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12 March 2009

Caribbean: Potentials Impacts in a Deteriorating Global Environment (with special emphasis on the Dominican Republic). 12 March 2009. Outline. Global Context Impact on the Caribbean Policy challenges What countries are doing Lessons from previous crises World Bank Support. 2.

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12 March 2009

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  1. Caribbean: Potentials Impacts in a Deteriorating Global Environment(with special emphasis on the Dominican Republic) 12 March 2009

  2. Outline • Global Context • Impact on the Caribbean • Policy challenges • What countries are doing • Lessons from previous crises • World Bank Support 2

  3. The broad trends…. • Caribbean is being hit hard by the global economic crisis • Real sector impacts are translating into job losses and likely social consequences • Region is vulnerable, with limited room for counter-cyclical fiscal policy, limited array of well-targeted safety nets • Responses: • Smart spending • Remember the poor and vulnerable • Crisis as an opportunity

  4. The recession is in full swing in the U.S..… 4 Source: Bloomberg

  5. …with sharp declines in growth in the fourth quarter of 2008… Source: Barclays Capital forecasts

  6. … and the prospects for 2009 are bleak Real GDP Growth Rates (percent change) Source: WEO (Jan 2009) 2007 08 09 10 Canada 2007 08 09 10 Euro area 2007 08 09 10 United Kingdom 2007 08 09 10 United States

  7. Global crisis is being transmitted to the Caribbean and DR through many channels: • Financial sector • Remittances • Tourism • FDI • External demand 7

  8. Financial contagion effects

  9. The Caribbean countries join the massive global selloff of stocks Source: Jamaica Stock Exchange, Eastern Caribbean Securities Exchange, Trinidad & Tobago Stock Exchange Limited and Barbados Stock Exchange Inc.

  10. Borrowing costs have increased sharply Source: LCSPE Database

  11. Credit ratings have been downgraded in the region Source: LCSPE Database

  12. Access to credit is declining... DR Source: Central Banks and IMF IFS.

  13. Remittances

  14. Remittances are a significant source of income, particularly in Guyana, Jamaica and DR… Source: IMF-WEO. Note: Data refer to 2007 for all countries except Barbados, which refers to 2006

  15. … but remittances have started to decline Source: Central Banks.

  16. Tourism

  17. Caribbean countries, particularly the OECS, Bahamas and Barbados, rely heavily on tourism Note: Data refer to average of the two latest available years. Source: IMF - WEO

  18. The crisis is hitting tourism arrivals in the whole region, with negative growth since Oct 2008.… Source: One Caribbean.org. T&T, St Vincent and the Grenadines and Guyana have not been included because data is available only until Jul, Aug and May respectively (so impact of crisis is not evident)

  19. Foreign Direct Investment

  20. FDI ratios are very high in the region but they are expected to decline…

  21. There are indications that FDI is slowing, with tourism projects put on hold… • Baha Nar, a US$2.6 billion project in Nassau, which would have employed 4,400 building workers has been stopped. • Mayaguana, US$1.8 billion resort, in Bahamas on hold • Grenada: Major tourism projects on hold (US$262 m) • Jamaica, St. Lucia, Anguilla, Grenada projects halted. • DR, authorities have confirmed a large mining investment for 2009

  22. External demand effects - Trade

  23. In DR, Exports have recently started a sharp contraction

  24. Growth is expected to slow in 2009…the outlook is difficult, with risks mainly on the downside… Source: IMF and Press releases

  25. Employment is responsive to growth cycles in the region…Employment-growth elasticity differs across countries and years Source: ILO (KILM)

  26. Policy Challenges

  27. Fiscal challenges • Fiscal deficits remain high in many countries • Debt burdens are high • Fiscal space is limited • Revenues dependent on commodities in some countries

  28. Fiscal space is limited, with high ridigity in expenditures…. Fixed expenditure (Wages, Interests and Pensions when available) as a share of Total Revenue - 2007 Source: National Statistics and IMF

  29. In DR, the currency depreciated, and NIR have declined…. Source: Central Banks, IFS and LCSPE Database.

  30. 25 20 15 Annual change (%) 10 5 0 2007M07 2007M09 2007M11 2008M01 2008M03 2008M05 2008M07 2008M09 2008M11 2009M01 2007M01 2007M03 2007M05 Bahamas Barbados DR Jamaica T&T Guyana 15 13 11 9 7 Annual change (%) 5 3 1 -1 2007M07 2007M09 2007M11 2008M01 2008M03 2008M05 2008M07 2008M11 2007M01 2007M03 2007M05 2008M09 Belize Dominica St. Kitts St. Lucia St. Vincent …finally some good news: inflation pressures easing due to slowdown in commodity prices Source: IMF IFS.

  31. What are Governments Doing?

  32. Policy responses to the crisis Source: ECLAC, “The reactions of Latin American and Caribbean governments to the international crisis: an overview of policy measures up to 30 January 2009”.

  33. Some Thoughts on What Governments Can Do? • Avoid irreversible damage, that is actions that prevent • Malnutrition • Withdrawing children from schools • Basic and preventive health interruptions • Smart spending/stimulate without destroying • Crisis as an opportunity • Leverage crisis to build consensus around key policy reforms • focus on medium and longer term recovery path • target elimination of inefficiencies in both public and private sectors

  34. Smart spending/stimulate without destroying • Government could: • Leverage existing programs (e.g. expand existing safety nets) • Focus subsidies (e.g energy subsidies in DR) • Improve expenditure procedures and fiscal transparency in order to ensure that increased public spending is well targeted • Where there is fiscal room, accelerate existing public investment projects and maintanance spending but avoid starting large new projects • increase the scope of automatic stabilizers. eg. make taxes progressive • Governments should avoid • Subsidies to specific industries • Increases in minimum wages • Increases in public wages or increases in public employment

  35. World Bank Support • Financing – crisis response • Financing to scale up well-targeted safety net programs from ongoing (e.g. Jamaica $40 million PATH project) or new projects • Budget support based on policy programs (pipeline: DR, Grenada?) that are aimed at maintaining macrostability while protecting the poor • Medium term response – AAA, TA, lending for • Strengthened social protection systems • Improved competitiveness and growth • Strengthened governance and public financial management

  36. Thank you

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