Impact of the US Subprime Impact of the US Subprime Crisis on the Global Economy Crisis on the Global Economy and the Caribbean and the Caribbean Christina Daseking* Christina Daseking* ([email protected]) ([email protected]) Western Hemisphere Western Hemisphere Department Department International Monetary Fund International Monetary Fund iews expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its manag ews expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its manag
Transcript
Impact of the US Subprime Impact of the US Subprime Crisis on the Global Economy Crisis on the Global Economy
Western Hemisphere Western Hemisphere DepartmentDepartment
International Monetary FundInternational Monetary Fund*The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.*The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.
22
OutlineOutline
Strains in financial markets Strains in financial markets →→
Weakening of global economic Weakening of global economic outlook outlook →→
Impact on the Caribbean Impact on the Caribbean →→
Conclusions and policy Conclusions and policy recommendations recommendations →→
33
The troubles started with a housing The troubles started with a housing market correction—which is still market correction—which is still
underway...underway...
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1989 1994 1999 2004 2009
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
United StatesEurope ex-U.K.
U.S. and European House Price Inflation(Percent year-on-year)
Source: Global Financial Stability Report, 2008Note: Europe ex-U.K.: unweighted average of Spain, Germany, Italy, Netherlands, Greece (from 1995), Ireland (from 1997).
United Kingdom
Futures implied
Strains in global financial marketsStrains in global financial markets
44
... as mortgage delinquencies continue to ... as mortgage delinquencies continue to rise rise
Strains in global financial marketsStrains in global financial markets
0
5
10
15
20
25
0 4 8 12 16 20 24 28 32 36 40 44 48 52
Months after origination
Sources: Global Financial Stability Report, IMF, 2008.Note: U.K. delinquencies for 90+ days; U.S. delinquencies for 60+ days.
U.S. and U.K. Nonconforming Delinquencies by Mortgage Vintage Year(In percent of original balance)
Strains in global financial marketsStrains in global financial markets
-30
-10
10
30
50
70
90
1990 1993 1996 1999 2002 2005 2008
-30
-10
10
30
50
70
90
Residential mortgagesCommercial real estate
Net Percentage of Banks Tightening Lending Standards
Source: Haver Analytics.
66
Aggregate potential losses from Aggregate potential losses from financial crisis estimated at US$ 945 financial crisis estimated at US$ 945
billionbillion
0
200
400
600
800
1000
U.S. savings and loan (1986-1995)
Japan banking crisis (1990-1999)
Asia banking crisis (1998-1999)
U.S. subprime crisis (2007-present)
-
5
10
15
20
25
30
35
40
Losses (in billions of U.S. dollars, left scale) Percent of GDP (right scale)
Comparison of Financial Crises
Sources: Global Financial Stability Report, IMF, 2008.Note: U.S. subprime costs represent staff estimates of losses on banks and other financial institutions. All costs are in real 2007 dollars. Asia includes Indonesia, Malaysia, Korea, the Philippines, and Thailand.
Otherfinancials
Banks
Strains in global financial marketsStrains in global financial markets
←
77
Housing and financial market Housing and financial market pressures are interacting to slow pressures are interacting to slow
growth.growth.
-3
-2
-1
0
1
2
3
4
1992 1994 1996 1998 2000 2002 2004 2006 2008-1
0
1
2
3
4
5
6Real GDP; 12-month % change
(Loan stds., LIBOR, HY spread, equities, ...)
IMF Financial Conditions Index
Financial conditions
index
Global economic outlookGlobal economic outlook
0
200
400
600
800
1000
1200
2000 2001 2002 2003 2004 2005 2006 2007 2008
High-yield bonds
High-yield CDS
Re-pricing of Risks(Spreads, in basis points)
80
100
120
140
160
180
200
220
240
2000 2003 2006 200980
100
120
140
160
180
200
220
240
Futures market prices
Case-Shiller
10 cities index
Declining House Prices
88
0
1
2
3
4
0
1
2
3
4
Advanced economies are most Advanced economies are most affected by financial turbulence...affected by financial turbulence...
