How Vulnerable is Central
America to Shocks From
the South?
Inter-American Development Bank
10-25-02
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
• 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?
CAC7 - Bilateral Real Exchange Rate with US
(Dec. 1995=100)
120
Asian Crisis
Mexican Crisis
Russian Crisis
Argentina Crisis
115
110
105
100
95
90
85
CRI
DOM
SLV
GTM
HND
Source: WEO (Sept 2002) - forecast for 2003 from EIU Sep- 2002
PAN
NIC
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
Jul-99
Jan-99
Jul-98
Jan-98
Jul-97
Jan-97
Jul-96
Jan-96
Jul-95
Jan-95
Jul-94
Jan-94
80
Real Exchange Rate Depreciation
(vis-à-vis the US dollar, Jun. 2002 vs. Jan. 1997)
ARG
-30
-20
-10
0
10
223.37
20
BRA
117.75
CHL
47.14
COL
38.53
PER
23.23
NIC
11.57
PAN
8.3
CRI
6.88
GTM
3.21
DOM
2.82
SLV
0.09
VEN
-5.52
-19.11
-19.84
HND
MEX
-25
25
Source: IFS/IMF
75
125
175
225
275
CAC6- Lending Interest Rates
50
45
40
35
LAC7 Average
30
LAC7 Median
25
CAC7 Average
20
CAC7 Median
Source: IFS (IMF).
*The values do not include El Salvador
2
Ja
n0
-0
1
Ju
l
1
Ja
n0
-0
0
Ju
l
0
Ja
n0
-9
9
Ju
l
9
Ja
n9
-9
8
Ju
l
8
Ja
n9
-9
7
Ju
l
Ja
n9
7
15
CAC-7 Capital Flows
(billions of US dollars)
6
Total Capital Flows+
5
Errors & Omissions
4
3
FDI
2
Non FDI
1
0
-1
1997
1998
-2
Source: WEO (Sept 2002)
Includes Errors and Omissions
1999
2000
2001
2002f
Errors & Omissions
CAC-7 Capital Flows
(% of Total Capital Flows+Errors & Omissions, Average 1997-2002f)
1.5
1
0.5
0
CRI
DOM
SLV
GTM
HND
NIC
-0.5
-1
Source: EIU (Sept 2002)
FDI
Non FDI
Errors & Omissions
PAN
CAC7 Current Account Balance
(% of GDP)
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
-3.9%
-5.2%
-4.6%
2002f
-5.0%
-4.5%
2001
-4.3%
-4.2%
-5.2%
Source: WEO (Sept 2002) - forecast for 2003 from EIU Sep- 2002
2003f
2000
1999
1998
1997
-6.0%
CAC7- Current Account Balance
(as a % of GDP, 2001)
SLV
DOM
CRI
PAN
HON
GTM
NIC
-25.00%
-20.00%
Source: EIU
-15.00%
-10.00%
-5.00%
0.00%
Private Capital Flows
(US$ billions)
65
6
LAC7
CAC7
60
5.5
40
3.5
35
3
30
2.5
2002 f
4
2001
45
2000
4.5
1999
50
1998
5
1997
55
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
• 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?
Spreads w.r.t. US Treasury Bonds
600
900
550
500
800
400
700
350
600
300
250
500
200
DOM
Source: Bloomberg
SLV
GTM
CRI
PAN
EMBI+
9/2/02
7/2/02
5/2/02
3/2/02
1/2/02
11/2/01
9/2/01
7/2/01
5/2/01
3/2/01
400
1/2/01
150
EMBI +
450
Gross Domestic Product
(yoy % change)
CAC 7
7%
LAC 7
6%
5%
4%
3%
2%
1%
Source: EIU (Oct 2002)
2003f
2002f
2001
2000
1999
1998
1997
1996
1995
1994
-2%
1993
-1%
1992
0%
Gross Domestic Product
(yoy % change)
CAC 7
7%
USA
6%
5%
4%
3%
2%
1%
Source: EIU (Oct 2002)
2003f
2002f
2001
2000
1999
1998
1997
1996
1995
1994
-2%
1993
-1%
1992
0%
Econometric Evidence: CAC7 and U.S.A. GDP
Growth
Dependent variable: Cyclical component of CAC7 GDP growth
Cyclical component of U.S.A. GDP growth
Terms of trade
International interest rate
(1)
(2)
0.298
0.916
(2.19)
(2.12)
0.005
0.023
(0.68)
(1.68)
-0.064
-0.574
(-0.81)
(-1.64)
LEI spread
0.001
(0.50)
Observations
Number of countries
Fixed effects
(1)
Data from 1980 to 2001
(2)
Data from 1992 to 2001
153
70
7
7
YES
YES
Exports + Imports (% GDP)
(2001)
90
80
70
60
50
40
30
20
10
Source: WEO (Sept 2002) and RES/BID estimates
ARG
BRA
PER
COL
MEX
VEN
PAN
GTM
CHL
SLV
HND
DOM
NIC
CRI
0
CAC7 - Export Composition according to
destiny (2001)
Source:EIU
US
Mexico
CAC7
PAN
NIC
HND
GTM
SLV
DOM
CRI
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
CAC-7 Remittances
(billions of US dollars)
6
Remittances
5
4
Capital Flows +
Errors y Omissions
3
2
1
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
CAC-7 Remittances
(as a % of FDI Capital Flows, for 2001)
713
1000
479
261
158
151
100
24
10
3
1
CRI
DOM
SLV
GTM
Source: WEO, Central Banks and RES estimates
HND
NIC
PAN
Total Capital Flows and Remittances (% of GDP)
Average 1997-2001
25
20
15
10
5
0
NIC
PAN
GTM
Capital Flows / GDP
CRI
HND
SLV
Remittances / GDP
Source: WEO (Sept 2002), Central Banks and RES estimates
Capital flows include errors and omissions
DOM
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?
