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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. 10-25-02. 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.

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How Vulnerable is Central America to Shocks From the South?

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  1. How Vulnerable is Central America to Shocks From the South? Inter-American Development Bank 10-25-02

  2. 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?

  3. 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?

  4. CAC7 - Bilateral Real Exchange Rate with US(Dec. 1995=100) Asian Crisis Russian Crisis Argentina Crisis Mexican Crisis Source: WEO (Sept 2002) - forecast for 2003 from EIU Sep- 2002

  5. Real Exchange Rate Depreciation(vis-à-vis the US dollar, Jun. 2002 vs. Jan. 1997) Source: IFS/IMF

  6. CAC6- Lending Interest Rates LAC7 Average LAC7 Median CAC7 Average CAC7 Median Source: IFS (IMF). *The values do not include El Salvador

  7. CAC-7 Capital Flows(billions of US dollars) Total Capital Flows+ Errors & Omissions FDI Non FDI Errors & Omissions Source: WEO (Sept 2002) Includes Errors and Omissions

  8. FDI Non FDI Errors & Omissions CAC-7 Capital Flows(% of Total Capital Flows+Errors & Omissions, Average 1997-2002f) Source: EIU (Sept 2002)

  9. CAC7 Current Account Balance(% of GDP) Source: WEO (Sept 2002) - forecast for 2003 from EIU Sep- 2002

  10. CAC7- Current Account Balance (as a % of GDP, 2001) SLV DOM CRI PAN HON GTM NIC Source: EIU

  11. 65 LAC7 CAC7 60 55 50 45 40 35 30 1997 1998 1999 2001 2000 2002 f 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.

  12. 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?

  13. Spreads w.r.t. US Treasury Bonds Source: Bloomberg

  14. Gross Domestic Product (yoy % change) CAC 7 LAC 7 7% 6% 5% 4% 3% 2% 1% 0% -1% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002f 2003f -2% Source: EIU (Oct 2002)

  15. Gross Domestic Product (yoy % change) CAC 7 USA 7% 6% 5% 4% 3% 2% 1% 0% -1% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002f 2003f -2% Source: EIU (Oct 2002)

  16. 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 effectsYES YES (1) Data from 1980 to 2001 (2) Data from 1992 to 2001

  17. Exports + Imports (% GDP)(2001) Source: WEO (Sept 2002) and RES/BID estimates

  18. CAC7 - Export Composition according to destiny (2001) US Mexico CAC7 Source:EIU

  19. CAC-7 Remittances(billions of US dollars) Remittances Capital Flows + Errors y Omissions

  20. CAC-7 Remittances(as a % of FDI Capital Flows, for 2001) Source: WEO, Central Banks and RES estimates

  21. Total Capital Flows and Remittances (% of GDP)Average 1997-2001 Source: WEO (Sept 2002), Central Banks and RES estimates Capital flows include errors and omissions

  22. 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?

  23. CAC-7 Capital Flows* (as a % of GDP, 5 year average as of 2001) Source: WEO & EIU * Includes Errors & Omissions

  24. Public Sector Balance (% of GDP) CRI DOM SLV GTM HON NIC PAN Source: EIU (Sept 2002)

  25. PAN CRI DOM SAL GTM HON NIC 48.9 24.3 36.89 28.12 63 202.9 75.6 Observed Public Debt (% of GDP) 5.98 4.49 5.12 4.56 4.02 1.62 5.67 Real Interest Rate 4.8 6 4.26 3.7 3 3.5 3.38 Real GDP Growth * -5 0 -3.8 -1.5 -5.9 -15.8 -2.8 Observed Primary Surplus (% of GDP) 0.54 -0.35 0.30 0.21 0.62 -3.78 1.68 Req. Primary Surplus (% of GDP) Fiscal Sustainability Source: Own estimates. Data from EIU Notes:/* Refers to geometric average of growth rates during the last decade

  26. 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

  27. Supply-Side Openness Coefficient (Supply of Tradables - Interest Payments / Absorption of Tradables)) Source: WEO (Sept 2002) and RES/BID estimates

  28. Total Public Debt External Public Debt CAC7:Public Debt (% of GDP) Source: EIU .(Median)

  29. CAC7 Total Public Debt CAC7 Ext. Public Debt LAC7 Total Public Debt LAC7 Ext. Public Debt CAC7 & LAC7:Public Debt (% of GDP) 60 50 40 30 20 10 0 1995 1996 1997 1998 1999 2000 2001 2002f Source: EIU and Central Banks.(Median)

  30. Currency Composition of Public Sector Debt (2001) [eD*/(D + eD*)] Source: Central Banks and EIU

  31. Financial Mismatch of the Public Sector [(D/eD*)/(Y/eY*)] (2001) Source: Central Banks and EIU

  32. Deposits and Loans in Foreign Currency Nicaragua Costa Rica Honduras Dominican Rep. Deposits in FC/Deposits Loans in FC/Loans Guatemala 0 10 20 30 40 50 60 70 80 90

  33. Loans in FC to non-tradable sector/Loans Nicaragua Costa Rica Guatemala Honduras 0 10 20 30 40 50 60 70 80 90

  34. Investment in Public Sector/Assets (loans to public sector are not considered) Nicaragua Costa Rica El Salvador Guatemala Honduras 0 5 10 15 20 25 30 35

  35. Capital Flows Vulnerability: A summary CRI DOM SLV GTM HON NIC PAN Public Debt (% of GDP) Financial Mismatch of the Public Sector Financial Mismatch of the Private Sector ? ? ? Financial System exposure to the Public Sector = High = Medium = Low Source: Central Banks and EIU

  36. 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.

  37. How Vulnerable is Central America to Shocks From the South? Inter-American Development Bank 10-25-02

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