LATIN AMERICA’S LESSONS FROM
CAPITAL ACCOUNT LIBERALIZATION
José Antonio Ocampo
Columbia University
Medium-term cycles of capital flows to emerging markets:
1. 1975-81 -- Recycling of petrodollars, via bank loans, to oil-importing EMs
1982, Aug.-- Mexico unable to service its debt on schedule, defaults
=> Start of the Latin American debt crisis, 1982-89
2. 1990-97 -- New capital flows to EMEs following 1989 Brady Plan
1994, Dec. -- Mexican peso crisis
1997, July -- Thailand forced to devalue and seek IMF assistance
=> Start of East Asia crisis
1998, Aug. -- Russia defaults on much of its debt => Contagion to Brazil.
2001-02 -- Turkey and Argentina currency & debt crises
3. 2003-07 -- New capital flows into developing countries
2008, Sep. – Lehman Brothers collapse
=> Beginning of North Atlantic FinancialCrisis
4. 2009-13 -- Post-crisis surge in capital flows to emerging markets,
2013, May
-- May 2013 U.S. Fed tapering began the contraction phase
But, so far, financing conditions have continued to be good
3
Net resource transfers to Latin America
4.0%
Figure 1: Net resource transfer, 1950-2012
(% of GDP at current prices)
0.0%
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2.0%
-2.0%
-4.0%
-6.0%
-8.0%
via financial flows
Source: Authors’ estimates based on ECLAC data
via FDI
Total
4
Major phases of liberalization and regulation
1950-75 -- Extensive FX and capital account regulations in all LA
▫ Exceptions: Mexico and Venezuela
1. 1975-81 -- Capital account liberalization in Argentina, Chile and Peru, but Brazil and
Colombia remain relatively closed; Domestic liberalization in Argentina and Chile
▫ 1982-89 -- Closing of the capital account during LA debt crisis
2. 1990-98 -- Broad-based capital account liberalization in LA, including Brazil and
Colombia, but with new instruments to regulate capital flows:
▫ Taxes on capital flows in Brazil, and URRs in Chile and Colombia.
▫ Regulations on FX transactions, e.g. restrictions on domestic financial deposits
in FX.
-- Semi-dollarized systems in Argentina and Peru, hyperinflations of 1989
and 1990; but not in Brazil despite its hyperinflation in early 1990s
3.2000-06 -- Further liberalization in Brazil, Colombia, Chile (FTA with U.S.), but
reversal of liberalization in Venezuela and Argentina
▫ 2004-13 -- Peru used differential RRs on deposits in dollars and short-term
external borrowing by domestic banks vs. deposits in the domestic currency
▫ 2007-08 -- Colombia used URRs before FTA with U.S.
▫ 2009-11 -- Brazil used taxes on capital inflows after the North-Atlantic crisis
5
Comparison of capital account restrictiveness of Latin America
vs Emerging Market Economies
Figure 2: Capital Account Restrictiveness in Latin America and EMEs
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
1970
1975
1980
1985
1990
LA7
1995
2000
EMEs
Source: Negative of Chinn-Ito index of capital account openness.
2005
2010
6
Capital flow regulations in Latin America
Figure 3: Capital Flow Regulations in Latin America and EMEs
.9
.9
A. Capital Inflow Regulations
.8
.8
.7
.7
.6
.6
.5
.5
.4
.4
.3
.3
.2
.2
.1
.1
1996
1998
2000
2002
2004
LA7
.9
B. Capital Outflow Regulations
2006
2008
2010
1996
1998
2000
EMEs
2002
LA7
.9
C. FX-related Regulations
.8
.8
.7
.7
.6
.6
.5
.5
.4
.4
.3
.3
.2
.2
.1
2004
2006
2008
2010
EMEs
D. Financial Sector Specific Restrictions
.1
1996
1998
2000
2002
LA7
2004
2006
EMEs
2008
2010
1996
1998
2000
2002
LA7
2004
2006
2008
2010
EMEs
Source: Updated by Erten and Ocampo (2013) with data from Schindler (2009) and Ostry et al. (2012).