CAC-7 Capital Flows*
(as a % of GDP, 5 year average as of 2001)
25.00%
20.00%
15.00%
10.00%
5.00%
Source: WEO & EIU
* Includes Errors & Omissions
VEN
PER
MEX
COL
CHL
BRA
ARG
PAN
NIC
HND
GTM
SLV
DOM
-5.00%
CRI
0.00%
Public Sector Balance (% of GDP)
CRI
DOM
2002f
2001
2000
1999
SLV
GTM
HON
NIC
PAN
-20%
Source: EIU (Sept 2002)
-15%
-10%
-5%
0%
5%
Fiscal Sustainability
DOM
SAL
GTM
HON
48.9
24.3
36.89
28.12
63
Real Interest Rate
5.98
4.49
5.12
4.56
4.02
1.62 5.67
Real GDP Growth *
4.8
6
4.26
3.7
3
3.5
0
-3.8
-1.5
-5.9
Observed Public Debt (% of GDP)
Observed Primary Surplus (% of GDP) -5
Req. Primary Surplus (% of GDP)
0.54
-0.35
0.30
Source: Own estimates. Data from EIU
Notes:/* Refers to geometric average of growth rates during the last decade
0.21
0.62
NIC
PAN
CRI
202.9 75.6
-15.8
3.38
-2.8
-3.78 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))
1
0.95
0.9
0.85
0.8
0.75
0.7
0.65
0.6
0.55
Source: WEO (Sept 2002) and RES/BID estimates
NIC
BRA
VEN
GTM
ARG
MEX
PAN
COL
PER
CRI
HON
DOM
CHL
SLV
0.5
CAC7:Public Debt (% of GDP)
60
50
40
30
20
10
0
1995 1996 1997 1998 1999 2000 2001 2002f 2003f
Total Public Debt
Source: EIU .(Median)
External Public Debt
CAC7 & LAC7:Public Debt (% of GDP)
60
50
40
30
20
10
0
1995
1996
1997
1998
1999
CAC7 Total Public Debt
LAC7 Total Public Debt
Source: EIU and Central Banks.(Median)
2000
2001
2002f
CAC7 Ext. Public Debt
LAC7 Ext. Public Debt
Currency Composition of Public Sector Debt (2001)
[eD*/(D + eD*)]
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
Source: Central Banks and EIU
CHL
CRI
BRA
COL
MEX
VEN
GTM
NIC
DOM
HON
PER
ARG
PAN
SLV
0%
Financial Mismatch of the Public Sector
[(D/eD*)/(Y/eY*)] (2001)
1.2
1
0.8
0.6
0.4
0.2
Source: Central Banks and EIU
SLV
PAN
ARG
PER
GTM
NIC
COL
HON
MEX
BRA
VEN
CHL
DOM
CRI
0
Deposits and Loans in Foreign
Currency
Nicaragua
Costa Rica
Honduras
Dominican Rep.
Deposits in FC/Deposits
Loans in FC/Loans
Guatemala
0
10
20
30
40
50
60
70
80
90
Loans in FC to non-tradable
sector/Loans
Nicaragua
Costa Rica
Guatemala
Honduras
0
10
20
30
40
50
60
70
80
90
Investment in Public Sector/Assets (loans to
public sector are not considered)
Nicaragua
Costa Rica
El Salvador
Guatemala
Honduras
0
5
10
15
20
25
30
35
Capital Flows Vulnerability: A summary
CRI
DOM SLV
GTM HON
NIC PAN
Public Debt (% of GDP)
Financial Mismatch of the
Public Sector
Financial Mismatch of the
Private Sector
?
Financial System exposure to
the Public Sector
?
= High
Source: Central Banks and EIU
= Medium
?
= Low
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.
How Vulnerable is Central
America to Shocks From
the South?
Inter-American Development Bank
10-25-02