Post on 11-Jun-2020
The impact of Sub-prime crisis on Latin America: A structural overview
Paris – February 2008
Sebastián Nieto Parra
Research Associate
OECD Development Centre
2
The Subprime Crisis and OECD countries2
US & Latin America: A new turn to a long story?3
Current Account Channel4
Overview
5
Conclusions6
Financial Channel
Objective1
3
Two core questions
• The Subprime crisis could be interpreted as an exogenousshock for Latin American economies. It is a ¨stress testing¨scenario for Latin American countries.
• What is the impact of this crisis on real sector and onfinancial sector?
• Above all, have Latin American economies improved thecredibility of economic policies during last years?
4
The Subprime Crisis and OECD countries2
US & Latin America: A new turn to a long story?3
Current Account Channel4
Overview
5
Conclusions6
Financial Channel
Objective1
5
OECD developed countries• Slowdown of the OECD developed countries in 2008. Recovery of GDP
growth would be in 2009.• Risks are on the downside scenario given financial and real factors.
6
OECD Housing Markets• Real housing investment is slowing in most countries.• The upswing in housing markets has been highly correlated across
countries.
7
The Subprime Crisis and OECD countries2
US & Latin America: A new turn to a long story?3
Current Account Channel4
Overview
5
Conclusions6
Financial Channel
Objective1
8
Latin America and US GDP• Latin American GDP growth is highly correlated to US economic growth.
However, it is not the same across Latin American countries.
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Latin American countries and US GDP
• US GDP growth exhibit higher correlation with Mexico and CentralAmerica GDP growth than with South America GPD growth.
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Latin American countries and US GDP
• In the past Latin American exposure to US recessions has beenconsiderable.
• Recessions do not have the same impact as slowdowns.
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Strong Latin America Internal Conditions
• Today Latin American Internal Demand is acting as a cushion toexternal shocks.
• Private consumption and Private Investment are important drivers ofLatin American economic growth.
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Supported by the credibility of economic policies
• Credible monetary (inflation targeting policy) and fiscal (sustainabilityof the debt) policies.
• Reduction of inflation rates and fiscal deficits during last years
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Supported by the credibility of economic policies
• Favourable external conditions have been exploited to accomplishremarkably good public debt management.
• Buybacks of external debt, international bonds in local currency,…
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Supported by the credibility of economic policies
• Excellent debt management improves the Solvency of the State andchallenges the “original sin”.
rhs
15
The Subprime Crisis and OECD countries2
US & Latin America: A new turn to a long story?3
Current Account Channel4
Overview
5
Conclusions6
Financial Channel
Objective1
16
Current Account Channel
Three determinant aspects:
1. US and Latin America trade channel (Direct)
2. Remittances (Direct)
3. China and Commodity Prices (Indirect)
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Latin American exports to US• Latin American countries’ partnership with the US is closer than for
other emerging countries.
• This has a high cost in times of recession.
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Trade channel• More than 40% of Latin American exports are going to the US.• Differences across Latin American countries are considerable:
Mexico, Venezuela, Colombia and Central American countries vs.Argentina, Chile, Brazil and Peru.
0%10%20%30%40%50%60%70%80%90%
100%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
China EU US Rest of World
Latin American exports by destination
Source: OECD Development Centre based on WITS data , 2008
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Trade channel and Industrial Production
• The result is a considerable connexion (no connexion) between US andMexican (Brazilian) industrial production.
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Remittances• Remittances represent a high proportion of recipient country GDP.• Mexico and Central American economies are the Latin American
economies more exposed to a shock of US GDP growth on remittances.
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Remittances• The volatility of Remittances is lower than for other inflows
towards developing countries.
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China and Commodity Prices• The impact of China on the World Economy is increasing. Market
participants do not anticipate a considerable slowdown of this economy.
• This is good news for Latin America given its growth trade connexion with China.
