The Global Financial Crisis Implications for the Caribbean

Transcription

1 The Global Financial Crisis Implications for the Caribbean Trevor Alleyne* Caribbean Development Bank Conference Barbados December 3, 28 *The views expressed herein are those of the author and should not n be attributed to the IMF, its Executive Board, or its management. ent.

2 Outline The channels through which Caribbean economies may be affected financial system and real sector The policy response how should policymakers confront the crisis 2

3 Outlook for Advanced Economies has Deteriorated Rapidly Real GDP Crisis in Global Financial Markets July 16, 28 Oct 1, 28 Oct 3, (Annual percent change) 4 3 (Annual percent change) 4 3 (Annual percent change) United States United Kingdom Canada Euro Area Source: World Economic Outlook, IMF; and Fund staff calculations. 3

4 Caribbean Contagion Channels Transmission Channels Global Economy Meltdown of subprime mortgage market Exposure to subprime assets Contamination of other mortgage-backed securities, losses at Fannie Mae and Freddie Mac Exposure to other mortgage backed assets Exposure to failed banks & NBFIs Failure of major financial institutions in the US and EU Collapse of major credit markets, total liquidity freeze Drying up of government, trade, investment, and consumer credit Sharp drop in advanced economy equity prices Loss in share value on domestic and foreign markets Sharp decline in consumer demand and output Recession Loss in foreign export markets, in FDI, in assets/savings; and in remittances The Caribbean Region Financial Institutions Increase in non performing loans Private companies and private households Loss of employment and income Loss in reserves Drop in offshore financial services activity Loss in tax revenue; need to provide financial assistance? Governments, Central banks 4

5 Assets of Financial System Some deterioration in asset quality foreign investments of commercial banks, non-banks (securities firms, insurance companies, pension funds) In Jamaica, investments in GOJ bonds Not clear about situation with other investments, not necessarily limited to distressed assets Transmission Channels Financial Unavailability of liquid assets Liquid assets may be tied up in problem institutions. 5

6 Global Credit Squeeze Transmission Channels Financial Global credit squeeze Tighter global borrowing conditions could squeeze domestic liquidity and raise domestic interest rates. Trade credit lines Withdrawal for Caribbean importers; Demand for credit lines from foreign purchasers of Caribbean exports Other external funding Wider sovereign spreads, increased rollover risk Problems for leveraged financial institutions 6

7 Transmission Channels Financial Sovereign Spreads on internationally traded bonds have risen Emerging Market Sovereign Spreads (Basis points) Belize Jamaica EMBI+ Latin February-4 May-4 August-4 November-4 February-5 May-5 August-5 November-5 February-6 May-6 August-6 November-6 February-7 May-7 August-7 November-7 February-8 May-8 August-8 November-8 Source: JP Morgan 7

8 Transmission Channels Financial Foreign Bank Contagion Advanced country banks traditionally viewed as source of strength for local financial system but now a source of vulnerability. Canadian banking system thus far avoided crisis banks rated highly, but situation could change rapidly. Banks could transmit US/European/emerging market financial crisis to local systems. 8

9 Potential Spillovers from Global Financial Crisis 1 Financial conglomerates are active in the Caribbean, suggesting a channel of contagion across the region. Transmission Channels Financial 8 Scotiabank RBTT 1/ First Carib. Republic RBC Citigroup BAR T&T SVG GRE ANT JAM GUY STL DOM BEL SKN SUR BAH HAI 1/ RBTT was squired by Royal Bank of Canada (RBC) in June 28 9

10 Investors have viewed Canadian and other non- US banks more favorably than US competitors Transmission Channels Financial 9 7 Canadian /Non-US Banks November 1, 27 = 1 Jan-8 Apr-8 Jul-8 Oct-8 RBC Scotiabank Citigroup HSBC Morgan Stanley Bank of America US Banks Thomson Reuters; and Fund staff calculations. 1

11 Transmission Channels Financial Markets perceive a strong correlation in the probability of distress among global banks Probability that bank in row will become distressed if bank/country in column fails based on CDS market data July 1, 27 BBVA Santander Citigroup Scotiabank HSBC Mexico Colombia Brazil Chile Citigroup Scotiabank September 3, 28 Citigroup Scotiabank Source: Fund staff calculations 11

12 Transmission Channels Real Economy Crisis and the Real economy Economic slowdown/recession in major trading partners Lower tourism receipts Lower remittances Lower FDI and other private capital Lower commodity prices Slower economic growth Balance of payments pressures 12

13 Transmission Channels Real Economy Tourism will be adversely affected by slowing growth in advanced economies Travel Receipts for Tourism Dependent States (in Percent of GDP), Average Antigua and Barbuda Maldives Bahamas, The St. Lucia Netherlands Antilles Barbados Lebanon Seychelles St. Kitts and Nevis Grenada St. Vincent & Grens. Vanuatu Malta Cyprus Jamaica Croatia Dominica Fiji Gambia, The Samoa Belize São Tomé & Príncipe Dominican Republic Jordan 13

14 The Caribbean has a high degree of dependence on remittances flows. Total Remittances, Average over 2-27 Transmission Channels Real Economy 4 35 (In percent of exports) Trinidad and Tobago Suriname Antigua and Barbuda Belize St. Lucia Barbados St. Vincent & Grens. Dominica St. Kitts and Nevis Guyana Grenada Jamaica Source: Balance of Payments Statistics, IMF; and World Economic Outlook, IMF Note: Total remittances include worker remittances and migrant transfers. 14

