1. 1 ROUNDTABLE POLICYMAKER DISCUSSION: The Financial Angle Guillermo A. Calvo IADB, University of Maryland and NBER October 24, 2003

2. 2 OVERVIEW OF PRESENTATION â The last five years have witnessed a marked slowdown in LAC growth â which has led to questioning the effectiveness of Reforms that took place in the 1990s. â However, the debate tends to abstract from factors that are external to the region. â In particular, the debate seems to ignore the serious turmoil in the Bond Market for EMs brought about by the Russian 1998 crisis, â and which may lie behind poor growth performance.

3. CAPITAL FLOWS AFTER THE RUSSIAN CRISIS

4. LAC-7: Business Cycle and Financial Flows (GDP and financial flows, last four quarters) GDP (yoy % change) Financial Flows (% GDP) GDP Financial Flows

5. 0 20000 40000 60000 80000 100000 1997-I 1997-III 1998-I 1998-III 1999-I 1999-III 2000-I 2000-III 2001-I 2001-III 2002-I 2002-III 2003-I 2003-III LAC-7 Capital Flows (4 quarters, millions of US dollars) Russian Crisis Institute of International Finance Forecasts Includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela

6. -13000 -11000 -9000 -7000 -5000 -3000 -1000 1000 1997-I 1997-III 1998-I 1998-III 1999-I 1999-III 2000-I 2000-III 2001-I 2001-III 2002-I 2002-III 2003-I LAC-7: Current Account Adjustment (4 quarters, millions of US dollars) Includes: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela % GDP Russian Crisis

7. Deleveraging in LAC-7 (Financial flows in billions of real US dollars, cumulative since 1990) Ene-92Ene-93Ene-94Ene-95Ene-96Ene-97Ene-98Ene-99Ene-00Ene-01Ene-02Ene-03 Russian Crisis

8. LAC-7: Capital Flows & Bank Credit (Cumulative financial flows in billions of real US dollars since 1990 & real bank credit, Set-98=10) Real Domestic Bank Credit (set 98=100) 80 85 90 95 100 Mar-98 Jul-98 Nov-98 Mar-99 Jul-99 Nov-99 Mar-00 Jul-00 Nov-00 Mar-01 Jul-01 Nov-01 Mar-02 Jul-02 Nov-02 Mar-03 110 130 150 170 190 210 230 Cumulative Financial Flows Domestic bank credit Cummulative financial flows Russian Crisis

9. Deleveraging in LAC-7 (Cumulative financial flows in billions of real US dollars since 1990 and EMBI+ adj. for Argentina) Dic-01 Jun-02 Dic-02 Jun-03 300 500 700 900 1100 1300 1500 Russian Crisis EMBI+ ENRON effect Cumulative financial flows Cummulative financial flows EMBI+ adj. for Argentina

10. 300 500 700 900 1100 1300 1500 1700 Jun-97 Dic-97 Jun-98 Dic-98 Jun-99 Dic-99 Jun-00 Dic-00 Jun-01 Dic-01 Jun-02 Dic-02 Jun-03 35 55 75 95 115 135 155 LAC-7: Spreads & Domestic Interest Rates (EMBI+ adj. for Argentina and domestic lending rates) Includes: Brazil, Chile, Colombia, Mexico, Peru & Venezuela EMBI+ adj. for Argentina Domestic lending rates (June 1998=100) Interest Rates Spread Russian Crisis

11. THE REAL SIDE

12. LAC-7 Business Cycle: 1997-2003 (s.a. GDP, annualized quarterly growth rate, Venezuela excluded) RecessionRecovery Stalling Recovery -5% -3% -1% 1% 3% 5% 7% 1997.I 1997.III 1998.I 1998.III 1999.I 1999.III 2000.I 2000.III 2001. I 2001.III 2002.I 2002.III 2003.I

13. 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 Jun-97 Dic-97 Jun-98 Dic-98 Jun-99 Dic-99 Jun-00 Dic-00 Jun-01 Dic-01 Jun-02 Dic-02 Jun-03 LAC-7: Labour Market (s.a. unemployment, simple average, excluding Venezuela) Includes: Argentina, Brazil, Chile, Colombia and Mexico RecessionRecoveryStallingRecovery

14. LAC-7 Investment Cycle: 1997-2003 (s.a. investment, annualized quarterly growth rate, Venezuela excluded) RecessionRecovery Stalling Recovery -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 1997.I 1997.III 1998.I 1998.III 1999.I 1999.III 2000.I 2000.III 2001. I 2001.III 2002.I 2002.III 2003.I Includes: Argentina, Brazil, Chile, Colombia, Mexico and Peru

15. (GDP yoy variation in %) LAC-7 Growth Forecasts Source: Latin Focus Consensus Forecasts -2.0 0.0 1.0 2.0 3.0 4.0 5.0 200220032004

16. 16 OUTLOOK â The capital market looks much more favorable for EMs. â Delevaraging and large real depreciation should help LAC to take advantage of improved capital market conditions. â This positive phase should be utilized to lessen financial vulnerabilities by: Õ financial reform Õ trade opening Õ monetary arrangements, e.g., currency unions.