The Impact of the Global Financial Crisis The Impact of the Global Financial Crisis on Low-Income Countries on Low-Income Countries
Dominique DesruelleDominique Desruelle
International Monetary FundInternational Monetary Fund
United Nations Economic and Social CouncilUnited Nations Economic and Social CouncilMarch 9, 2009March 9, 2009
Key messagesKey messages
The third wave of the global crisis is hitting low-income The third wave of the global crisis is hitting low-income countries (LICs)countries (LICs)
LICs are more integrated than before: trade, foreign LICs are more integrated than before: trade, foreign direct investment, and remittancesdirect investment, and remittances
22 LICs face acute financial constraints in 2009: additional 22 LICs face acute financial constraints in 2009: additional financing needs of at least US$25 billionfinancing needs of at least US$25 billion
The donor community must act to provide scope for The donor community must act to provide scope for countercyclical policiescountercyclical policies
Background: A decade of progress in LICsBackground: A decade of progress in LICs
Higher growth Higher growth Higher reserves Higher reserves Lower debt Lower debt
Better policies, global growth, and debt relief resulted in:Better policies, global growth, and debt relief resulted in:
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
1997 2002 200720
30
40
50
60Debt-to-GDP (in percent, right axis)
International reserves in months of imports
(left axis)
Real GDP growth (in percent, left axis)
More exportsMore exports More foreign direct investmentMore foreign direct investment More remittancesMore remittances
Remittances, FDI, and Exports in percent of GDP
05
10152025303540
Remittances/GDP FDI/GDP Exports/GDP
1990 2000 2007
The global environment is drastically worseningThe global environment is drastically worsening
Net food and fuel Net food and fuel importers were importers were weakened by the 2007-weakened by the 2007-08 price shock08 price shock
Commodities exporters Commodities exporters now face increased now face increased pressure on external pressure on external accountsaccounts
Selected Commodity Prices
(January 2004=100)
50100150200250300350400450
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Source: IMF staff projections.Dec-10Dec-10
Food
MetalsEnergy
Abrupt slowdown in advanced and emerging partner Abrupt slowdown in advanced and emerging partner countriescountries
2009 global outlook2009 global outlook
GDP growth (percent)
0
2
4
6
8
10
12
All LICs Sub-SaharanAfrica
Asia MiddleEast andEurope
LatinAmerica
WEO Spring 2008Latest projections
Current account deficit (in percent of GDP)
02468
1012141618
All LICs Sub-SaharanAfrica
Asia MiddleEast andEurope
LatinAmerica
WEO Spring 2008Latest projections
Lower GDP growthLower GDP growth Higher current account Higher current account deficitsdeficits
Immediate contagion from direct financial channels Immediate contagion from direct financial channels limited so far, but risks exist…limited so far, but risks exist…
Reduced inflows into domestic marketsReduced inflows into domestic markets
Hardened terms on foreign borrowingHardened terms on foreign borrowing Reduced availability of trade creditReduced availability of trade credit Rollover risk (sovereign and private debt)Rollover risk (sovereign and private debt)
Banking systemBanking system
Parent banks restricting financingParent banks restricting financing Second-round effects: Second-round effects: Impact of lower growth on the quality of Impact of lower growth on the quality of
banks’ credit portfolio banks’ credit portfolio
Main transmission channels: Trade, remittances, fdiMain transmission channels: Trade, remittances, fdi
80
85
90
95
100
105
110
2007 2008 2009
LIC Exports (G&S) index (2007=100)
Post-shock (Current projection)
Pre-shock (Spring 2008 WEO)
Sources: WEO Database; and Fund staff calculations
95
100
105
110
115
120
2007 2008 2009
LIC Remittances index (2007=100)
Pre-shock (Spring 2008 WEO)
Post-shock (Current projection)
Sources: WEO database; and Fund staff calculations.
80
90
100
110
120
130
140
2007 2008 2009
LIC FDI index(2007=100)
Pre-shock(Spring 2008 WEO)
Post-shock (Current projection)
Sources: WEO database; and Fund staff calculations.
Drop in revenues—esp. Drop in revenues—esp. for commodity exportersfor commodity exporters
Increased spending Increased spending
pressures, including to pressures, including to protect the poorprotect the poor
Tighter financing Tighter financing conditions (domestic, conditions (domestic, external)external)
External crisis is rapidly spilling over into a External crisis is rapidly spilling over into a budgetary crisis… budgetary crisis…
0 20 40 60 80 100
VietnamGuinea
MongoliaMauritania
Papua New GuineaSudan
AzerbaijanYemen, Republic
AngolaNigeria
ChadCongo, Republic of
Source: IMF staff estimates.
Commodity Revenues to Total Revenue, 2008 (Ratio, in percent of total revenue)
Debt indicators are projected to continue improving but Debt indicators are projected to continue improving but less than beforeless than before
……Affecting debt sustainabilityAffecting debt sustainability
Moreover, new risks have emergedMoreover, new risks have emerged Exchange rate depreciationExchange rate depreciation Support to banking sectorSupport to banking sector
Higher borrowing to offset the impact of the crisis could Higher borrowing to offset the impact of the crisis could pose serious riskspose serious risks
IMF Policy RecommendationsIMF Policy Recommendations
Fiscal stimulus: Fiscal stimulus: Some LICs with strong fiscal positions have space to expandSome LICs with strong fiscal positions have space to expand Most LICs face binding financing constraints: need higher aid to help Most LICs face binding financing constraints: need higher aid to help
avoid procyclical policiesavoid procyclical policies
Monetary and exchange rate policies:Monetary and exchange rate policies: LICs with falling inflation may have room for monetary easingLICs with falling inflation may have room for monetary easing Allow exchange rate to absorb shocksAllow exchange rate to absorb shocks
Closely monitor financial sector risksClosely monitor financial sector risks
22 countries face acute financing needs22 countries face acute financing needs
Sources: WEO database, and Fund staff calculations
Billions of U.S. dollars Number of Countries
And financing needs could rise well above And financing needs could rise well above $25 billion if downsize risks materialize…$25 billion if downsize risks materialize…
The IMF is responding to its members’ needsThe IMF is responding to its members’ needs
Financial assistance to LICs increased substantially in Financial assistance to LICs increased substantially in 20082008
New or scaled-up loan agreements with several LICs are New or scaled-up loan agreements with several LICs are expected to be in place soonexpected to be in place soon
We are stepping up provision of non-financial support We are stepping up provision of non-financial support (policy advice, technical assistance)(policy advice, technical assistance)
Key messagesKey messages
The third wave of the global crisis is hitting low-income The third wave of the global crisis is hitting low-income countries (LICs)countries (LICs)
LICs are more integrated than before: trade, foreign LICs are more integrated than before: trade, foreign direct investment, and remittancesdirect investment, and remittances
22 LICs face acute financial constraints in 2009: additional 22 LICs face acute financial constraints in 2009: additional financing needs of at least US$25 billionfinancing needs of at least US$25 billion
The donor community must act to provide scope for The donor community must act to provide scope for countercyclical policiescountercyclical policies
Thank youThank you
