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1Economic Research DepartmentEconomic Research Department 1The New International Financial Map for LAC

The New International Financial Map for LAC

Alicia García-Herrero

Chief Economist Emerging Markets Economic Research Department, BBVA

22 October 2009

October 2009

Economic Research Department


More competition for financing due to higher indebtness

in developed economies

But still emerging markets should benefit due to:

•

Much improved perception of their economies

•

Idea of core and periphery is disappearing: more South to South flows

However, some risks ahead:

•

China will become a large capita exporter but Latin America not in such great position. Furthermore, China is sitting on a time bomb

•

Foreign bank financing could shrink (host countries may be instrumental)

Main MessagesMain Messages


1.

DEVELOPED COUNTRIES: Risk Reward Considerations

a. Risk perceptions have increased

b. Returns are revised downwards

2. EMERGING ECONOMIES: Risk Reward Considerations

a. Risk has not increased in generally

b. Returns should, thus be revised downwards as long as the demand is there

3. Will demand for emerging financial assets hold up? :

The role of China and foreign banks

IndexIndex


A -

Risk perceptions still higher than at pre-crisis levels

Risk Reward Considerations in postRisk Reward Considerations in post--crisis developed economiescrisis developed economies

United States: financial tensions indicators

0

100

200

300

400

500

600

700

800

Interbankliquidity (1)

Bank credit risk(2)

Stock marketvolatility (3)

Corporate creditrisk (4)

Sovereign risk(5)

Range Lehmand and pre-crisis Current

Source: BBVA ERD


B -

Capity

to create returns

in developed markets are revised downward, due to:

1. Lower potential growth

in the future

US and EMU: Potential GDP growth (avg. annual % var.)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

US EMU

1998-2007 2011-2018

•

Higher

uncertainty,

•

Probably higher structural unemployment (hysteresis effect).

•

Crowding out of private sector



2. Regulatory constraints should make it harder to get financing

in developed world



3. Deleveraging of financial system: much more needs to come from Europe

Leverage: Total assets over tangible equity

0

10

20

30

40

50

60

3Q08 2Q09

USEMU

Total assets over



Euro area: implicit official rate in EONIA futures and BBVA Forecast

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-10

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-11

Sep-

11

Nov

-11

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00BBVA Forecast

Current Eonia

Eonia futures (current)

Source: Bloomberg and BBVA ERD

United States: implicit official rate in Fed Funds futures and BBVA Forecast

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00FF current curve

Fed Funds rate (current)

BBVA Forecast

Source: Bloomberg and BBVA ERD

4. Low interest rates for quite some time

We project hikes will resume in 1Q11 for US and 3Q11 for Euro area)



1.








The role of China and foreign banks

IndexIndex


Risk Reward Considerations in postRisk Reward Considerations in post--crisis emerging economiescrisis emerging economies

Risk

perception

of

emerging

countries

has not

increased

in a structural

way

Still

lower

than

its

average in the

past: much

smaller

spike

that

global risk

aversion

VIX vs. Embi +

0

1020

3040

5060

7080

90

abr-

98

abr-

99

abr-

00

abr-

01

abr-

02

abr-

03

abr-

04

abr-

05

abr-

06

abr-

07

abr-

08

abr-

09

0

200400

600800

10001200

14001600

1800

VIX EMBI +(right axis)


•

Banking sector seems to be sound

1 -

Marginal exposure to toxic assets

2 -

Prudential and solvency ratios have not deteriorated.

3 -

Collapse of credit markets led to a successful substitution for

domestic sources of funds in some cases (particularly in Latin America), along with the appearance of new financing sources (i.e., China).



•

Monetary authorities have been very active

both through orthodox and heterodox measures (reserve requirements, etc)

EMERGING MARKETS: Change in Official Rates (Bps since Sep.08)

Turkey

Chile

India

Colombia

Brazil

South Ko

rea Taiw

an

Mex

ico

Poland

Indo

nesia

China

Czec

h Re

public

Philipp

ines

Malay

sia

Hon

g Ko

ng

Peru

Sing

apore

Roman

ia Hun

gary

Russia

-1000

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

Source: Bloomberg and BBVA



•

Multilateral/bilateral support has been more flexible and timely

Latin America: Reserves and Financing Facilities (%GDP)

