1. Comments on The Effect of Oil Prices: Case of Importers Discussant: Ratna Sahay International Monetary Fund October 19, 2006 XXIV Meeting of the Latin America Network of Central Banks and Finance Ministries

2. Overview Presentation nicely contrasts previous shocks with current shock Presentation nicely contrasts previous shocks with current shock Presentation is consistent with IMF view Presentation is consistent with IMF view Comments will focus on additional and somewhat different interpretation of the presentation Comments will focus on additional and somewhat different interpretation of the presentation Role of good luck and good policies Role of good luck and good policies

3. Good luck: Robust global growth: alternative interpretation Not only demand factors (US, China), which would result in Not only demand factors (US, China), which would result in Sharp wage increases: not happened, unlike 1970s spiral Sharp wage increases: not happened, unlike 1970s spiral Higher interest rates: not occurred; savings high, especially China Higher interest rates: not occurred; savings high, especially China Rather, reflects strength of positive supply-side factors Rather, reflects strength of positive supply-side factors High TFP growth High TFP growth Increased supply of factors of production, particularly cheap labor in newly emerging markets (China, India) Increased supply of factors of production, particularly cheap labor in newly emerging markets (China, India) Therefore, increased prices of complementary factors of production: commodity prices and oil → Therefore, increased prices of complementary factors of production: commodity prices and oil →→ “Strong growth despite high oil prices” or “High oil prices because of strong growth”? Answer: Common shock (positive supply shock and unanticipated higher growth) raised both. “Strong growth despite high oil prices” or “High oil prices because of strong growth”? Answer: Common shock (positive supply shock and unanticipated higher growth) raised both.

4. Variation Oil and commodity prices moving together Previous Shock* Previous Shock* (month of shock = 0) *Yom-Kippur War and OPEC oil embargo (Oct-73), Iranian Revolution (Jan-79) and Iraq's Invasion of Kuwait (Aug-90) Current Shock Current Shock (month of shock = Dec-03) 90 110 130 150 170 190 210 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Oct-05 Dec-05 Feb-06 Metals Beverages Oil Agricultural Raw Materials Food Nº of months after the shock 0123456789101112131415161718192021222324 OilFoods-13.2% Metals-15.7%+70.5% Agricultural Raw Materials -25.3% Beverages-31.2% Variation Foods Metals Oil +2.5% +72.4% +115.2% +0.5% Beverages+22.0% (Oil and commodity prices deflated by US CPI) Sources: Latin Macro Watch, 2006. Jaramillo, 2006.

5. But benefits of commodity price increases have been unequally distributed (% of 2006 GDP) ←

6. Good luck: Positive growth surprise... WEO growth projections revised upwards % Source: WEO, September 2006

7. ...translates to higher oil demand and prices Source: Hossein Samiei (2006) “Global Economy and the Oil Market”, mimeo, IMF

8. Good policies: Higher oil price pass through (Developing countries) Source: Hossein Samiei (2006)

9. Good policies: Better LAC fiscal performance

10. Good policies: Better LAC monetary framework leading to low inflation

11. Looking ahead Global Global Output gaps are closing → Output gaps are closing →→ Inflation is picking up → Inflation is picking up →→ Risks to growth are weighted to the down side → Risks to growth are weighted to the down side →→ Oil prices increasingly reflect future supply concerns Oil prices increasingly reflect future supply concerns Regional Regional Latin America Latin America Slowing global growth, higher US interest rates could hurt → Slowing global growth, higher US interest rates could hurt →→ Key challenge: raise long-term growth, with fiscal discipline (IMF REO, Mexico, November 2006) → Key challenge: raise long-term growth, with fiscal discipline (IMF REO, Mexico, November 2006) →→ Caribbean Caribbean Post Cricket World Cup Post Cricket World Cup

12. Global output gap is almost closed (Percent of potential GDP) Emerging markets Advanced economies World Projections Source: Hossein Samiei (2006) ←

13. Headline InflationCore Inflation United States United States Euro area Japan 2002030405Jul. 06 2002030405Jul. 06 Inflationary pressures rising in advanced economies (Annualized percent change of 3-month moving average over previous 3-month avg) ← Source: Hossein Samiei (2006)

14. Risks to global growth weighted to downside % Source: WEO, September 2006 ←

15. Higher global interest rates could hurt ←

16. Key challenge is to raise long-term growth ←