
61,5%
57,0%
55,2%
53,9%
54,4%
-
100
200
300
400
500
600
700
800
900
1.000
Jun Jun Jun Jun Nov*
2004 2005 2006 2007
Loans*R$ bi
Individual Borrow ers Corporate Borrow ers
Expansion of the Credit
15
III. Macroeconomic Developments
16
Trade Balance
12-month accumulated
exports
imports
US
$ b
illi
on
12-month surplus:
US$36.4 bi
165.6
129.2
45
55
65
75
85
95
105
115
125
135
145
155
165
175
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Feb
08
17
Net FDIU
S$
bil
lio
n
FDI
-15
-5
5
15
25
35
45
Jan
99
Jul
99
Jan
00
Jul
00
Jan
01
Jul
01
Jan
02
Jul
02
Jan
03
Jul
03
Jan
04
Jul
04
Jan
05
Jul
05
Jan
06
Jul
06
Jan
07
Jul
07
Feb
08
18
International ReservesU
S$
bil
lio
n
Apr 03: 15.9
end-of-2004:27.50
20
40
60
80
100
120
140
160
180
200
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Mar
08
Mar 25: US$194.3 bi
19
Net External DebtU
S$
bil
lio
n
1Q03:165.2
4Q04:135.7
4Q07:-10.8-25
0
25
50
75
100
125
150
175
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
4Q07
20
External Sustainability Indicators
* Record low since the start of the series in 1970; 2008 – estimates.
net external debt/GDPnet external debt/exports
de 3.1 para -0.1*
%
de 32.7 para –1.4%*
(Feb)(Feb)
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
00 01 02 03 04 05 06 07 08
-5
0
5
10
15
20
25
30
35
00 01 02 03 04 05 06 07 08
21
Interest Payments/Exports Ratio
* Record low since the start of the series in 1970.
%
from 35.6% to 9.5%*
6
10
14
18
22
26
30
34
38
1999 2000 2001 2002 2003 2004 2005 2006 2007
22
IPCA Expectations and Target
central target
12-month IPCA
expectations
upper limit
lower limit
% p
.a.
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Dec
09
0
3
6
9
12
15
23
IPCA (12-month trailing basis )
market consensus
%%
Feb 08: 4.61% 2008: 4.44%*
0
3
6
9
12
15
18
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Inflation Convergence to Targets
*March 20
24
Jan 084.15%
avg. 1994-Jun/95 4.77%
avg. Jul/95-1998 -0.08%
avg. 1999-2002 2.91%
avg. 2003-2007 4.13%
Consolidated Public Sector Primary Surplus%
of
GD
P
-2
-1
0
1
2
3
4
5
6
7
Jan
94
Jan
95
Jan
96
Jan
97
Jan
98
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
25Source: BCB
Debt/GDP%
of
GD
P
35.1
56.0
4Q 0742.8
market expectations (annual data)
1Q 02 – 2Q 07 (quarterly data)
35
37
39
41
43
45
47
49
51
53
55
57
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
2008 2012
26
US
$ b
illl
ion
Accumulated Reduction in FX-Linked Domestic Debt as of Jan 2003
-10
0
10
20
30
40
50
60
70
80
90
Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
Jan06
Jul06
Jan07
Jan08
80.9
Jul07
27
III. Conclusions
28
Asset Prices Similarly to what was seen in the last two decades or so, the Brazilian
assets depreciated in response to the break out of the sub-prime financial turmoil
However, differently from the old pattern, the depreciation was relatively modest and they fastly recovered and on balance have not been hardly affected so far
Banking Sector The Brazilian bank sector was healthy enough to overcome the problems
caused by the international liquidity crunch without sacrificing the recent cicle of credit expansion
Macroeconomic Developments Afer almost a decade of Inflation Targetting, flotation and generation of
primary surplus (privatisation, bank reform), “this time is different” From my perspective, since there has been a strong enhancement in the
fundamentals, this is largely the best explanation for the fact that so far Brazil has not suffered a lot as a consequence of the sub-prime crisis
Conclusion
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