China's and India's trade with Latin America(US$ millions)
0
5000
10000
15000
20000
25000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: OECD Development Centre, Latin American Economic Outlook, 2008
Chinese Exports to LAC
Chinese Imports from LAC
Indian Exports to LAC
Indian Imports from LAC
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China and Commodity Prices• Chinese demand for Latin American commodities as well as
commodity prices are increasing. • Good news in the short term. It could be a bad news in the long
run.
China’s and India’s rising demand for Latin American commodities (US$ millions, 1998-2005)
0
200
400
600
800
1 000
1 200
1998 2001 2003 2005
Agricultural Raw Materials
Food
Ores & Metals
Source: OECD Development Centre, Latin American Economic Outlook, 2008
Commodity Prices (100 Basis Index = 1975)
0200400600800
100012001400160018002000
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
Source: OECD Development Centre, Latin American Economic Outlook, 2008
Aluminium
Copper
Petroleum
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China and Commodity Prices• There are still trade complementarities with Latin American
countries that remain today.
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Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).Source: OECD Development Centre, Latin American Economic Outlook, 2008
Trade Opportunities with China for selected countries (2000-05)
25
The Subprime Crisis and OECD countries2
US and Latin America: A long story changing?3
Current Account Channel4
Overview
5
Conclusions6
Financial Channel
Objective1
26
Financial Channel
Two determinant aspects:
• Banking System and Foreign Banks
• Capital Markets
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Local Banking Systems• Foreign banks in Latin America are more exposed to Sub-prime
Crisis than local banks. In particular US based banks.• Huge difference between Brazilian and Mexican Banks.
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Capital Markets• High correlation between global risk and Latin American
Sovereign Bond Spreads.• The impact of the Sub-prime Crisis on Sovereign Bond Spreads
has been lower than past experiences (e.g., ENRON case)
29
Capital Markets• Equity returns decreased in Latin American but remain positive
with respect to one year ago (the exception being Colombia).• The risk is on the downside given the volatility of stock markets.
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Capital Flows and Recommendations
• We have constructed the recommendations given by 12investment banks during the period 1997-2007. All of themimportant players in the emerging bond markets, i.e. marketmakers.
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Capital Flows and Recommendations
• The impact of investment banks’ recommendations on capital flows is positive and significant.
• Investment banks’ recommendations could be used as a leading indicator of portfolio allocations in emerging countries.
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Capital Flows and Recommendations
• An overweight recommendation must be compensated by anunderweight recommendation.
• Investment Banks’ recommendations remain neutral and evenpositive for some Latin American countries.
33
The Subprime Crisis and OECD countries2
US & Latin America: A new turn to a long story?3
Current Account Channel4
Overview
5
Conclusions6
Financial Channel
Objective1
34
Banks’ Economic Forecasts • Market makers’ forecasts for Latin American economies.• Latin American GPD growth remains positive and above 4,0%,
inflation is contained to within central banks’ targets (twoimportant exceptions: Argentina and Venezuela).
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Banks’ Economic Forecasts • Exchange rates are stable and there is not an important risk of
huge depreciations in 2008. Are we going towards a “softlanding” in 2009?
• With respect to the euro it is not the same story.
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Final Remarks • Latin America’s exposure to US economy is considerable given
Current Account channel (Trade and Remittances) and Financialchannel (Banking and Capital Markets) BUT the effect is differentacross countries.
• However the impact of a slowdown in the US Economy may be morereduced than in the past given :
1. Robust Internal Demand.
2. Improvement in the Credibility of Monetary and Fiscal Policies.
3. The increasing role of the rest of the Emerging World in LatinAmerica. Two decades ago, OECD countries represented 70% of theWorld GDP, today they represent “only” 55%.
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Thank you!
http://www.oecd.org/dev
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Annex 1 Recommendations Database
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Annex 2Recommendations Database
Example: Average of the recommendations given to Brazil by the investment banks (lhs) with respect to the weight of Brazil in the EMBI Global index (rhs).