11 07 08 0907 08 09 United StatesUnited States
11 07 08 0907 08 09 Euro areaEuro area
11 07 08 0907 08 09 JapanJapan
Annual growthAnnual growth
Potential GDP growthPotential GDP growth
(Percent change)(Percent change)
Source: WEO
Global economic outlookGlobal economic outlook
99
...but other countries will be affected, ...but other countries will be affected, too...too...
2007 2008 2009 2008 2009
World 4.9 3.7 3.8 -0.5 -0.6
Advanced economies 2.7 1.3 1.3 -0.6 -0.8
Emerging and developing economies 7.9 6.7 6.6 -0.2 -0.4
Source: World Economic Outlook, IMF
Current projections J an. 2008 projections
Difference from
Recent Changes to Growth Outlook
Global economic outlookGlobal economic outlook
1010
...and the balance of risk to global growth ...and the balance of risk to global growth remains remains tiltedtilted to the downside. to the downside.
1
2
3
4
5
6
2004 2005 2006 2007 2008 2009
1
2
3
4
5
6
50 percent range 70 percent range
90 percent range
Source: WEO.
Baseline forecast
←
Global economic outlookGlobal economic outlook
1111
Caribbean stock markets saw little Caribbean stock markets saw little impact from the financial impact from the financial
turbulence...turbulence...Stock Prices
(In percent change; local currency) 1/
-20
-10
0
10
20
30
40
50
S&P MSCILatam
MSCIEMEA
MSCIAsia
J AM T&T BAR ECSE-30
-20
-10
0
10
20
30
40
50
July 1, 2007 - April 11, 2008
Impact on the Impact on the CaribbeanCaribbean
1212
...although sovereign spreads on ...although sovereign spreads on internationally traded bonds have internationally traded bonds have
risenrisenEmerging Market Sovereign and U.S. High Yield Spreads(Basis points)
0
200
400
600
800
1000
1200
1400
1600
2000 2001 2002 2003 2004 2005 2006 2007 2008
EMBI Latam
U.S. high-yield
J amaica
Trinidad
Sources: Bloomberg; and Datastream.
Impact on the Impact on the CaribbeanCaribbean
1313
The banking systems in the region are The banking systems in the region are well capitalized and profitable...well capitalized and profitable...
Impact on the Impact on the CaribbeanCaribbean
Capital Adequacy NPLs/Total Loans Return on Assets
Source: International Financial Statistics.1/ Computed as simple average over the period. Data for J amaica and Barbados for 2007 are for end-November.
Contributions to Private Sector Credit Growth (in Percent), 2005-07 1/of which: contributions from
Impact on the Impact on the CaribbeanCaribbean
1515
Canadian banks with representation Canadian banks with representation across the region dominate the across the region dominate the
system...system...
Impact on the Impact on the CaribbeanCaribbean
*The Royal Bank of Trinidad and Tobago is in the process of being acquired by the Royal Bank of Canada.
CARICOM: Country Presence of Regional Banks, 2005(In number of countries)
0
2
4
6
8
10
12
14
Bank ofNovaScotia
Royal Bankof Trinidad
and Tobago
FirstCaribbean
InternationalBank
Royal Bankof Canada
Citibank RepublicBank
1616
......but have been relatively protected but have been relatively protected from losses thus far.from losses thus far.
Global Bank Losses, as of March 2008(In billions of U.S. dollars)
Total Reported Remaining Subprime-Related
Losses Losses ExpectedCountry/Region
Europe 80 43 Of which: United Kingdom 19 22
United States 95 49Canada 7 0
Asia 11 3 Of which:
J apan 10 0
GCC 1 0
Total 193 95
Sources: Goldman Sachs; UBS; and IMF staff estimates.
Impact on the Impact on the CaribbeanCaribbean
1717
But financial risks remain...But financial risks remain...
Challenges of consolidated and Challenges of consolidated and cross-border supervision cross-border supervision Regulatory weaknesses in non-bank Regulatory weaknesses in non-bank financial sectorfinancial sectorInadequate reporting and disclosure Inadequate reporting and disclosure standards, including for off-balance standards, including for off-balance sheet entities (as in many advanced sheet entities (as in many advanced economies)economies)Exposure to sectors affected by the Exposure to sectors affected by the slowdown (real estate)slowdown (real estate)
Impact on the Impact on the CaribbeanCaribbean
1818
... and there are other channels for the ... and there are other channels for the financial crisis to affect the region.financial crisis to affect the region.