7
Lessons from capital account liberalization and regulation
• Surges in international capital flows generate pressure to adopt procyclical macroeconomic management and to liberalize capital
account and financial regulations, with large destabilizing effects:
▫ Both the liberalization of the 1970s/early-1980s and that of the
1992-97 ended up in major crises.
• However, not all booms end up in crises: The critical issues are
current account deficits and associated currency
appreciation.
▫ Reduction of external debts and accumulation of reserves serve as
additional buffers against capital flow volatility.
▫ The domestic counterpart of the current account deficit is
important: the experience of the Southern Cone during the first boom and of
a broader group of countries during the second was problematic, since
external financing was essentially consumed.
• Maintaining some capital account regulations to directly
manage capital flow volatility is important.
▫ Brazil, Chile, Colombia and Peru used some of these tools effectively.
▫ But these regulations should be used as a complement, not as a substitute
for domestic financial regulations – in some cases, their use as a
substitute has made crises unavoidable and more severe.
8
Current conditions in Latin America: what can we
expect?
 The recent boom in external financing generated a strong recovery
of investment, for the first time since the boom of the 1970s.
 An additional strength was the reduction in external debt ratios,
both gross and net of foreign exchange reserves:
• More macroeconomic policy autonomy.
• Better access to external financing
 But Latin America spent –in fact, overspent— the terms of trade
boom
 Significant vulnerability to the deterioration of the terms of trade…
 … and therefore to the Chinese slowdown.
 However, so far, access to financing has continued to be good:
 Almost unaffected by successive euro crises
 Marginally so by FED tapering
 Somewhat more by the fall in commodity prices.
9
Investment as a share of GDP
Figure 4: Latin America Investment ratio, 1965-2013
(2000 prices)
26%
25%
24%
23%
22%
21%
20%
19%
18%
17%
16%
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
15%
Source: ECLAC
10
External debt as a share of GDP
External Debt (gross and net) as % of GDP
40%
35%
30%
25%
20%
15%
10%
5%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Debt
Net of foreign exchange reserves
Source: Authors’ estimates based on ECLAC data
11
Current account balance has deteriorated since 2002
when adjusted by terms of trade
Current account balance, adjusted by the terms of trade (% of GDP)
3.0%
1.0%
-1.0%
-3.0%
-5.0%
-7.0%
Current account balance
Source: Authors’ estimates based on ECLAC data
Adjusted by the terms of trade
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-9.0%
12
But, so far, access to external financing looks good (1)
25.0
Latin American bond emissions, 2003-Jun 2015
(billion dollars)
20.0
15.0
10.0
5.0
0.0
Monthly
Source: ECLAC
Five-months moving average
4/1/1997
7/1/1997
10/1/1997
1/1/1998
4/1/1998
7/1/1998
10/1/1998
1/1/1999
4/1/1999
7/1/1999
10/1/1999
1/1/2000
4/1/2000
7/1/2000
10/1/2000
1/1/2001
4/1/2001
7/1/2001
10/1/2001
1/1/2002
4/1/2002
7/1/2002
10/1/2002
1/1/2003
4/1/2003
7/1/2003
10/1/2003
1/1/2004
4/1/2004
7/1/2004
10/1/2004
1/1/2005
4/1/2005
7/1/2005
10/1/2005
1/1/2006
4/1/2006
7/1/2006
10/1/2006
1/1/2007
4/1/2007
7/1/2007
10/1/2007
1/1/2008
4/1/2008
7/1/2008
10/1/2008
1/1/2009
4/1/2009
7/1/2009
10/1/2009
1/1/2010
4/1/2010
7/1/2010
10/1/2010
1/1/2011
4/1/2011
7/1/2011
10/1/2011
1/1/2012
4/1/2012
7/1/2012
10/1/2012
1/1/2013
4/1/2013
7/1/2013
10/1/2013
1/1/2014
4/1/2014
7/1/2014
10/1/2014
1/1/2015
4/1/2015
7/1/2015
13
But, so far, access to external financing looks good (2)
Latin America: Spreads and Yields of Soverign Bonds, 1997-2015
20
18
16
14
LATAM Spreads
LATAM Yields
12
10
8
6
4
2
0
Source: JPMorgan
LATIN AMERICA’S LESSONS FROM
CAPITAL ACCOUNT LIBERALIZATION
José Antonio Ocampo
Columbia University