Second, despite the steps reported above and some lively academic literature on financial contagion over the last two decades, systemic risk analysis and research is far less advanced than that of monetary policy, for example. There are no established frameworks that can be taken “straight off the shelf”. Having said that, let me describe briefly the concept of systemic risk. Systemic risk was defined by the G10 in 2001 as “… the risk that an event will trigger a loss of economic value or confidence in, and attendant increases in uncertainty about, a substantial portion of the financial system that is serious enough to quite probably have significant adverse effects on the real economy.” 6 In simpler terms, it is the risk that the failure and distress of a significant part of the financial sector reduces the availability of credit, which in turn may adversely affect the real economy. Interestingly, this notion of systemic risk is quite similar to the definition of financial stability that the ECB uses in its Financial Stability Report, underlining the fact that our financial stability work has always had a macro-prudential orientation. Our working definition describes financial stability as a “condition in which the financial system – comprising of financial intermediaries, markets and market infrastructures – is capable of withstanding shocks and the unravelling of imbalances, thereby mitigating the likelihood of disruptions in the financial intermediation process which are severe enough to significantly impair the allocation of savings to profitable investment opportunities”.
Globally, actual and expected demand have increased, output has been contained and inventories have seen some depletion. The baseline scenario of this Report adjusts the projection for the average price of Brent and WTI upwards, placing it at around USD 59 and USD 56 per barrel in 2018 and 2019. The combined effect of higher copper and oil prices and adjustments in the prices of other exports and imports have led to an improvement in the terms of trade, particularly this year. Thus, considering the period 2017-2019, the terms of trade will accumulate an increase of around 10%, which compares with the 7% estimate of last September. Turning to our activity and demand projections, the baseline scenario assumes no major changes from September. This year, the economy will grow 1.4%, inside the range expected in September. For 2018, the growth projection in the 2.5% to 3.5% range is maintained. Part of the improvement with respect to 2017, particularly during the first half of the year, owes to the low comparison base of the mining sector. This same scenario assumes that non-mining GDP will have a more paced recovery. The gradual return to higher GDP expansion rates leans on a favorable external scenario, the end of the adjustment of mining and housing investment, the absence of significant macroeconomic imbalances and a clearly expansionary monetary policy stance. A working assumption is that in 2018 the economy will receive a fiscal impulse in accordance with the approved budget.