The Impact of Global Financial The Impact of Global Financial Crisis on LICs:Crisis on LICs:

Preliminary Assessment Preliminary Assessment

Hugh BredenkampHugh Bredenkamp Strategy, Policy, and Review DepartmentStrategy, Policy, and Review Department

International Monetary FundInternational Monetary Fund

December 2008December 2008

OverviewOverview

LICs are facing a “double blow”: already weakened LICs are facing a “double blow”: already weakened from the past year’s high food and oil prices, they may from the past year’s high food and oil prices, they may be hit hard by the financial crisis and global slowdown be hit hard by the financial crisis and global slowdown

Transmission channels and vulnerabilities will vary Transmission channels and vulnerabilities will vary across countriesacross countries

Need for global stimulus, applied selectivelyNeed for global stimulus, applied selectively

Case for scaling up aid even stronger than beforeCase for scaling up aid even stronger than before

Background: A Decade of ProgressBackground: A Decade of Progress

Growth (8½%, on avg., in ’07)Growth (8½%, on avg., in ’07)

Inflation (6½%) Inflation (6½%)

Fiscal deficits (5¼%) Fiscal deficits (5¼%)

Reserves Reserves

(5¾ months of imports) (5¾ months of imports)

Debt (30% of GDP)Debt (30% of GDP)

For LICs, better policies, global growth, and debt relief For LICs, better policies, global growth, and debt relief had resulted in: had resulted in:

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1997 2002 2007

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International reserves in months of imports

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Real GDP growth (in percent, left axis)

Food and Fuel crisis Food and Fuel crisis LICs weakened LICs weakened

going into Financial Crisisgoing into Financial CrisisDespite the recent ease, fuel prices remain historically high...

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Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Sep-08

Energy (deflated by world CPI)Food (deflated by world CPI)Series5Series2

October 2008 WEO

September 2008 WEO

September 2008 WEO

October 2008 WEO

Food and Fuel crisis Food and Fuel crisis LICs weakened LICs weakenedgoing into Financial Crisis (cont’d)going into Financial Crisis (cont’d)

In September, 33 LICs were identified as vulnerable In September, 33 LICs were identified as vulnerable (with reserves falling below 3 months in 2008)(with reserves falling below 3 months in 2008)

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Food Fuel

Jan 07-Apr 08

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The impact of prices on the BOP of net food- and fuel-importing LICs has continued to mount, though only marginally recently...

BoP Shock(In percent of GDP)

Fall 2008: Severe Financial CrisisFall 2008: Severe Financial Crisis

Global growth to 3%Global growth to 3%

Oil price to $68Oil price to $68

Nonfuel commodity Nonfuel commodity prices prices

Food prices Food prices

Recovery begins late Recovery begins late 20092009

October 2008 WEO scenario for 2009….October 2008 WEO scenario for 2009….

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2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4

Quarterly World Real GDP Growth (In percent)

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6.0 World Real GDP Growth 1980-2009(In percent)

Effects on LICs: Direct Financial ChannelsEffects on LICs: Direct Financial Channels

Immediate contagion has been limited:Immediate contagion has been limited:– few linkages few linkages – illiquid marketsilliquid markets– capital controlscapital controls

Reduced inflows into domestic marketsReduced inflows into domestic markets– Uganda, South AfricaUganda, South Africa

Parent banks restricting financing, capital withdrawalParent banks restricting financing, capital withdrawal– Kyrgyz RepublicKyrgyz Republic

Hardened terms on foreign borrowingHardened terms on foreign borrowing– New issues postponed by Kenya, GhanaNew issues postponed by Kenya, Ghana

Reduced availability of trade creditReduced availability of trade credit

Adverse effects on confidenceAdverse effects on confidence– Stock markets down: Kenya, Mauritius, Nigeria, Stock markets down: Kenya, Mauritius, Nigeria,

South AfricaSouth Africa– Exchange rate pressures Exchange rate pressures depreciation depreciation

against USD: Kenya, Mauritius, South Africa, Uganda, against USD: Kenya, Mauritius, South Africa, Uganda, ZambiaZambia

Effects on LICs: Direct Financial Channels Effects on LICs: Direct Financial Channels (cont’d)(cont’d)

Global growth Global growth LIC growth : LIC growth :

1 % global growth 1 % global growth 0.3 % to 0.5 % in SSA growth 0.3 % to 0.5 % in SSA growth

TradeTrade

Slowdown in advanced and middle-income countries, Slowdown in advanced and middle-income countries, plus contraction of trade creditplus contraction of trade credit

lower export volumes for LICslower export volumes for LICs

Reduced export prices for oil and commodity Reduced export prices for oil and commodity exportersexporters

Spillovers from Global RecessionSpillovers from Global Recession

Spillovers from Global RecessionSpillovers from Global Recession

RemittancesRemittancesWorkers remittances have grown rapidly ….Workers remittances have grown rapidly ….

Especially important in some countries: more than 25% Especially important in some countries: more than 25% of GDP for Lesotho; 12% for Cape Verdeof GDP for Lesotho; 12% for Cape Verde

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2000 2007

Europe and Central Asia

South and East Asia

Sub-Saharan Africa

Latin America

Remittance Flows to Developing Countries(in billions of USD)

Spillovers from Global RecessionSpillovers from Global Recession

But at least no stagflation…

Inflation is expected to recede….

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2006 2007 2008 2009

Low-Income Countries Middle-Income Countries

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2006 2007 2008 2009

October 2008 WEO

Advanced Countries

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2006 2007 2008 2009

October 2008 WEO

September2008 WEO

October 2008 WEO

September2008 WEO

September2008 WEO

Fund Advice: GlobalFund Advice: GlobalStabilize financial marketsStabilize financial markets– Continue liquidity support Continue liquidity support – Further capital injectionsFurther capital injections

Global fiscal stimulus: Global fiscal stimulus: – On the order of 2% of world GDP (growth On the order of 2% of world GDP (growth ↑ 2%)– Onus is on countries with space to expand without Onus is on countries with space to expand without

jeopardizing medium-term sustainability jeopardizing medium-term sustainability

Monetary easingMonetary easing

Avoid beggar-thy-neighbor policies (especially Avoid beggar-thy-neighbor policies (especially protectionism)protectionism)

Fund Advice: LICsFund Advice: LICsLICs should leave stimulus task to larger economiesLICs should leave stimulus task to larger economies

Some may have scope for countercyclical policy, Some may have scope for countercyclical policy, depending on:depending on:– debt situationdebt situation– availability of financingavailability of financing

Continue strengthening social safety netsContinue strengthening social safety nets

Restore inflation controlRestore inflation control

Allow exchange rates to adjustAllow exchange rates to adjust

The Need for SupportThe Need for Support

New financing needs will vary widely but could New financing needs will vary widely but could be large (fin crisis+food/fuel+MDGs)be large (fin crisis+food/fuel+MDGs)

Vital that delivery of assistance is accelerated to Vital that delivery of assistance is accelerated to avoid forced procyclical measures in LICsavoid forced procyclical measures in LICs

IMF support: PRGF (incl. augmentations) and IMF support: PRGF (incl. augmentations) and the Modified Exogenous Shock Facility (ESF):the Modified Exogenous Shock Facility (ESF):– Rapid Access componentRapid Access component– Higher accessHigher access– Fewer requirementsFewer requirements