© 2007 Europa Partners Ltd. All rights reserved. The Ongoing Crisis in the USA: Carlos A. Anderson Should we worry about its impact on the Peruvian Economy?

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Presentation transcript:

© 2007 Europa Partners Ltd. All rights reserved. The Ongoing Crisis in the USA: Carlos A. Anderson Should we worry about its impact on the Peruvian Economy?

Table of Contents 1.Decoupling Theory: Myth or reality? 2.Contagion Channels Current Account Financial Channel The Dollar Channel 3.Scenarios & Their Likely Impact 4.Conclusions Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Theory: Decoupling World Trade Simplified: Trade between 4 main Blocks 1 USAEU ASIA OTHER EMERGING COUNTRIEs Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Dimensions in World Trade Trade between 4 main Blocks (2007) 1 USAEU ASIA OTHER EMERGING COUNTRIEs North America Exports: 9% Imports: 15% Other Emerging Economies Exports: 13% Imports: 10% Europe Exports: 48% Imports: 48% Asia and Australasia Exports: 31% Imports: 28% Note: Region 1 includes USA only; Region 2 includes Europe and Canada; Region 3 includes Asia and Australasia and Region 4 is formed by the rest of the world Source: GMID Euromonitor International Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Since 2002 World Trade has duplicated Source: GMID Euromonitor International Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Decoupling for Some, not All GDP Growth correlation Latin America vs. USA Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Impact of Recessions …  Impact of USA Recessions usually felt in Latin America Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

And Slowdowns  While USA slowdowns have a limited effect Latin America Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Some Decoupling Remarks 1.Decoupling varies from region to region and country to country 2.Past events will not necessarily repeat themselves 3.However, sheer size of the USA and its still undisputed economic leadership in the world imply that a crisis in the USA will be felt throughout the world. 4.We will now focus on the mechanisms behind and the extent of the possible impact in Peru. Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Contagion Channels 1.Current account Direct trade with USA Remittances China & Commodity Prices 2.Financial System Banking system and Foreign Banks Capital Markets 3.Dollar Channel Exchange rate fluctuations Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Direct Trade with USA & China Source: Promperu  Share US in Peruvian exports is decreasing  lower potential impact  China and other emerging economies increase their participation Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Remittances & FDI Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Volatility in Development Flows Low volatility  Remittances flow most likely stable Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Commodities Spur Peruvian Exports Total Exports (USD M)Mining Exports/Exports Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Commodities: Contribution to Exports & GDP Mining exports boom after 2003  share of GDP almost doubles from 10.4% in 2003 to 19.7 in 2007 Experts as a share of GDP double between 2000 and 2007 M USD GDP 53,323 53,935 56,756 61,342 69,735 79,485 93, ,069 Exports 6,955 7,026 7,714 9,091 12,809 17,368 23,800 27,956 Mining 4,804 4,730 5,369 6,356 9,199 12,950 18,374 21,493 Non Mining 2,150 2,295 2,345 2,734 3,611 4,418 5,426 6,463 CAGR 10.8% 22.0% 23.9% 17.0% Mining / Exp.69.1%67.3%69.6%69.9%71.8%74.6%77.2%76.9% Exp. / GDP13.0% 13.6%14.8%18.4%21.9%25.6% Mining9.0%8.8%9.5%10.4%13.2%16.3%19.8%19.7% Non Mining4.0%4.3%4.1%4.5%5.2%5.6%5.8%5.9% Source: IMF & Promperu Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Commodity Prices are the Main Driver Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved. Price Metal Index 2001=100 Source: Perspectivas del precio de los Metales. Apoyo Consultoría. Diciembre del 2006.

The Financial Channel: Foreign Banks in Peru Participation by Foreign Banks in Peru relatively low Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved. Market Share of Foreign Banks in Local Banking System Percentage of Total Assets

The Capital Markets Volatility IGBVLVolatility Dow Jones PeriodDailyWeeklyDJIAIGBVL 2006 H120.3%-3.3%0.5%1.5% 2006 H2-1.0%0.0%0.4%0.9% 2007 H115.5%7.2%0.5%1.2% 2007 H247.3%79.7%0.9%1.4% 2008 H110.6%38.3%1.0%1.3% CorrelationVolatility Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

The Dollar Channel The Impact through the exchange rate can be significant A US crises could lead to a dollar collapse, which would result in a much cheaper Dollar and a more expensive Peruvian Sol The possible impact on the Peruvian economy: 1.Exports to the US will fall 2.Remittances send from the US will be worth less 3.The international crisis will likely affect the worlds economic activity Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved. Sol versus Dollar (last year) Source: BCRP

Scenarios Impact on Peruvian Economy trough Crisis US Direct Trade Remittances Commodity Demand & Prices Banking System Capital Markets Dollar Channel ModerateL/ML L SevereMLM/HLMM A moderate crisis will be felt through direct trade, lower demand for commodities combined with lower prices, and tightening of capital markets A severe crisis in the USA, with spillovers to the rest of the world including China, is the worst case scenario. Considerable lower demand for commodities combined with considerably lower prices as well as temporal investment stop as a result of higher interest rates could have considerable implications for Peru. An even weaker dollar will make exports to the US more expensive while imports will be cheaper and as a result the current account will worsen Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.

Conclusions Peru's exposure to US economy is important given current account channel, (trade and remittances) financial channel (effect on the Lima Bolsa) and the dollar channel. However, the impact of a US slowdown may be more reduced than in the past given: 1.Robust internal demand 2.Improvement of credibility and fiscal policies 3.The increasing role of the rest of the emerging countries in the worlds economy Authorised and regulated by The Financial Services Authority. © 2007 Europa Partners Ltd. All rights reserved.