Transcript Monetary Policy with Head Winds: Issues and Trade-offs

Caribbean: Potentials Impacts in a
Deteriorating Global Environment
(with special emphasis on the Dominican Republic)
12 March 2009
1
Outline






Global Context
Impact on the Caribbean
Policy challenges
What countries are doing
Lessons from previous crises
World Bank Support
2
The broad trends….
 Caribbean is being hit hard by the global economic
crisis
 Real sector impacts are translating into job losses
and likely social consequences
 Region is vulnerable, with limited room for countercyclical fiscal policy, limited array of well-targeted
safety nets
 Responses:



Smart spending
Remember the poor and vulnerable
Crisis as an opportunity
3
The recession is in full swing in the U.S..…
U.S. Economic Indicators
Total Employment and YoY variation of Consumer Confidence and Vehicle Sales
20%
147000
Total employment
10%
146500
0%
146000
Vehicle sales
145500
-20%
145000
Consumer Confidence
-30%
in thousands
-10%
144500
-40%
144000
-50%
Source: Bloomberg
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
143000
Mar-07
-70%
Feb-07
143500
Jan-07
-60%
4
…with sharp declines in growth in the fourth
quarter of 2008…
Real GDP Growth in Advanced Countries
QoQ annualized growth (%)
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
Euro area
Japan
US
-12.0
Source: Barclays Capital forecasts
2008Q4 (E)
2008Q3
2008Q2
2008Q1
2007Q4
2007Q3
2007Q2
2007Q1
2006Q4
2006Q3
2006Q2
2006Q1
2005Q4
2005Q3
2005Q2
2005Q1
2004Q4
2004Q3
2004Q2
2004Q1
-14.0
5
… and the prospects for 2009 are bleak
Real GDP Growth Rates
4.0
(percent change)
3.0
3.0
2.7
2.6
2.0
1.6
1.1
1.6
1.0
0.7
1.0
0.6
0.2
2.0
0.2
0.0
-1.0
-1.2
-1.6
-2.0
-2.0
Current WEO
Source:
2009)
2007WEO
08(Jan 09
United States
10
-3.0
-2.8
2007 08 09 10
Euro area
2007 08 09 10
United Kingdom
2007 08 09 10
Canada
6
Global crisis is being transmitted to the Caribbean
and DR through many channels:
 Financial sector
 Remittances
 Tourism
 FDI
 External demand
7
Financial contagion effects
8
The Caribbean countries join the massive global
selloff of stocks
4600
Barbados Stock Exchange Market Index
4400
4200
4000
3800
3600
3400
3200
Jan07
M ar
M ay
Jul
Sep
No v
Jan08
M ar
M ay
Jul
Sep
Source: Jamaica Stock Exchange, Eastern Caribbean Securities Exchange, Trinidad & Tobago Stock Exchange Limited and Barbados Stock Exchange Inc.
No v
Jan09
9
Borrowing costs have increased sharply
2000
Sovereign Spreads EMBI Global
1800
1600
Belize
DR
LAC
Jamaica
1400
1200
1000
800
600
400
200
Source: LCSPE Database
03/02/09
02/02/09
01/02/09
12/02/08
11/02/08
10/02/08
09/02/08
08/02/08
07/02/08
06/02/08
05/02/08
04/02/08
03/02/08
02/02/08
01/02/08
12/02/07
11/02/07
0
10
Credit ratings have been downgraded in the region
Foreign Currency Ratings
Countrty
Jamaica
Dominican Rep.
Bahamas
Belize
Agency
Change
From
To
Date
Moody's
downgrade rating
B1
B2
3/4/2009
Fitch
downgrade rating
B+
B
11/18/2008
S&P
downgrade outlook
Stable
Negative
10/21/2008
S&P
downgrade rating
B+
B
12/23/2008
Fitch
downgrade outlook
Positive
Stable
9/25/2008
S&P
downgrade outlook
Stable
Negative
11/24/2008
Moody's
upgrade rating
Caa1
B3
2/10/2009
Source: LCSPE Database
11
Access to credit is declining...
45
Domestic Credit to the Private Sector
40
35
DR
Annual % change
30
25
20
15
10
Jamaica
Dominican Republic
Barbados
Source: Central Banks and IMF IFS.
OECS
Trinidad & Tobago
Bahamas
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
5
Guyana
Belize
Suriname
12
Remittances
17
Remittances are a significant source of income,
particularly in Guyana, Jamaica and DR…
Remittances, share in GDP
25
20.9
18.8
15
4
2.3
1.4
0.9
0.7
0.5
0.3
St. Lucia
4.5
T&T
5
St. Kitts
5.9
St.
Vincent
6.2
Dominica
9.3
10
A&B
