The effects of the financial crisis on developing countries mapping out the issues By Julian Jessop
1. Plan of My Talk The outlook for advanced economies. Impact on developing countries. Some losers and winners. Can developing economies save the rest? Conclusions key issues.
2. Price Falls Needed to Return House Price to Income Ratios to Their Long-Run Average (%) Total Falls to date Yet to come? Spain 42 7 37 Ireland 42 11 35 Netherlands 42 0 42 Australia 39 0 39 UK 35 13 25 France 32 0 32 Denmark 28 4 25 Italy 27 0 27 US 26 18 10 Norway 24 0 24 Sweden 23 0 23 Canada 14 0 14 Sources: Thomson Datastream & Capital Economics
3. 3 Month Inter-Bank Rates Minus 3 Month Treasury Bill Rates (bps) (2007 2008) Source: Thomson Datastream
4. Capital Economics GDP Growth Forecasts (% Annual) 2008 2009 2010 US 1.4-1.5 0.0 UK 1.0-1.5-1.0 Euro-zone 1.2-1.0 0.5 Japan 0.3-0.2 1.1
5. Annual GDP Growth (%) (1980-2009) Sources: Thomson Datastream and Capital Economics
6. Effects on developing countries 1. Common factors driving both developed and developing countries. 2. Trade in goods and services, FDI. 3. Commodity prices. 4. Financial markets securities, currencies. 5. Policy responses aid, protectionism.
7. Common factors? Financial excesses. House price bubbles. Household debt. Current account deficits. Relatively rare in emerging markets main exceptions in Emerging Europe, parts of Asia.
10 5 8. Regional Current Account Balances (% GDP) Emerging Asia Emerging Europe Latin America 10 5 0 0-5 -5-10 -10-15 80 83 85 87 89 91 93 95 97 99 01 03 05 07-15 Source: IMF
9. Emerging Europe Current Account Deficits (% GDP) (2008) Source: Capital Economics
10. Emerging Asia Current Account Balances (% GDP) 15 15 10 10 5 5 0-5 -10-15 NIE-4 ASEAN-4 Other Asia China 82 85 87 89 91 93 95 97 99 01 03 05 07 0-5 -10-15 Source: IMF. NIE-4 = HK, Korea, Singapore, Taiwan. ASEAN-4 = Indonesia, Malaysia, Philippines, Thailand. Other Asia = India, Pakistan, Sri Lanka, Vietnam.
11. Trade and FDI links Smaller countries more vulnerable typically have higher export/gdp ratios. Also more likely to lose FDI? Low cost countries may have an edge as consumers become more price conscious.
12. Exposure of Asian Countries to the US (% Shares of GDP) 120 Exports to US (direct) 100 80 60 Exports to US (including goods finished in third countries) Total Exports 185% 120 100 80 60 40 20 0 40 20 0 GDP decreasing Source: Thomson Datastream
13. Emerging Europe Exports to Euro-zone (% GDP) (2007) 45 40 35 30 25 20 15 10 5 0 45 40 35 30 25 20 15 10 5 0 Sources: Thomson Datastream & IMF
14. Emerging Europe GDP Forecasts (% y/y) (2009) Source: Capital Economics
15. Long-term bullish case for commodities Strong growth in final demand especially from developing countries. Reduced capacity of supply to respond. This reflects a range of constraints, including - previous years of under-investment; - finite natural resources (oil, land, water); - limited scope for further productivity improvements (especially in agriculture); - increased frequency of supply shocks (due to global warming and geopolitical risks).
16. Crude Oil Price ($ per Barrel) (2005-2008) (Latest = 13 November) Source: Thomson Datastream
17. Agricultural Commodity Prices (Jan 05 = 100) (2005 2008) (Latest = 13 November) Source: Bloomberg
18. Per Capita Daily Calorie Intake of Meat (2001 2003) Source: FAO Statistical Yearbook
19. Financial Markets the negatives General flight to safety i.e. government bonds, US dollar and Japanese yen. All riskier assets and currencies have suffered, not just emerging markets. Emerging market bonds have not done as badly as lower rated advanced economy corporate bonds.
20. Year-to-Date Stock Market Performance (%) 0-10 -10-20 -20-30 -30-40 -40-50 -50-60 -60-70 -70 0 Source: Bloomberg
21. Year-to-Date Performance Against the US$ (%) 20 20 10 0-10 -20-30 -40 10 0-10 -20-30 -40 Source: Bloomberg
22. Financial Markets the positives Negative wealth effects (from falling equity markets) smaller in developing economies. Currency weakness less of a worry than before for Asia (though large foreign currency debts common in Emerging Europe). Prolonged period of low global interest rates may see recovery in emerging markets where fundamentals actually relatively good.
23. Interest Rate Forecasts (%) (2000-2010) (Latest = November) Sources: Thomson Datastream & Capital Economics
24. Policy responses Aid budgets cut? Increased protectionism? Increased role for G20. Attempts to limit contagion. And in developing countries, looser monetary and fiscal policy.
25. Shares of World GDP (Market Exchange Rates, 2007, %) Euro-zone 22% UK 5% Japan 8% US 25% China 6% Other Asia 8% Other 26% Source: IMF
26. Some conclusions Emerging Asia - could turn out to be a safe haven. Emerging Europe - too close to the West. Latin America - triple whammy. Africa - commodity story. Need to worry most about the over-indebted, commodity producers, and (as ever) the very poor.
The effects of the financial crisis on developing countries mapping out the issues By Julian Jessop