Tourism dependence Tourism dependence →→
Reliance on FDI inflows Reliance on FDI inflows →→
High levels of public debt in many High levels of public debt in many countries countries →→
Impact on the Impact on the CaribbeanCaribbean
1919
Tourism will be adversely affected by Tourism will be adversely affected by slowing growth in advanced economiesslowing growth in advanced economies
0
10
20
30
40
50
60
Maldive
s
Antigu
a an
d Ba
rbud
a
Baham
as, T
he
St. Luc
ia
Netherlan
ds A
ntille
s
Barba
dos
Leba
non
Seych
elles
St. Kitts
and Nev
is
Grena
da
St. Vinc
ent &
Gre
ns.
Vanua
tu
Malta
Cypru
s
J amaic
a
Croati
a
Domini
ca Fiji
Gambia
, The
Samoa
Belize
São T
omé &
Prín
cipe
Domini
can R
epub
lic
J ordan
Travel Receipts for Tourism Dependent States(in Percent of GDP), Average1980-2005
Impact on the Impact on the CaribbeanCaribbean
←
2020
FDI inflows are sizable and could also FDI inflows are sizable and could also be adversely affected be adversely affected
0
6
12
18
24
2000 2001 2002 2003 2004 2005 2006
ECCU 1/
J amaicaBarbados
Foreign Direct Investment in Percent of GDP, 2000-06
The Bahamas
Source: World Economic Outlook, IMF.1/ Computed as a simple average of six IMF member countries.
Impact on the Impact on the CaribbeanCaribbean
←
2121
High public debt exposes countries to High public debt exposes countries to liquidity pressures and constrains fiscal liquidity pressures and constrains fiscal
space.space.
0
40
80
120
160
200
St.
Kitt
s an
d N
evis
Leba
non
Jam
aica
Gre
nada
Ant
igua
and
Bar
buda
Dom
inic
a
Egy
pt
Bel
ize
Bar
bado
s
St.
Vin
cent
and
Gre
ns.
Arg
ent
ina
St.
Luci
a
Bra
zil
Tur
key
Uru
guay
Phi
llipi
nes
Pan
ama
Bah
amas
, The
Mex
ico
Mal
aysi
a
Col
ombi
a
Tha
iland
Indo
nesi
a
Ecu
ador
Hai
ti
Sou
th A
frica
Trin
idad
and
Tob
ago
Sur
inam
e
Bul
garia
Source: World Economic Outlook; and Fund staff calculations.
Public Debt in Percent of GDP, end-2006
Impact on the Impact on the CaribbeanCaribbean
2222
Policy Recommendations for Financial Policy Recommendations for Financial Supervisors Around the GlobeSupervisors Around the Globe
Review financial institutions’ public Review financial institutions’ public disclosure standardsdisclosure standardsImprove access to information to assess Improve access to information to assess health of individual institutionshealth of individual institutionsProvide clearer guidance on risk transfer Provide clearer guidance on risk transfer and capital requirements for off-balance and capital requirements for off-balance sheet entities sheet entities Improve cross-border information sharing Improve cross-border information sharing and coordination among regulatorsand coordination among regulatorsEstablish contingency plans and conduct Establish contingency plans and conduct “fire drills” to prepare for liquidity crises“fire drills” to prepare for liquidity crises
2323
Conclusions and Policy Conclusions and Policy Recommendations for the CaribbeanRecommendations for the Caribbean
Notwithstanding resilience thus Notwithstanding resilience thus far, challenges lie aheadfar, challenges lie aheadStrong coordination between Strong coordination between fiscal, monetary, and incomes fiscal, monetary, and incomes policy will be crucial to:policy will be crucial to:– preserve debt sustainabilitypreserve debt sustainability– support the most vulnerable support the most vulnerable
groupsgroups– contain second-round effects on contain second-round effects on
inflationinflation
2424
Issues for DiscussionIssues for Discussion
Do participants agree with the Do participants agree with the identified risks and channels of identified risks and channels of transmission?transmission?
Are there additional channels?Are there additional channels?
How should policy makers balance How should policy makers balance the risk to stability (financial and the risk to stability (financial and social), growth, and inflation?social), growth, and inflation?
