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The Impact of the Global Economic and Financial Crisis on the CESEE region and Latin America Reiner Martin (OeNB and ECB) and José Maria Serena (Banco de España)
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The Impact of the Global Economic and Financial Crisis on the CESEE region and Latin America Reiner Martin (OeNB and ECB) and José Maria Serena (Banco de España) Based on analytical work by S. Gallego (Banco de España/BdE), S. Gardó (OeNB), R. Martin (OeNB and ECB), L. Molina (BdE) and J.M. Serena (BdE) SUERF/BWG Conference and Special OeNB East Jour Fixe Vienna, 12 February 2010
Outline • Basic characteristics and stylized facts of the two regions • Vulnerabilities at the onset of the global financial crisis • The impact of the financial crisis on the two regions • Conclusions
Basic characteristics and stylized facts • Latin America and CESEE: regional analysis, but important differences within the regions (more important in CESEE region) • Some similarities: both regions enjoyed high growth rates in 2002-2007, and were surprisingly resilient at the beginning of the turmoil, but were severely affected afterwards. • Structural differences between the regions: • Level of development: average income per capita in CESEE is 60% higher than that in Latin America. • Integration in the world economy: trade linkages, financial linkages, institutional integration (closer look – key to understand transmission mechanism).
CESEE region: particularly deep financial integration • Also, the EU provides CESEE countries with a framework for institutional integration.
Analytical focus: How vulnerable were the CESEE and LA regions at the onset of the global financial crisis compared to previous crisis episodes? • Macroprudential and macroeconomic indicators: market sentiment, real, fiscal, monetary, banking and external. • Comparison in selected points in time: 1998 (Russian crisis), 2001 (Argentine crisis) and 2008. • Regional results refer to stylised averages and are thus not necessarily indicative for the vulnerability profile of individual countries. Vulnerabilities in 2008 in CESEE and Latin America
…but what about fundamentals? • Markets were perhaps overoptimistic, what about fundamentals? • The type of indicators we consider in the paper are: • External indicators: BoP pressures, sovereign risk • Banking indicators: imbalances in banking industry • Fiscal indicators: pressures from public finances • Monetary indicators: overextension of credit • Real indicators: sustainable growth • The indicators represent potential risks and serve as reasonably good leading indicators of crises (empirical analysis on-going!) • In this presentation we use ‘composite indicators of vulnerability’ to summarize each of the five indicator types.
Capital flows to CESEE moderated more strongly than for Latin America, but remained positive in the crisis
The policy response so far • Monetary policy in most countries cautious until late 2008 - and despite subsequent easing most CESEE and LA policy rates remain higher than in major industrialised economies. • CESEE and LA authorities have taken extra-ordinary measures to stabilise financial systems and reduce real economy spillovers. • LA central banks were also actively mitigating effects of credit contraction using FX reserves. • For HU, LV and RO, IFI/EU support instrumental in stabilizing their economies. These programs might have also supported private flows to other CESEE countries. • ‘Vienna initiative’ to co-ordinate the response of the main public and private stakeholders to the financial crisis in CESEE.
The fiscal room for manoeuvre tended to be larger in Latin America than in CESEE
Better short-term cyclical outlook for Latin America, surrounded by a high degree of uncertainty
Conclusions • CESEE and Latin America differ in some important basic features. • Booming economic conditions before the global crisis largely driven by capital inflows, but also supported by region-specific features. • Notable differences in pre-crisis macrofinancial vulnerabilities: • considerable intra-regional variation, especially in CESEE. • LA: economic policies played important role in reducing vulnerabilities. • Both regions hit hard after Lehman; CESEE hit more strongly given higher trade openness and more pronounced drop in capital inflows. • A fully-fledged financial meltdown did not materialize in LA or CESEE. Integration into European banking networks an asset for CESEE • Economic downturn has bottomed out in both regions, short-term outlook for Latin America better; medium-term growth perspectives similar.
Thank you for your attention! Disclaimer The views expressed in this presentationdo not necessarily reflect the official viewpointof the Oesterreichische Nationalbank (OeNB)or the Banco de España (BdE).
