THE EFFECTS OF THE INTERNATIONAL FINANCIAL

CRISIS IN LATIN AMERICA AND THE CARIBBEAN

Alicia BárcenaExecutive Secretary, ECLAC

Meeting of the Regional Coordination MechanismSantiago de Chile, 03 November 2008

CONTENTSOrigin of the international financial crisisBail-out and the response of central banksEffects on the real economy and on long runproductivity growthFinancial contagion and the effects on LatinAmerica and the CaribbeanPolicy challengesFinal remarks

THE HYPOTHESIS: THE COMPONENTS OF THE CRISIS ARE A MIX OF INCENTIVES AND POLICIESExcessive risk-taking and remuneration packages in theprivate banking system related to subprime mortgage market Expansionary monetary policy by the Federal Reserve Bank and industrialized countries (except Europe) forextended periods of time. Real interest rates are currently negativePersistent macroeconomic imbalances in industrialzedeconomiesInnovations in financial markets with complex instrumentswithout transparencyInadequate prudential regulationInsufficient margins of safety

CENTRAL BANKS STARTED PROVIDING MASSIVE AMOUNTS OF LIQUIDITY TO THE INTER-BANK MARKETS AND, ONCE THAT PROVED NOT SUFFICIENT, BAIL-OUT PACKAGES WERE ADOPTED THROUGHOUT THE DEVELOPED WORLD

The bail-out packages in the Euro area include interbank lending guarantees by several countries (US$ 546 billion in Germany; US$ 435 billion in France; US$ 136 billion in Spain). Britain will guarantee credit up to US$ 340 billion.

Total liquidity provision and bail-out packages, 14-Sep to 20-Oct 2008(Trillions of USD)

Source: ECLAC, on the basis of information of the IMF, World Bank and international press.

0.7 + 3.60.7 + 3.6trilliontrillionGermanyGermany

FranceFranceSpainSpainIrelandIreland

••CapitalizationCapitalization••Injections of liquidityInjections of liquidity••Interbank credit guaranteesInterbank credit guarantees

Country Liquidity usedTotal rescue

packagesUnited States 1.37 4.30

European Union 1.63 2.4215 euro zone countries 1.16 1.56United Kingdom 0.46 0.87Japan 0.12 …

Others 0.05 …Total 3.17 6.72

THE TRANSMISSION CHANNELS

Financialcontagion Remittances

Changes inrelativeprices

Externaldemand

Realeconomy

Long run productivity growth

Cycle of the financial crisis

Housingmarketbubble

Mortgagesecuritization

+Developments

In financialderivatives

Creditcrunch

Realeconomy

Balance-sheetsof financialinstitutions

Liquidityproblems

SMEsSMEsWorkersWorkersConsumersConsumersInvestorsInvestors

Long run productivity growth

Annual GDP growth rates(In percentage points)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

MundoEstados UnidosUnión EuropeaJapón

Source: ECLAC, on the basis of information of the IMF.

forecast

Projections for 2009…… recession

Source: ECLAC, on the basis of information from Bloomberg.

FINANCIAL CONTAGION REACHED EMERGING AND DEVELOPING ECONOMIES AND LAC

CHANGE OF PRICE INDICES OF SELECTED STOCK EXCHANGES(Percentage change between December 2007 and average of first half of October 2008)

-28,1%-30,1%

-34,9% -35,4% -35,3%

-25,7%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%USA (Dow Jones)

United Kingdom(UKX) Japan (NKY)

Argentina(MERVAL) Brazil (IBOV)

Mexico(MEXBOL)

CONTAGION DOES NOT SEEM TO BE CORRELATED WITH FUNDAMENTALS

500

600

700

800

900

1000

1100

1200

1300

1400

9/2/08

9/9/08

9/16/0

8

9/23/0

8

9/30/0

8

10/7/

0810

/14/08

150

170

190

210

230

250

270

290

310

330

Argentina (left)Chile (right)

200

250

300

350

400

450

500

550

600

9/2/08

9/9/08

9/16/0

8

9/23/0

8

9/30/0

8

10/7/

0810

/14/08

500

750

1000

1250

1500

Brazil (left)