% of GDP
20
Barbados
Grenada
Belize
Suriname
DR
Jamaica
Guyana
0
Source: IMF-WEO.
Note: Data refer to 2007 for all countries except Barbados, which refers to 2006
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… but remittances have started to decline
25
20
Annual change (%)
15
10
5
0
-5
Nov-08
Dominican Republic
-10
-10.8
Jamaica
-15
Jan-09
-20
Nov
Sep
Jul
May
Mar
Jan-08
Nov
Sep
Jul
May
Mar
Jan-07
Source: Central Banks.
Jan-09
-14.9
-25
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Tourism
20
Caribbean countries, particularly the OECS,
Bahamas and Barbados, rely heavily on tourism
Note: Data refer to average of the two latest available years.
Source: IMF - WEO
21
The crisis is hitting tourism arrivals in the whole
region, with negative growth since Oct 2008.…
30
Annual change (%)
20
10
0
-10
-20
-30
Jun
Antigua y Barbuda
Barbados
Belize
Dominican Republic
Grenada
Guyana
Jamaica
St.Lucia
Jul
Aug
Sep
Oct
Nov
Dec
Source: One Caribbean.org.
T&T, St Vincent and the Grenadines and Guyana have not been included because data is available only until Jul, Aug and May
respectively (so impact of crisis is not evident)
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Foreign Direct Investment
23
FDI ratios are very high in the region but they are
expected to decline…
35
30.8
30.8
30
Net FDI, as GDP% 2007
28.1
25.4
25
21.1
20
16.1
15.6
14.2
15
8.7
10
5
3.8
3.9
3.7
T&T
Suriname
DR
0
A&B
Dominica
Grenada
St. Kitts
St. Lucia
Source: Central Banks and IMF. *Prelimanary data or projections.
St. Vincent
Guyana
Jamaica
Belize
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There are indications that FDI is slowing, with
tourism projects put on hold…
 Baha Nar, a US$2.6 billion project in Nassau, which
would have employed 4,400 building workers has
been stopped.
 Mayaguana, US$1.8 billion resort, in Bahamas on
hold
 Grenada: Major tourism projects on hold (US$262 m)
 Jamaica, St. Lucia, Anguilla, Grenada projects halted.
 DR, authorities have confirmed a large mining
investment for 2009
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External demand effects - Trade
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In DR, Exports have recently started a sharp
contraction
Evolution of trade (in value)
D om inican R e p. M ain e x ports de s tinations (% )
5000
4500
U SA (8 0 )
4000
EU (1 0 )
K O R (1 .2 )
M EX (1 .0 4 )
value in US$
C A N(1 .5 )
3500
3000
2500
2000
1500
D EU (0 .9 )
JP N(0 .7 8 )
1000
500
1997
C A FTA 5 (0 .7 7 )
1998
1999
National Exports
2000
2001
2002
2003
2004
2005
2006*
2007*
Free Trade Zone Exports
Table 1: Exports by Main Destination (percent)
USA
Haiti
EU 5
China
Japan
Other Countries
2006
32
10
15
4
2
37
2007
30
6
27
3
4
29
2008
23
13
29
3
2
30
Source: LCSPE calculation on CEI-RD data. Note: data include only
“national” export flows and excludes exports by the Free Trade Zones.
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2008
Growth is expected to slow in 2009…the outlook
is difficult, with risks mainly on the downside…
Real GDP Growth (percentage change)
11.0
2007
9.0
2008
2009
2010
7.0
5.0
3.0
1.0
Source: IMF and Press releases
Dominican
Republic
Suriname
Bahamas
Barbados
Trinidad &
Tobago
Belize
OECS
average
Guyana
-3.0
Jamaica
-1.0
30
Employment is responsive to growth cycles in the
region…
Employment-growth elasticity differs across countries and years
Elasticity of Employment to total GDP
Elasticity of Employment
1.4
1993-97
1997-01
Bahamas
DR
2001-05
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Source: ILO (KILM)
Guyana
Jamaica
Suriname
T&T
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Policy Challenges
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Fiscal challenges