15 Current account deficits in the region are financed by financial flows which are expected to slow down going forward Antigua and Barbuda Bahamas, The Current Account Balance FDI Portfolio flows Other flows (Percent of GDP, 27) Barbados Belize Dominica Grenada Guyana Jamaica St. Kitts and Nevis Transmission Channels Real Economy St. Lucia St. Vincent & Grens. Suriname Trinidad and Tobago Source: International Financial Statistics, IMF; WEO, IMF; and Fund staff calculations 15

16 Concerns about the global economy are pushing down crude oil prices leading to some relief to the cost of imports for the Caribbean US$ bill Transmission Channels Real Economy Projection US$ / Barrel / 29 2/ 29 3/ Oil imports Non-oil imports Oil price (RHS) 4/ Source: World Economic Outlook, IMF; and Fund staff calculations. 1. Based on October 28 WEO. 2/ Using October 28 WEO projection for oil prices and assuming volume of oil imports stays constant at 28 levels 3/ Using November 24, 28 NYMEX futures contract price for Light Sweet Crude Oil for January 29 delivery and assuming volume of oil imports stays constant at 28 levels. 4/ Average of three spot prices; Dated Brent, West Texas Intermediate, and the Dubai Fateh, US$ per barrel 16

17 Transmission Channels Real Economy Growth in certain Caribbean states is highly sensitive to change in U.S. growth Cyclical Growth Elasticities of Caribbean Countries Relative to the U.S Barbados ECCU Guyana Jamaica Trinidad and Tobago Source: Fund staff estimates. 17

18 Transmission Channels Real Economy Global slowdown in major trading partners will lead to a decline in Caribbean tourism and growth (Annual percent change) Projection Major Trade Partners Ouput 1/ Caribbean Output 2/ Caribbean Tourism Receipts Source: World Economic Outlook, IMF 1/ Weighted average of United States, United Kingdom, Canada and the Euro Area 2/ Un-weighted average of full members of CARICOM (excluding Haiti and Montserrat) 18

19 Transmission Channels Real Economy Spillovers from a US credit crunch will likely involve reduced capital inflows, remittances, and exports Estimated Impact of a Severe Credit Crunch in the U.S. on Jamaica -1 Impact on capital inflows to Jamaica of a 2 std. dev. decline in banks' credit to the private sector in the U.S. (In millions of U.S. dollars) 2.. Impact on Jamaica's current account of 2 std. dev. decline in banks' credit to the private sector in the U.S. Change in current account balance (US$ mn., RHS) FDI Change in annual current transfers (US$ mn., RHS) Other capital Cummulative declines: Gross Capital Inflows: US$7 mn. FDI:US$45 mn. T = T = 1 T= 2 T= 3 T= 4 T= Percentage change in exports volume, goods and services (LHS) T = T = 1 T= 2 T= 3 T= 4 T= Source: Fund staff estimates. 19

20 Transmission Channels Real Economy Growth in the Caribbean have been revised downward in light of the global financial crisis. Real GDP Growth outlook for selected Caribbean Countries Jamaica Barbados Trinidad & Tobago 1-1 Spring/Summer Current Spring/Summer Current Source: Fund staff estimates. 2

21 Outline The channels through which Caribbean economies may be affected financial system and real sector The policy response how should policymakers confront the crisis 21

22 Policy Challenges Policy Response: Actions Authorities Have Taken Central Bank Actions Fiscal Actions Other Actions The Bank of Jamaica (i) introduced a temporary lending window to supply US dollar liquidity (up to US$3 million) to domestic financial institutions facing margin calls from external creditors; (ii) strongly raised interest rates and increased cash reserve requirement In Barbados, in late October, the central bank cut the minimum deposit rate by 5 bps to 4 percent. In The Bahamas, govt. announced plans to step up targeted social transfers and electricity subsidies; temporary introduction of an unemployment insurance scheme. In Trinidad and Tobago, faced with the prospect of sharply reduced fiscal revenues, the Prime Minister recently announced expenditure reductions to prevent the emergence of a fiscal deficit. Tightening of credit standards in the ECCU ECCB stepped up frequency of on-site examinations of commercial banks In Grenada, after seeing two airlines collapse, the government decided to provide bonds to new airlines under which the government will pay the airlines if a specified share of seats are not filled. In Jamaica, the government plans to access IDB facility which aims to provide trade credit lines to private sector. 22

23 Policy Response: Financial System Quickly assess country s s exposure to various contagion channels. Gather detailed information on financial system s s foreign assets to assess losses - need for capital infusion and/or provisioning? Are liquid assets held abroad accessible? Intensify oversight of non-banks, improve quality of information, and accelerate reforms for strengthening regulation. Intensify cross-border information sharing and coordination among regulators. Establish contingency plans and conduct fire drills - including in a regional context - to prepare for liquidity crises. Policy Challenges 23

24 Policy Response: Macroeconomic policies With access to credit markets severely constrained, careful international reserve management is a priority. Explore options with multilaterals, donors, regional swap arrangements, to boost international reserves. Monetary policy geared toward safeguarding reserves Maintain commitment to medium-term fiscal sustainability objectives. Policy Challenges Highly indebted countries will have little room for countercyclical policy stance minimize slippages from short-run run fiscal targets. Fiscal space can be created by accelerating structural reforms in fiscal area. 24

25 Policy Response: How can the IMF Assist? Intensified consultation to enhance and develop contingency plans to address alternative adverse scenarios in global financial markets. Work closely with other IFIs, donors, regional development institutions (IDB, CDB, EU, CIDA, bilaterals) Fund facilities: Emergency Financing Mechanism Short-term term Liquidity Facility Stand By Arrangements (precautionary) Revamped Exogenous Shocks Facility PRGF (including augmentation - Grenada, Haiti) Policy Challenges 25

26 Thank you