How Vulnerable is Central America to Shocks From the South?

How Vulnerable is Central America to Shocks From

the South?


the South?

Inter-American Development Bank

10-25-0210-25-02

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




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

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

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

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

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

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

-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

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.

Outline




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+

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

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

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

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

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

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

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

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

Outline




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

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

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

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

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

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

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

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

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


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

0 10 20 30 40 50 60 70 80 90

Honduras

Guatemala

Costa Rica

Nicaragua

Loans in FC to non-tradable sector/Loans

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)

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


? ?

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.


the South?


the South?

Inter-American Development Bank

10-25-0210-25-02

Documents

How Vulnerable is Central America to Shocks From the South?