R. B. Venezuela (right)

EMERGING MARKETS BOND INDEX EMBI+, January-October 2008

INCREASING RISK PERCEPTIONS TOWARDS EMERGING ECONOMIES DID NOT LEAVE OUT LATIN

AMERICAEMERGING MARKETS BOND INDEX EMBI+ AND SELECTED LATIN AMERICAN COUNTRIES’ EMBI+

INDICES, 2007-2008

100150200250300350400450500550600650700

Jan-

07

Feb-

07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Aug

-08

Sep

-08

Oct

-08

EMBI+ Argentina Brazil Colombia Mexico Peru Venezuela Trendline

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

Guy

ana

Hai

ti

Hon

dura

s

Jam

aica

El S

alva

dor

Nic

arag

ua

Gua

tem

ala

Gra

nada

Bol

ivia

Bel

ize

Dom

inic

an R

epub

lic

Ecu

ador

Par

agua

y

Per

u

Mex

ico

Col

ombi

a

Cos

ta R

ica

Pan

ama

Trin

idad

and

Tob

ago

Bra

zil

Uru

guay

Chi

le

Arg

entin

a

Ven

ezue

la (B

ol. R

ep. o

f)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

Millions of dollars Percentage of GDP

IN MEXICO, CENTRAL AMERICA AND THE CARIBBEAN WORKERS’ REMITTANCES ARE A

MAJOR SOURCE OF INCOME

23 979 million

LATIN AMERICA AND THE CARIBBEAN: WORKERS’ REMITTANCES, 2007(Millions of dollars and percentages of GDP)

DOWNWARD TREND OF REMITTANCESLATIN AMERICA AND THE CARIBBEAN: REMMITANCES GROWTH RATE

(Quarter-on-quarter growth rate)

Source: ECLAC, on the basis of national official information.

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan-

06

Mar

-06

May

-06

Jul-0

6

Sep

-06

Nov

-06

Jan-

07

Mar

-07

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Guatemala

El Salvador

R. Dominicana

ECONOMIC OUTLOOK OF LATIN AMERICA BEFORE THE FINANCIAL CRISIS (2003-2007)

Per capita GDP growth was over 3%

The unemployment rate went down from 11% to 7.7%

The quality of employment improved

The region had broad access to external financing due to low interest rates and low sovereign risk

The global demand of commodities increased sharply

The terms of trade increased 20% in the region: the growth rates between 2003 and 2007 were 6% in Mexico, -7% in Central America and 33% in South America

Current account balances shifted to surpluses or significantly lower deficits

Increased flexibility in exchange rates

Foreign exchange liquidity buffers have increased substantially

Net public sector borrowing requirements are lower

MACROECONOMIC BALANCES ARE IN BETTER SHAPE THAN BEFORE

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

S - I

G - T

CAB

LATIN AMERICA AND THE CARIBBEAN: Current Account Bal., Fiscal Deficit and Excess Private Saving(Percentages of GDP)

Although the situation differs widely across countries …

… AND THE SAME IS TRUE FOR PUBLIC FINANCES

10

12

14

16

18

20

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Fisc

al R

even

ues(

% P

IB)

102030405060708090100110120130140150

Uni

t Val

ue In

dex

of E

xpo

(200

0=10

0)

Fiscal Revenues Export Prices

LATIN AMERICA AND THE CARIBBEAN: Export Prices and Fiscal Revenues

IN 2001-2007, THE INCREASE IN GOODS EXPORTS WAS DUE MAINLY TO PRICE RISES. THIS TREND HAS CONTINUED IN 2008, WITH

VOLUME GROWING (2.0%) BELOW ITS HISTORIC LEVEL (5.5%).2001-2007 (Annualized rates)

2.3

2.9

7.9

9.1

9.7

12.8

15.5

16.7

5.9

3.1

4.9

6.5

13.2

1.7

14.6

3.9

6.9

10.1

5.5

5.7

9.2

9.2

8.7

19.7

-0.2

7.8

5.7

5.2

4.1

3.7

3.7

3.0

3.4

2.9

1.5

6.7

11.4

10.9

-2.3

6.3

-5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0

Costa Rica

Panama

El Salvador

Honduras

Haiti

Nicaragua

Dominican Republic

Uruguay

Guatemala

Paraguay

Mexico

Argentina

Brazil

Latin America and the Caribbean

Colombia

Ecuador

Bolivia

Peru

Chile

Venezuela (Bol. Rep. of)

