How Vulnerable is Central America to Shocks From the South?
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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
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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?
![Page 3: How Vulnerable is Central America to Shocks From the South?](https://reader035.fdocuments.net/reader035/viewer/2022062500/5681573a550346895dc4e17a/html5/thumbnails/3.jpg)
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?
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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
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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
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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
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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
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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
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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
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-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
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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.
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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?
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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+
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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
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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
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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
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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
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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
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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
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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
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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
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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?
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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0 10 20 30 40 50 60 70 80 90
Honduras
Guatemala
Costa Rica
Nicaragua
Loans in FC to non-tradable sector/Loans
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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)
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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
? ?
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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.
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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