Transcript per capita

6-Apr-17 | 1
The Financial Crisis and
Developing Economies
Robert Lensink
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Outline
The Financial Crisis and Emerging Markets
The Financial Crisis and Sub-Saharan Africa
How to Solve the Crisis
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The crisis and Emerging Markets: Initial resilience
Strong fundamentals underpinned most Emerging Markets’ initial
resilience to deteriorating financial conditions.
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total developing-country foreign exchange reserves amounted to
$3.2 trillion
many countries were posting strong economic growth
emerging equity markets were rallying
spreads on emerging-market sovereign bonds had reached record
low levels
Banks held few mortgage-based securities and banks heavily
regulated
Several countries (e.g. in Latin America) benefited from the rise in
international prices of minerals, crude oil, and food.
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….No longer
The crisis is spreading to Emerging Markets all over the World.
Foreign capital fled and confidence evaporated
• Stock markets plunged
• Currencies tumbled
• Foreign banks abruptly stopped lending
Private capital flows to Emerging Markets will decline: A 30%
decline in net flows from last year is expected.
Moreover, exports of goods and services will suffer as world
economy slows
S&P 500 vs Emerging Markets Index
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Some recent indicators for Emerging Markets
Exchange rate
(jan 1-oct 22)
Current account(%
GDP)
Brazil
-24.8
-1.6
China
6.9
8.5
Hungary
-19.2
-5.9
India
20.1
-2.9
Russia
-8.7
6.2
South Africa
-38.7
-7.7
South Korea
-31.3
-3.3
The IMF, the Crisis and Emerging Markets
Until some weeks ago, the IMF had been absent
from the financial crisis
But, the IMF is back in business, already helping
Iceland ($1 billion), Pakistan ($10 over 2 years) and
Ukraine (a $14 billion package).
Other countries talking to the fund include Belarus,
Bulgaria, Hungary, Latvia, Romania and Sebia.
The IMF and the Crisis
Press release on October 29. The IMF will launch a
new short-term lending facility for Emerging Markets
(with track record of good polices) hit by the Crisis
The new facility comes with no conditions attached
once a loan has been approved and offers large
upfront financing to help countries restore confidence
and combat financial contagion.
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Eastern Europe
Eastern European countries are particularly at risk
during this financial crisis
The reason is that many Eastern European countries
have double digit current account deficits
Moreover, many banks are integrated in global
markets, so that even countries with surpluses may
run into problems
In addition, most central banks and governments in
Eastern Europe do not have the financial means to
stop the crisis
Eastern Europe
Many Eastern European countries are in trouble. In Russia, the
stock market went down by two-thirds since may 2008; In the
Ukraine the stock market went down by 80%. Inflation went up.
Fortunately, Russia, has a huge amount of foreign exchange
reserves ($550 billion), thanks to gas and oil revenues.
This should enable Russia to stop a run on the rouble.
Falling oil prices may be problematic for Russia: The oil price
went up from $11 dollar a barrel in 1998, to $147 in july 2008.
Since then it is halved.
Asia
Growth rates as high as 10% (China) and 8% (India)
During 2000-2006 period, GDP per capita growth in
East Asia 8%!
However, financial crisis will certainly affect Asia.
Growth rates will probably go down by 1-2%
Compared to other regions, Asian countries are
probably most resilient: p.c. growth rates around 6%.
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China
China is in good shape
• $2 trillion reserves
• A current-account surplus
• Little connection to foreign bonds
• Governement Budget Surplus
The impact of this crisis on China is probably limited
• Its banks have only limited involvement in global
markets
Economic growth in China is likely to slow-perhaps to 8%- but
not collapse.
China will benefit from cheaper oil.
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India
Until recently, India has not been seriously affected by the
recent financial turmoil
The Indian current account has been opened fully, but more
calibrated approach has been followed to the opening of the
capital account
prudential policies have attempted to prevent excessive
recourse to foreign borrowings
None of the Indian banks had any direct exposure to the subprime markets
However, India has a weak fiscal position, which is a risk.
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India
India will certainly feel some impact of the financial crisis
• Reduced availability of international capital, both debt and equity
• Pressure on the exchange rate: the roepie depreciated by 20% this
year
• Stock markets are going down: this year by 50%
Therefore, a decline in Indian growth rates is expected.
The IMF forecasts a reduction by 1.1% to just below 7% growth.
India will benefit from cheaper oil.
Latin America
Latin America is in a better position to avoid a downturn in the
economy than some decades ago
Most countries do not have huge budget deficits, have built up
considerable currency reserves, and have adopted flexible
exchange rate
Nevertheless, the high growth rates across Latin America (above
5% from 2004-2008) will fall hard, probably to below 3% next
year (about 1.5% per capita).
Latin America
Developments of commodity prices are crucial
Many Latin American countries depend on prices of minerals,
oil and food (grains and livestock)
Due to the fall in food prices, the trade surpluses that averaged
almost $100 billion a year between 2004-2008, are likely to fall
to around $23 billion next year
Especially Argentina, Venezuela, Bolivia and Ecuador are
expected to face tough times due to their dependence on
commodity exports, and the needs for external financing
An end to the commodity boom?
Latin America
Mexico is most directly affected by the US economy:
more than 80% of the exports are to the US.
Moreover, remittances from US will decline.
Economic growth is expected to even fall below 2%.