Fiscal deficits remain high in many countries
Debt burdens are high
Fiscal space is limited
Revenues dependent on commodities in some
countries
35
Fiscal space is limited, with high ridigity in
expenditures….
Fixed expenditure (Wages, Interests and Pensions when available) as a share of Total
Revenue - 2007
80
76
70
70
61
60
60
54
51
50
49
38
40
30
20
10
0
Jamaica
Antigua y St. Vincent St. Kitts
Barbuda
Source: National Statistics and IMF
St. Lucia
Dominica
Grenada
Guyana
38
In DR, the currency depreciated, and NIR have
declined….
Source: Central Banks, IFS and LCSPE Database.
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-1
Source: IMF IFS.
Belize
Dominica
St. Kitts
St. Lucia
2008M11
T&T
2008M09
Jamaica
2008M07
2008M05
DR
2008M03
Barbados
2008M01
2007M11
Bahamas
2007M09
2007M07
2007M05
2007M03
2009M01
2008M11
2008M09
2008M07
2008M05
2008M03
2008M01
2007M11
2007M09
2007M07
2007M05
2007M03
2007M01
0
2007M01
Annual change (%)
Annual change (%)
…finally some good news: inflation pressures
easing due to slowdown in commodity prices
25
20
15
10
5
Guyana
15
13
11
9
7
5
3
1
St. Vincent
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What are Governments Doing?
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Policy responses to the crisis
Measures by country
Jamaica
Dominican Republic
Haiti
Bahamas
Barbados
Belize
Guyana
Antigua & Barbuda
Dominica
Grenada
St. Kitts & Nevis
St. Lucia
St. Vincent & the Grenadines
Monetary and
Fiscal policy
financial policy
x
x
x
Exchange-rate
and external
trade policy
Sectoral
policies
Employment
and social
policies
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Source: ECLAC, “The reactions of Latin American and Caribbean governments to the international
crisis: an overview of policy measures up to 30 January 2009”.
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Some Thoughts on What Governments Can Do?
 Avoid irreversible damage, that is actions that
prevent



Malnutrition
Withdrawing children from schools
Basic and preventive health interruptions
 Smart spending/stimulate without destroying
 Crisis as an opportunity
Leverage crisis to build consensus around key policy
reforms
 focus on medium and longer term recovery path
 target elimination of inefficiencies in both public and
private sectors

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Smart spending/stimulate without destroying
 Government could:





Leverage existing programs (e.g. expand existing safety nets)
Focus subsidies (e.g energy subsidies in DR)
Improve expenditure procedures and fiscal transparency in order to
ensure that increased public spending is well targeted
Where there is fiscal room, accelerate existing public investment
projects and maintanance spending but avoid starting large new
projects
increase the scope of automatic stabilizers. eg. make taxes progressive
 Governments should avoid



Subsidies to specific industries
Increases in minimum wages
Increases in public wages or increases in public employment
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World Bank Support
 Financing – crisis response


Financing to scale up well-targeted safety net programs
from ongoing (e.g. Jamaica $40 million PATH project) or
new projects
Budget support based on policy programs (pipeline: DR,
Grenada?) that are aimed at maintaining macrostability
while protecting the poor
 Medium term response – AAA, TA, lending for



Strengthened social protection systems
Improved competitiveness and growth
Strengthened governance and public financial
management
47
Thank you
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