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
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