But a recession will probably be avoided
Brazil probably in somewhat better position
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Sub-Saharan Africa: a forgotten continent?
The international press hardly pays attention to the
crisis and Africa
If Emerging Markets’ growth drops, the Western
Economies will be hurt. Not so if Africa drops
Some argue that Africa will not be affected since the
African financial system is not integrated with the
World Economy
Sub-Saharan Africa
On average, growth rates in Sub-Saharan Africa high during the
last two years: about 6% (about 3.5% per capita)
This is much higher than in earlier periods: average of 4.5
between 2000-2006 (2% per capita); and even much lower in
earlier periods.
Many countries in Sub-Saharan Africa already hit by food crisis.
Moreover, progress on poverty reduction still low
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Headcount [% living below $1.25 a day]
1981
2005
East Asia (China)
78
17
Latin America
12
8
South Asia (India)
59
40
Sub-Saharan Africa
54
51
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Number of poor (millions) below $1.25 a day
1981
2005
East Asia (China)
1072
316
Latin America
42
46
South Asia (India)
548
596
Sub-Saharan Africa
214
391
Growth elasticity of headcount poverty
Percentage decline in headcount due to percentage increase in
average income, varies between 1 and 2
For Sub-Saharan Africa, with a headcount of 50%, the index will
fall by 1.75-3.5 percentage points with current per capita growth
rates of 3.5%.
The population growth is about 2.5%, so that high growth rates are
needed to stabilize the amount of poor. With current growth rates
of about 6% this may be the case.
However, if growth declines, the amount of poor will definitely rise!
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How is Africa affected by the financial crisis ?
1.
2.
3.
4.
Indirectly via a decline in global growth
A decline in aid
A decline in remittances
A decline in private flows (FDI, Loans)
I will concentrate on 1, 2 and 3.
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Decline in global growth
Without offsetting macroeconomic policy changes,
global growth could decline by 3-6 percentage points
The global trend growth is now about 4%
Hence, a global decline of about 2 percent may result
World growth will slow, reducing trade expansion
etc.
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Growth decline in Africa
The IMF suggest that for every 1% decline in global GDP growth,
growth in Sub-Saharan Africa will decline by 0.5 percentage points
Hence, if global growth declines somewhere between 3 and 6
percent, African growth will decline by 1.5-3 percentage points.
GDP per capita growth in Sub-Saharan Africa is now about 3.5%.
Due to a global decline in growth, this may result in GDP per capita
growth rates of somewhere between 0.5 and 2%
In addition, negative effects of declines in capital flows may be
expected. Therefore, without offsetting policies, growth in
Africa may go down to 0% per capita: recession!
Aid, Remittances and FDI
› A
FDI, ODA and Remittance Inflows in Sub-Saharan Africa, 1979 - 2003
3.0E+10
Foreign direct
investment, net
inflow s (BoP,
current US$)
2.5E+10
2.0E+10
Current US $
Official
development
assistance and
official aid
(current US$)
1.5E+10
Workers'
remittances and
compensation of
employees,
received (US$)
1.0E+10
5.0E+09
Year
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
0.0E+00
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A decline of Aid
Total ODA to Sub-Saharan Africa: $33 billion (25 billion Euro;
5% GDP; $43 per capita)
Total ODA world wide: 88 billion Euro
Boneses financial workers at Wall Street this year: $70 Billion
Total Dutch development aid: 4.25 billion Euro
Facility of Wouter Bos to support Banks: 20 billion Euro.
Financial rescue package in US: $700 billion
Resources used to support the poor are very modest compared
to the sums being spent to bring stability to the international
financial system!
A decline in Aid
Due to the enormous amounts used for preventing a
financial meltdown, the Western World would be
under severe pressure to cut international aid
Some politician may even use the current situation to
plea for a decline in aid.
The G8 committed itself to double the aid flow to
Africa by 2010. However, it is almost sure that the G8
will not honor this commitment.
Remittances
Remittances now have the same amount as FDI: $15 billion per
year.
The amount of remittances that will be send back to Africa, will
decline considerably if there is a drastic worsening of European
(and South African) labor markets
This will especially hurt countries with a high dependency on
remittances (in percent of export earnings): Lesotho (60%);
Uganda (40%), Senegal, Guinnea-Bissau, Benin, Burkina-Faso
(15-25%).
Expectations
Asia: growth will decline by 1-2 percent. However, given current
high growth rates, GDP per capita growth will still be around
6%.
Latin America: more seriously affected. Growth will decline by
2%, may be even more. Per capita growth rates expected of
about 1-2%
Africa: may even drop into recession. Growth may decline by 23%. Due to relatively high population growth, this may result in
very low per capita growth rates, just above 0%.
Is this forecast unavoidable?
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What to do?
1. The US, Europe, and the surplus economies of Asia and
the Middle East should coordinate macroeconomic
policies to stop a global recession:
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›
›
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Expansionary fiscal policies
No protectionism
More export credits to developing countries
More funding of investment projects in developing
countries
Special role for China
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What to do?
2. The IMF should extend low-conditionality loans to
developing countries
›
The pressure to reduce aid flows should be withstood.
The crisis must not be an excuse to cut aid flows.
4. Institutional investors (e.g. pension funds, insurance
companies) should invest more in developing
countries, for instance in microfinance institutions.