The global crisis Effects on growth and development in Latin American economies

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The global crisisEffects on growth and
development in Latin American economies
International Conference Effects of the Global
Financial Crisis on Developing Countries and
Emerging Markets 11 December 2008, Berlin
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Contents

• The recent pattern of growth and development in
  Latin America and the Caribbean
• The lessons of past crises in Latin America and
  the Caribbean
• Actual and expected effects of the current crisis
• Strategies to address the crisis and policy
  challenges

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The recent pattern of growth and development in
Latin America and the Caribbean
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In average, the per capita GDP of LAC has
increased since 2003 reaching the highest growth
plateau in three decades
1990-2002 0.8
1980-1990 -0.4
Growth Rate
1970-1980 3.1
2003-2007 3.8
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Latin America and the Caribbean Financial
balances (1990-2006)
Fiscal contraction
Increase in private sector demand
Improvement in the external position
Percentages of GDP
Years
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The contraction in fiscal stance 1990-2005
THE REGIONAL FISCAL STANCE AVERAGE FOR LATIN
AMERICA
Percentage deviation from balanced budget
Years
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The external sector performance
Latin America Current account as of GDP
Latin America Rolling correlation coefficient
between external sector performance and growth
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Commodities exporters have had current account
surplus because of high prices, but for
commodities importers it has been an important
burden
LAC Current Account Balance, 2007 ( of GDP)
Source ECLAC
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The important growth of exports, until the 1st
semester of 2008, was highly associated to higher
export prices
LAC Growth rate of exports, 2007 (Annual growth
rate)
Source ECLAC
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For some economies in the region remittance are a
very important source of foreign currency
LATIN AMERICA AND THE CARIBBEAN REMITTANCES,
2007 (Millions of dollars and percentages of GDP)
Source ECLAC
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Latin AmericaCurrent account with and without
remittances1990-2006
Current account with remittances
US billion
Current account without remittances
Years
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Better economic performance has been accompanied
by lower unemployment rates
LATIN AMERICA AND THE CARIBBEAN UNEMPLOYMENT RATE
Percent
Source ECLAC
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Better economic performance has been
accompanied by reserve accumulation
Millions of US
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Poverty and extreme poverty rates are decreasing
LATIN AMERICA POVERTY AND EXTREME POVERTY,
1980-2007 (Percentage of people)
Source ECLAC
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Inequity is a characteristic of Latin American
economies
Source World Development Indicators and ECLAC
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The lessons of past crisis episodes
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What have we learned from past crises?

• Financial crises can be very costly for Latin
  American economies.
• International reserves show the effects of
  significant deterioration experienced in current
  account, the decline in capital inflows and the
  increase of capital outflows.
• During the most recent systemic crisis episodes,
  per capita GDP, consumption and investment
  experienced significant declines.
• This was particular important during the Debt
  crisis in the early 80s.
• In financial terms, recent financial crisis have
  represented for LAC economies, on average, about
  17 of the GDP of the country facing the crisis.
• Financial crises are associated with higher
  volatitility.

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Financial flows have shown significant reversal
in crisis episodes
Net transfer of resources and financial flows in
Latin America and the Caribbean 1970-2006
Percentages of GDP
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During times of crises the external sector has
experienced remarkable deterioration
Per capita Exports Var
Change in pp. of the Net Flows / GDP ratio.
International reserves Var
Source ECLAC Annual Var.
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GDP, consumption and investment have been
severely affected during past crisis episodes
Per capita GDP Var
Per Capita Consumption Var
Per Capita Investment Var
Source ECLAC Annual Var.
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Financial crises have been costly for Latin
American economies( of GDP)
Average fiscal cost 17 of GDP
Source LucLaeven (2008)
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Volatility of GDP per capita growth A regional
comparison
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Frequency and amplitude of cycle
Note and denote significant at the 95 and
90 levels of confidence.
Source Titelman, Pérez Caldentey, and Minzer
(2008)
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Feedback between external effects and
macroeconomic policy (Weighted averages)
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Actual and expected effects of the current crisis
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Since the first symptoms of the current financial
crisis, the risk-perception of the region has
increased
EMBI LATIN AMERICA SELECTED COUNTRIES Accumulate
d variation since May 2007.
EMBI Colombia 345
EMBI Venezuela, R.B. 603
EMBI Argentina 551
EMBI Brazil 249
EMBI México 452
EMBI LAC 360
Source ECLAC based on figures by JP Morgan
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Some countries have experienced an accelerated
depreciation of their currency
VARIATION OF NOMINAL EXCHANGE RATE ( variation
Dec. 2008/ Dec. 2007)
Source ECLAC, based on figures by Bloomberg. A
positive variation indicates a nominal currency
depreciation versus US Dollar.
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The current account surplus has narrowed
LATIN AMERICA AND THE CARIBBEAN CURRENT ACCOUNT
BALANCE (Percentages of GDP)
Source ECLAC
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And the effects on the real sector have begun to
be visible

• Mexico
• Drop from 49.5 to 44.6 in manufacturing index
  between October and November the largest fall
  since 2004).
• Decline in gross domestic investment.
• Brazil
• The last survey on industrial production
  (October) points to a monthly decline of -1.7.
• Auto production declined 31 in November (monthly
  basis).
• Argentina
• Decline in auto production and sales in October
  (28 and 26 on a yearly basis).
• Decline in construction activity.
• Central America (El Salvador).

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Per capita GDP will show a lower growth rate for
2009 near the Zero bound
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However given the heterogeneity of Latin America,
not all countries will be affected in the same
way or with the same rapidity or magnitude

• Heterogeneity in terms of money and finance
• Financial development is not the same
• Dollarized economies
• Some countries exports are biased toward
  developed economies.
• Mexico and Central American economies about 90
  and 60, respectively, of total exports have as
  final destiny developed economies.
• Some countries are biased toward commodities
  which demand has declined sharply in the very
  short run, inducing significant price reduction.
• Oil and mineral commodities have experienced a
  reduction in their prices of about 61 and 41,
  between July 2008 (record levels) and November
  2008.
• The correction experienced by some commodity
  prices will have positive effects in the current
  account balance and inflation rate of some LAC
  economies, given the reduction on energy and food
  imports cost.

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Strategies to confront the crisis and policy
challenges
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Latin Americas measures to tackle the effects of
the financial crisis
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The challenges ahead

• Can Latin American countries avoid a crisis
  (recession) like those that the continent has
  experienced in the past
• Low and volatile rates of growth.
• High unemployment and important social setbacks.
• It depends partly on how countries have
  administered the precedent period of economic
  expansion.
• It also depends on the ability to use monetary
  and fiscal policy to avoid being pro-cyclical and
  cushion the effects of the crisis.
• Monetary policy
• Can Central Banks carry out a more flexible
  monetary policy without endangering their
  inflation targets.
• Fiscal policy
• Do countries have the capacity to undertake
  counter-cyclical fiscal policy without running
  into financial constraints and or the external
  constraints.
• Do governments have the execution capacity.