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Argentina Brasil Chile Colombia México Perú Venezuela

Reserves

IMF FCL

Swap Fed

Current Account Balance

•IMF FCL

•FED swaps to “systemic” countries

•Increased in currency swaps in Asia (120 billion USD)



•

Foreign banks have generally maintained their commitment

market share of

participating banks

Hungary 50%

Serbia 50%

Romaniaincrease the risk-weighted capital

ratio70%

Bosnia 81%

Latvia 70%

Agreements reached by foreign banks operating in EE hosts (Vienna Group)

explicit statement to remain in the

market

willingness to conduct stress test exercises under the supervision of the national monetary

authority



1.








The role of foreign banks and China

IndexIndex


Emerging countries’

borrowers may abandon their periphery position: bond issuance are higher than they were at the beginning of the crisis

Will demand for emerging financial assets hold up?Will demand for emerging financial assets hold up?

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

50.00

2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3

* Brazil, Indonesia, Mexico, Phillipines, Russia and Turkey. Source: Dealogic.

Selected Emerging Economies: Bond Issuance* (billions of euros)


•

Will it continue?

•

As for bond issuance, a great deal is domestically financed

-

2,00

4,00

6,00

8,00

10,00

12,00

14,00

16,00

2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3

Local External

Source: Dealogic

Russia: Bond Issuance (billions of euros)

-

0,50

1,00

1,50

2,00

2,50

3,00

3,50

2008 Q1 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3

Local External

Source: Dealogic

Indonesia: Bond Issuance (billions of euros)



•

Whatever is foreign financed will be affected by stronger competition from the developed world (more similar returns for more similar risks): no more core and periphery

•

Growing role of Asian investors

•

Japan is already there but China could follow

•

Increased share of QDII is to be expected but Latin America will be one of the last places to consider (developed world first and then Asia)



•

For FDI, in 2008 China for the first time exported more capital than it imported. More to come but Latin America is, again , not

high in the list (big announcements but less so in reality)

•

US is now very cheap

•

Asia is better known and some countries are commodity abundant (Australia but also Indonesia)

•

Middle East (Iran) and Russia are also considered closer

•

Furthermore, big risk is looming in China which may derail the export of capital : the bust of the credit boom



DataLegacy of NPLs 3.5Capital (dec-08) 4.4Profits (dec-08) 0.6Nominal GDP 2008 30.1Loans issued Jan08-Aug09 12.3

Scenario A Scenario B Scenario C Scenario DOptimistic Neutral 1 Neutral 2 Pesimistic

AssumptionsLoans Issued (2008-2010) 17 20 20 25Default rate (after recoveries) 10% 15% 20% 25%Nominal GDP growth (2009-2020) 15% 10% 10% 7%

ResultsLoan default 1.7 3.0 4.0 6.3New NPLs (% 2008 Capital) 38.4 67.8 90.4 141.3New NPLs (% 2008 Profit) 291.4 514.3 685.7 1071.4New NPLs (% 2008 GDP) 5.7 10.0 13.3 20.8New NPLs (% 2020 GDP) 1.2 3.5 4.7 9.9

Source: Authors' calculations

Impact of the loan financing of the stimulus package(RMB tn, otherwise indicated)

Garcia Herrero and Santabarbara

(2009) work in progress



•

Chinese NPL problem could be large but even bigger problems have been solved before (with fewer resources)

•

China cleaned up its banking system before for a cost equivalent

to 25% of GDP …

•In reality cost disappeared hidden in asset management companies balance sheets and through high nominal growth



Another important issue is foreign bank financing –

a very important share of foreign financial for many emerging markets (specially Emerging Europe) may not come back. Why?

1.

Some of the foreign banks are still in trouble and may be forced

to operate at home:

This risk looks smaller now

2.

Those which will continue to operate will clearly do it based on

subdiaries

with full financial independence

3.

Financial protectionism in emerging countries: promoting national champions

Domestic (specially state-owned banks) have proven to be an important source of self insurance in several emerging countries (Brazil, Korea, etc.)



The New International Financial Map for LAC

Alicia García-Herrero

Chief Economist Emerging Markets Economic Research Department, BBVA

22 October 2009

October 2009

Economic Research Department

the new international financial map for lac€¦ · economic research department the new...

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