XXV MEETING OF THE LATIN AMERICAN NETWORK OF CENTRAL BANKS AND FINANCE MINISTRIES Adrián Armas U.S. Monetary Policy and its Implications for Latin American Economies

“When America sneezes, the world catches a cold. If America gets a cold, the world gets influenza and pneumonia” *Projections for 2007 and 2008 Source: World Economic Outlook, IMF, April 2007 GDP Growth (%)* USA World

Historically, slowdowns in the U.S. economy and increases in Fed rates have been followed by lower growth in Latin American countries Source: Bloomberg and World Economic Outlook, IMF, April 2007

¿Why is the impact of increases in Fed interest rates currently less significant?: The financial channel Long-term rates (bonds and home mortgages) have not followed the same trend (“conundrum”). Better communication of U.S. monetary policy: Through its statements, the Fed announces policy changes before they take place, leading to a gradual adjustment in markets. Despite Fed rate increases, investor risk aversion has not changed dramatically. There has been a notorious improvement in emerging markets’ fundamentals. Investors have started to differentiate among emerging countries.

¿Why is the impact of a US slowdown less significant?: The commercial channel U.S. GDP slowdown is still moderate and concentrated in U.S. specific sectors (construction). Growth in emerging markets has offset U.S. slowdown. Commodity prices are explained not only by demand but also by supply factors.

Stronger fundamentals put Latin America in a better position to face external shocks (I) Source: Moody’s, November 2006 *Short-term External Debt + currently maturing Long-Term External Debt + Total Nonresident Deposits over One Year/Official Foreign Exchange Reserves (%)

Source: Moody’s, November 2006 Stronger fundamentals put Latin America in a better position to face external shocks (II)

The turbulence episode of May-June 2006 reinforces the importance of better fundamentals for emerging economies Source:Reuter, IMF

Despite the improvement in fundamentals, some risks remain: A reversal of capital flows cannot be ruled out in emerging economies. Countries with a currency mismatch need: –Accumulation of international reserves. –Increase in the share of domestic-currency- denominated public debt. –Availability of resources from international institutions.

The accumulation of international reserves is needed to build a buffer stock In billions of US$ As percentage of GDP Source: IMF, Central Banks and others

The share of public debt in domestic currency has increased over the last years, leading to a lower currency mismatch *Includes foreign-currency-indexed debt Source: Moody’s, November 2006

On the other hand, export market diversification reduces vulnerability of the export sector to U.S. slowdown Latin American Exports, by Market (%) Source: Direction of Trade, IMF

U.S. Growth Terms of Trade The recent boom in the prices of Peruvian commodities seems to be more related to Asian growth, international liquidity and supply factors, rather than U.S. growth Terms of Trade (% change) U.S. GDP Growth (%) Source: BEA and Central Bank of Peru

Diversification and low correlation among key export prices diminish external vulnerability Copper and gold are Peru’s main export goods Source: Central Bank of Peru

Adjusting for the effect of high prices, the current account deficit remains at a moderate level Source: Central Bank of Peru

Peru has taken advantage of recent growth and high commodity prices to improve the fiscal position Source: Central Bank of Peru

The fiscal surplus was reflected in higher public sector deposits with the central bank

Monetary policy has been conducted according to domestic conditions

XXV MEETING OF THE LATIN AMERICAN NETWORK OF CENTRAL BANKS AND FINANCE MINISTRIES Adrián Armas U.S. Monetary Policy and its Implications for Latin American Economies