Post on 29-Jan-2016
description
How Vulnerable is Central America to Shocks From
the South?
How Vulnerable is Central America to Shocks From
the South?
Inter-American Development Bank
10-25-0210-25-02
Outline
• Central America and previous capital markets crises
• How has the region responded to the current crisis?
• How vulnerable is the region to capital markets disturbances?
Outline
• Central America and previous capital markets crises
• How has the region responded to the current crisis?
• How vulnerable is the region to capital markets disturbances?
CAC7 - Bilateral Real Exchange Rate with US (Dec. 1995=100)
Source: WEO (Sept 2002) - forecast for 2003 from EIU Sep- 2002
80
85
90
95
100
105
110
115
120
Jan-
94
Jul-9
4
Jan-
95
Jul-9
5
Jan-
96
Jul-9
6
Jan-
97
Jul-9
7
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
CRI DOM SLV GTM HND PAN NIC
Mexican Crisis Asian Crisis Russian Crisis Argentina Crisis
Real Exchange Rate Depreciation(vis-à-vis the US dollar, Jun. 2002 vs. Jan. 1997)
-30 -20 -10 0 10 20
0.09
2.82
3.21
6.88
8.3
11.57
23.23
38.53
47.14
117.75
223.37
-19.84
-19.11-5.52
-25 25 75 125 175 225 275
MEX
HND
VEN
SLV
DOM
GTM
CRI
PAN
NIC
PER
COL
CHL
BRA
ARG
Source: IFS/IMF
15
20
25
30
35
40
45
50
CAC6- Lending Interest Rates
Source: IFS (IMF). *The values do not include El Salvador
CAC7 Average
LAC7 Average
CAC7 Median
LAC7 Median
CAC-7 Capital Flows (billions of US dollars)
-2
-1
0
1
2
3
4
5
6
1997 1998 1999 2000 2001 2002f
Source: WEO (Sept 2002)
Includes Errors and Omissions
FDI
Non FDI
Errors & Omissions
Total Capital Flows+
Errors & Omissions
CAC-7 Capital Flows (% of Total Capital Flows+Errors & Omissions, Average 1997-2002f)
-1
-0.5
0
0.5
1
1.5
CRI DOM SLV GTM HND NIC PAN
Source: EIU (Sept 2002)
FDI Non FDI Errors & Omissions
CAC7 Current Account Balance(% of GDP)
-3.9%
-5.2%
-4.3%
-5.2%
-4.6% -4.5%-4.2%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%19
97
1998
1999
2000
2001
2002
f
2003
f
Source: WEO (Sept 2002) - forecast for 2003 from EIU Sep- 2002
-25.00% -20.00% -15.00% -10.00% -5.00% 0.00%
CAC7- Current Account Balance (as a % of GDP, 2001)
Source: EIU
SLV
DOM
CRI
PAN
HON
GTM
NIC
2.5
3
3.5
4
4.5
5
5.5
6
30
35
40
45
50
55
60
651997
1998
1999
2000
2001
2002 f
LAC7CAC7
Private Capital Flows(US$ billions)
Source: WEO(Dec 2001).
LAC 7 = Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
CAC 7 = Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua Panama.
Outline
• Central America and previous capital markets crises
• How has the region responded to the current crisis?
• How vulnerable is the region to capital markets disturbances?
Spreads w.r.t. US Treasury Bonds
Source: Bloomberg
150
200
250
300
350
400
450
500
550
600
1/2
/01
3/2
/01
5/2
/01
7/2
/01
9/2
/01
11/2
/01
1/2
/02
3/2
/02
5/2
/02
7/2
/02
9/2
/02
400
500
600
700
800
900
EM
BI
+
DOM SLV GTM CRI PAN EMBI+
Gross Domestic Product(yoy % change)
Source: EIU (Oct 2002)
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%19
92
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
f
2003
f
CAC 7 LAC 7
Gross Domestic Product(yoy % change)
Source: EIU (Oct 2002)
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%19
92
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
f
2003
f
CAC 7 USA
Econometric Evidence: CAC7 and U.S.A. GDP Growth
Dependent variable: Cyclical component of CAC7 GDP growth (1) (2)
Cyclical component of U.S.A. GDP growth 0.298 0.916
(2.19) (2.12)
Terms of trade 0.005 0.023
(0.68) (1.68)
International interest rate -0.064 -0.574
(-0.81) (-1.64)
LEI spread 0.001
(0.50)
Observations 153 70
Number of countries 7 7
Fixed effects YES YES
(1) Data from 1980 to 2001
(2) Data from 1992 to 2001
Exports + Imports (% GDP)Exports + Imports (% GDP)(2001)(2001)
0
10
20
30
40
50
60
70
80
90
CR
I
NIC
DO
M
HN
D
SL
V
CH
L
GT
M
PA
N
VE
N
ME
X
CO
L
PE
R
BR
A
AR
G
Source: WEO (Sept 2002) and RES/BID estimatesSource: WEO (Sept 2002) and RES/BID estimates
CAC7 - Export Composition according to destiny (2001)
Source:EIU
0%10%20%30%40%50%60%70%80%90%
100%
CR
I
DO
M
SLV
GT
M
HN
D
NIC
PAN
US Mexico CAC7
CAC-7 Remittances(billions of US dollars)
0
1
2
3
4
5
61990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Capital Flows + Errors y Omissions
Remittances
CAC-7 Remittances(as a % of FDI Capital Flows, for 2001)
Source: WEO, Central Banks and RES estimates
24
151
713479
261158
3
1
10
100
1000
CRI DOM SLV GTM HND NIC PAN
Total Capital Flows and Remittances (% of GDP) Average 1997-2001
0
5
10
15
20
25
NIC PAN GTM CRI HND DOM SLV
Capital Flows / GDP Remittances / GDP
Source: WEO (Sept 2002), Central Banks and RES estimates
Capital flows include errors and omissions
Outline
• Central America and previous capital markets crises
• How has the region responded to the current crisis?
