What does the Global Credit Crisis Mean for Poor Countries?

Helmut Reisen, Head of ResearchOECD Development Centre

20 October 2008

What Does the Global Credit Crisis Mean for Poor Countries?

DAC Network on Poverty Reduction, 20th October 2008

OECD Development Centre

1. Crisis & Contagion

2. Global Slump? Asian Drivers to the Rescue?

3. ‘Good’ Local Fundamentals & Vulnerabilities

4. Private Finance for Development

5. Multilateral & Bilateral ODA

6. Aid Architecture

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What Does the Global Credit Crisis Mean for Poor Countries?


Crisis & Contagion

• Crisis of global debt deleveraging, ultimately breakdown of money & interbank markets

• With slight delay, contagion to poor countries

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Crisis & Contagion

Three channels of contagion:

1. Pure contagion (risk aversion, VAR, Basel II).

2. Financial contagion (channels: bank assets/deposits, balance-sheet mismatches, debt characteristics and the share of foreign investors in domestic equity markets).

3. Real/trade contagion (global growth =>trade account, export volumes and prices, remittances, M&A). For PovNet focus crucial.

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Global slump?

Asian drivers to the rescue?

• IMF WEO ‘08: Global growth down to 3% in 2009 from >5% in 2006

• IMF WP/08/224: avg. cumulative output loss of banking crisis = 4.5% GDP

• Rising global growth share, yet Asian Drivers not big enough

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Global Slump? Asian Drivers to the Rescue?

Lower global growth

• lower food & oil prices

• lower headline inflation

• more monetary scope

• lighter M & X

• lower tax receipts

• lower remittances

• lower savings

• lower output & Ers

• higher debt ratios

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Food & Oil SubsidiesHow Much Scope for Cuts?

• UNDP, G24, BMZ: First food & fuel crisis, now on top global credit crisis => more ODA needed.

• Yet no sound evidence on ‘fundamental’ fuel & food prices in deleveraged world.

• Current redemptions lead to undershooting prices.

• Still, possible scope for cuts & reorientation of fuel & food subsidies.

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Dismal Science: ‘Good’ Local Fundamentals & Vulnerabilities

• Higher FX reserves => can & do melt rapidly.

• Not only quick ratio counts in open markets.

• Debt/Y ratios: endogenous to g & ERs; => raw material (rm) prices crucial.

• Fiscal balances: taxes often pegged on X, C & rm.

• Growth: highly dep on low spreads & high rm prices.

Quick ratio below one in :

• DRC, Cote d’Ivoire, Eritrea, Gambia, Guinea, Guinea-Bissau, Kenya, Lesotho, Niger, Rwanda, Sao Tome and Principe, Swaziland, and Zambia; Belarus, Ecuador, Jamaica, and Sri Lanka.

• Foreign debt mix (share of private non guaranteed liabilities from 60 to 85 per cent of total debt outstanding): Eastern Europe, CIS, HIPCs Bolivia, Zambia; India.

• Carry trades unravel.

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Private Finance for Development

• 2005-08 avg net flows EM:

• portfolio equity flows 8%,

• FDI 35% (mostly M&A),

• loans from banks (32%),

• and non-banks (26%), plus charities.

• DAC private flows 2006: 186 bn $.

Impact of deleveraging:

• Short term: emerging-market bond finance and net syndicated bank loans abruptly halted in III/08. Trade finance blocked.

• Mid term: push 2/3; pull 1/3 =>with global growth down, flows down.

• ‘Hunger for yield’ satisfied.

• Time to rebuild bank capital.

• FDI picks up first post-crises.

• Helped by SWFs (no debt leverage)?

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Multilateral ODA:The Comeback Kids?

Past: Official lenders were crowded out by private (% total lending)

Bn $ One-year forward commitment capacity 8/08

Committed , latest

Potential loan book extension

IMF 201 8 193

IDA IDA 15: 41.6Internal:16.5Sum: 58

11.2 47

Other:AfDBADBIDB

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Bilateral ODA - some evidence:- No significant Y-dependence

- But mind the impact of deep slumps

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Aid Architecture

• Ask yourself: How looks the aid architecture in a deleveraged world? And how would you like it?

• Representation, inclusiveness, overlap: Do we need to build from scratch?

• => Hints: use development banks more, with new soft-loan features (AfD); lever FX reserves.

• FX reserves non-OECD: 5000 bn$; 2% = 100; ratio loan/ IFIs capital = 2.5; => 250 bn $ soft loans.

• IMF surveillance, biased (Asian view)?

• OECD, FSF, etc. standards: Can international soft law bite?

What does the Global Credit Crisis Mean for Poor Countries?

Economy & Finance

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