The post-crisis landscape (in 3 snapshots) Eduardo Levy Yeyati UTDT & Barclays Capital

The growth outlook

3 Ranking recessions: Big… Note: GDP gap for past crises estimated using by gap between actual GDP and GDP assuming growth at the potential rate since the beginning of the recession. EM Crisis include Argentina, Brazil, Mexico, Thailand, Korea and Singapore. Source: Haver, Barclays Capital.

4 …synchronized… Measure of global synchronicity

5 …short… Note: Europe includes Germany, France, Italy, Spain and UK. Source: Haver, Barclays Capital Industrial production has turned Global IP and GDP

6 …buffered by stimulus (China and the US) Expected month of end of recession

777 What next? The Lehman panic has been undone by countercyclical policy …funded by savings (China, Chile), as well as debt and money printing (US, UK) What will be trend growth once the cyclical rebound is over?

8 For now…not impressive Source: BEA, Haver, Barclays Capital. Note for figure on the right: Typical recovery GDP growth is a weighted average of growth following uncertainty shocks (1/2), the ERM crisis (1/3) and EM crises (1/6). Assumes current crisis in began in 3Q09. Source of typical uncertainty shock recovery comes from Bloom, Nicholas. US GDP index level after recession trough GDP growth during recoveries from crises

999 What next? The Lehman panic has been undone by countercyclical policy …funded by savings (China, Chile), as well as debt and money printing (US, UK) What will be trend growth once the cyclical rebound is over? The cyclical rebound surprised the market; the post-crisis trend is likely tro disappoint When will the stimulus be switched off (and what is going to happen then)? When will QE be mopped up and interest rates normalize? …which bring us to…

The new global balance

Predictable: Rates & USD selloff Yields The recent evolution of USD

Less predictable: QE and the rates-USD decoupling Net Supply of riskless US assets (net of Fed purchases) QE behind the summer breakdown of the recovery trade

The CA and the savings drain CA deficit, and private and public savings (2002 – today), all as a share of GDP The impact of the global fiscal stimulus over global imbalances – the savings “drain”

Cash on the sidelines There is still cash on the sidelines, but is it a good USD proxy?

Why the USD may strengthen in 2010 Undoing of QE + H2 tightening The end of cheap funding of risky assets Fear of asset inflation may trigger tightening before inflation shows its face Growth disappointments down the road Moderate risk appetite The failure of the IMF as ILLR Good try with the FCL But no takers (Mexico, Poland, Colombia) and fewer users Self insurance will continue to be the norm UST delivered Good hedge (even if for circular, self-fulfilling reasons)

Advanced Emerging Markets

Emerging markets: What’s new Lessons from the 90s De-dollarization De-leverage Liquidity hoarding Leaning-against-the-wind exchange rate policy Lessons from the 80s Institutional building Monetary and fiscal credibility Ability to conduct countercyclical policies

Leaning against the wind ER policy Brazil’s Exchange Rate Policy The path of less resistance: EM vs G10

The newborn policy autonomy Policy Rates monthly

Decoupling or growth convergence? EM and G7 Growth relationship 5 year rolling correlation between EM and G7 growth

The couple moves East Decoupling and Convergence: EM growth as a function of G7 and Chinese growth (y/y quarterly data) EM mediansBRMXIDTRSA  (G7)  (G7_late)  ()  (China_late)  Observations R-squared Note: Median values from country-by-country regressions. p-values in italics. G7 growth computed as the average of individual growth rates weighed by the dollar GDP of the previous year. The EM sample includes: Argetina, Brazil, Chile, Colombia, Mexico, Peru, Honk Kong, India, Indonesia, Malaysia, Philippines, Singapur, Taiwan, Thailand, Czech Republic, Hungary, Poland, Turkey, and South Africa. Source: IMF, Barclays Capital.

The high beta-high alpha pattern also in markets Developed economies and the New Emerging Markets: An index view

Growth convergence in action EM Contribution to global growth

Growth convergence in action (and in markets) EM and G7 shares of world GDP EM’s growing Market Share

The glass half empty: Institutions… Institutional Indicators Macro Risk

…and income Growth Stats Contagion within EM: No more Russias EM medianG7 median Period EarlyLateEarlyLate Mean4.20%3.68%2.10%1.20% Vol.3.77%3.17%1.30%2.24% Skew Kurtosis Sharpe Ratio Poverty headcount (at 2$ PPP) 28%24%n.a. Income share of the lower quintile 6.9%7.5%7.6%7.9%

The price of risk remains above pre-Lehman levels… Risk appetite: Spreads over the cycle

…but the relocation to risky assets favors EM Em Assets fed by the growing risk appetite MM vs EM Equity fund flows

Advanced Emerging Markets The EM lable is obsolete  There is a new “advanced” group of countries, halfway between EM and G10 No mean reversion  Convergence should continue in the next five years Solved the financial front, the agenda should move towards income and institutions. The post-crisis landscape is bound to accelerate this process.

Thank you