• How vulnerable is the region to capital markets disturbances?
CAC-7 Capital Flows* (as a % of GDP, 5 year average as of 2001)
Source: WEO & EIU* Includes Errors & Omissions
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%C
RI
DO
M
SL
V
GT
M
HN
D
NIC
PA
N
AR
G
BR
A
CH
L
CO
L
ME
X
PE
R
VE
N
Public Sector Balance (% of GDP)
Source: EIU (Sept 2002)
-20% -15% -10% -5% 0% 5%
2002f
2001
2000
1999
CRI
DOM
SLV
HON
NIC
GTM
PAN
Fiscal Sustainability
Source: Own estimates. Data from EIU Notes:/* Refers to geometric average of growth rates during the last decade
Observed Public Debt (% of GDP)
Real Interest Rate
Real GDP Growth *
Observed Primary Surplus (% of GDP)
Req. Primary Surplus (% of GDP)
CRI
48.9
5.98
4.8
-5
0.54
DOM
24.3
4.49
6
0
-0.35
SAL
36.89
5.12
4.26
-3.8
0.30
GTM
28.12
4.56
3.7
-1.5
0.21
HON
63
4.02
3
-5.9
0.62
NIC
202.9
1.62
3.5
-15.8
-3.78
PAN
75.6
5.67
3.38
-2.8
1.68
What makes countries vulnerable to costly adjustments?
• Low supply side openness
• High indebtedness
• High financial mismatches– Public Sector– Private Sector
• High financial exposure to the public sector
Supply-Side Openness Coefficient (Supply of Tradables - Interest Payments / Absorption of Tradables))
0.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9
0.95
1
SL
V
CH
L
DO
M
HO
N
CR
I
PE
R
CO
L
PA
N
ME
X
AR
G
GT
M
VE
N
BR
A
NIC
Source: WEO (Sept 2002) and RES/BID estimatesSource: WEO (Sept 2002) and RES/BID estimates
Source: EIU .(Median)
CAC7:Public Debt (% of GDP)
0
10
20
30
40
50
60
1995 1996 1997 1998 1999 2000 2001 2002f 2003f
Total Public Debt External Public Debt
Source: EIU and Central Banks.(Median)
CAC7 & LAC7:Public Debt (% of GDP)
0
10
20
30
40
50
60
1995 1996 1997 1998 1999 2000 2001 2002f
CAC7 Total Public Debt CAC7 Ext. Public DebtLAC7 Total Public Debt LAC7 Ext. Public Debt
Currency Composition of Public Sector Debt (2001)
[eD*/(D + eD*)]
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%S
LV
PA
N
AR
G
PE
R
HO
N
DO
M
NIC
GT
M
VE
N
ME
X
CO
L
BR
A
CR
I
CH
L
Source: Central Banks and EIU
Financial Mismatch of the Public Sector [(D/eD*)/(Y/eY*)] (2001)
0
0.2
0.4
0.6
0.8
1
1.2
CR
I
DO
M
CH
L
VE
N
BR
A
ME
X
HO
N
CO
L
NIC
GT
M
PE
R
AR
G
PA
N
SL
V
Source: Central Banks and EIU
0 10 20 30 40 50 60 70 80 90
Guatemala
Dominican Rep.
Honduras
Costa Rica
Nicaragua
Deposits in FC/DepositsLoans in FC/Loans
Deposits and Loans in Foreign Currency
0 10 20 30 40 50 60 70 80 90
Honduras
Guatemala
Costa Rica
Nicaragua
Loans in FC to non-tradable sector/Loans
0 5 10 15 20 25 30 35
Honduras
Guatemala
El Salvador
Costa Rica
Nicaragua
Investment in Public Sector/Assets (loans to public sector are not considered)
Capital Flows Vulnerability: A summary
= High
Financial Mismatch of the Public Sector
Public Debt (% of GDP)
Financial System exposure to the Public Sector
= Medium = Low
DOM GTMCRI SLV HON NIC PAN
?Financial Mismatch of the Private Sector
Source: Central Banks and EIU
? ?
Concluding Remarks
• Central America has not been hurt by previous capital markets crisis
• The current crisis in South America is not an exception
• Despite the fact that remittances from the US help cushion crises, there are several issues of concern in some countries.
• The major source of concern should be the behavior of the US economy.
How Vulnerable is Central America to Shocks From
the South?
How Vulnerable is Central America to Shocks From
the South?
Inter-American Development Bank
10-25-0210-25-02