Price

Quantum

4.0

22.0

22.0

25.2

27.0

30.0

43.0

5.8

5.5

2.7

2.7

1.8

11.3

10.0

9.0

12.3

4.0

2.4

7.7

2.0

56.0

0.0

21.0

20.0

15.0

13.0

12.0

12.0

10.0

12.0

10.0

1.0

2.3

1.0

1.0

3.6

0.9

-10.0

-3.2

4.9

-20.0 0.0 20.0 40.0 60.0

Haiti

Dominican Republic

Costa Rica

Panama

El Salvador

Honduras

Guatemala

Mexico

Nicaragua

Chile

Peru

Colombia

Latin America and the Caribbean

Paraguay

Uruguay

Argentina

Brazil

Bolivia

Ecuador

Venezuela (Bol, Rep. of)

Price

Quantum

2008 (Annual variation)

Source: ECLAC, on the basis of official information

SOME COUNTRIES THAT HAD ATTAINED LARGE TRADE SURPLUSES HAVE SEEN THEM DECREASE WHILE OTHERS HAVE SEEN THEIR DEFICITS RISE. THE TERMS OF TRADE IMPROVED IN 2008 AND WILL DETERIORATE IN 2009

LATIN AMERICA: TRADE BALANCE, 2007- 2008(Millions of dollars)

-20,000 -10,000 0 10,000 20,000 30,000 40,000 50,000 60,000

Mexico

Dom. Republic

Guatemala

Costa Rica

El Salvador

Panama

Honduras

Nicaragua

Haiti

Uruguay

Paraguay

Colombia

Bolivia

Ecuador

Peru

Argentina

Chile

Brazil

Venezuela

2007

2008

-20 -10 0 10 20 30 40 50

Rep. Dominicana

Haití

Costa Rica

Nicaragua

Chile

Panamá

El Salvador

Honduras

Guatemala

Peru

Uruguay

Brasil

Mexico

Paraguay

América Latina y el Caribe

Colombia

Bolivia

Argentina

Ecuador

Venezuela (Rep. Bol)

LATIN AMERICA: TERMS OF TRADE 2008(Annual percentage change)

Source: ECLAC, on the basis of national official information.

WHAT WILL THE EFFECTS BE IN LATIN AMERICA AND THE CARIBBEAN?

The effects in the countries will be different according to their position in terms of:

Solvency of the financial systemSurplus or deficit in operations (current and financial) with the rest of the worldFiscal sustainability and public debt levelInflation rate and expectationsRelative importance of remittancesDegree of diversification of export marketsNet external trade position in terms of commodities (net exporter or net importer of food and energy)Degree of diversification of productive structureTechnological capabilities

MEASURES TAKEN BY LAC TO ASSURE PAYMENTS AND LIQUIDITY

Central banks have intervened directly to increase liquidity Concrete measures include:

nationalization of the private pension system in Argentina, issue of credit lines in USD for exporters in Brazil, purchase of off-shore deposits and lending the resulting funds to domestic financial institutions in Chile, lifting capital controls in Colombia increasing public spending in infrastructure in Mexico.

Financial institutions in LAC do not hold the kind of derivative instruments but there is lack of (mainly USD) liquidity that arecausing problems in the external financing of big firms The lesson —yet to be learned—is that capital markets complementnot substitute the banking system

WHAT WILL THE EFFECTS BE IN LATIN AMERICA AND THE CARIBBEAN?

More resilient so far but sharper economic slowdown (3%)No decoupling from cyclical deceleration from global Stag-Deflation (stagnation/recession plus deflation)Weakening commodity pricesScarcity of external financingHigher interest rates and unemployment rateVolatility, uncertainty and higher capital costs will affect investmentMicroeconomic fundamentals are severelycompromised

FINAL REMARKS

Crises are opportunities to challenge conventional forms of thinkingFocus is needed in microeconomic consequences of volatility and instability in prices to ensure long run growth and productivityRelevance of industrial policies and state interventions is needed and a new mix of gradualism and interventionism is requiredIntrarregional trade can be an engine of growthSocial expenditure should be countercyclical both nationally and internationally

THE EFFECTS OF THE INTERNATIONAL FINANCIAL CRISIS IN LATIN

AMERICA AND THE CARIBBEAN

Alicia BárcenaExecutive Secretary, ECLAC

Meeting of the Regional Coordination MechanismSantiago de Chile, 29 October 2008