Econometric Evidence: CAC7 and U.S.A. GDP Growth Dependent variable: Cyclical component of CAC7 GDP growth (1) (2) Cyclical component of U.S.A. GDP growth 0.298 0.916 (2.19) (2.12) Terms of trade 0.005 0.023 (0.68) (1.68) International interest rate -0.064 -0.574 (-0.81) (-1.64) LEI spread 0.001 (0.50) Observations 153 70 Number of countries 7 7 Fixed effects YES YES (1)Data from 1980 to 2001 (2) Data from 1992 to 2001
CAC7 - Export Composition according to destiny (2001) Source:EIU USMexicoCAC7
CAC-7 Remittances (billions of US dollars) Capital Flows + Errors y Omissions Remittances
CAC-7 Remittances (as a % of FDI Capital Flows, for 2001) Source: WEO, Central Banks and RES estimates
Total Capital Flows and Remittances (% of GDP) Average 1997-2001 Source: WEO (Sept 2002), Central Banks and RES estimates Capital flows include errors and omissions
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) Source: WEO & EIU * Includes Errors & Omissions
Public Sector Balance (% of GDP) Source: EIU (Sept 2002) CRI DOM SLV HON NIC GTM PAN
Fiscal Sustainability Source: Own estimates. Data from EIU Notes:/* Refers to geometric average of growth rates during the last decade Observed Public Debt (% of GDP) Real Interest Rate Real GDP Growth * Observed Primary Surplus (% of GDP) Req. Primary Surplus (% of GDP) CRI 48.9 5.98 4.8 -5 0.54 DOM 24.3 4.49 6 0 -0.35 SAL 36.89 5.12 4.26 -3.8 0.30 GTM 28.12 4.56 3.7 -1.5 0.21 HON 63 4.02 3 -5.9 0.62 NIC 202.9 1.62 3.5 -15.8 -3.78 PAN 75.6 5.67 3.38 -2.8 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)) Source: WEO (Sept 2002) and RES/BID estimates
Source: EIU.(Median) CAC7:Public Debt (% of GDP) Total Public DebtExternal Public Debt
Source: EIU and Central Banks.(Median) CAC7 & LAC7:Public Debt (% of GDP) 0 10 20 30 40 50 60 19951996199719981999200020012002f CAC7 Total Public DebtCAC7 Ext. Public Debt LAC7 Total Public DebtLAC7 Ext. Public Debt
Currency Composition of Public Sector Debt (2001) [eD*/(D + eD*)] Source: Central Banks and EIU
Financial Mismatch of the Public Sector [ (D/eD*)/(Y/eY*)] (2001) Source: Central Banks and EIU
0102030405060708090 Guatemala Dominican Rep. Honduras Costa Rica Nicaragua Deposits in FC/Deposits Loans in FC/Loans Deposits and Loans in Foreign Currency
0102030405060708090 Honduras Guatemala Costa Rica Nicaragua Loans in FC to non-tradable sector/Loans
05101520253035 Honduras Guatemala El Salvador Costa Rica Nicaragua Investment in Public Sector/Assets (loans to public sector are not considered)
Capital Flows Vulnerability: A summary = High Financial Mismatch of the Public Sector Public Debt (% of GDP) Financial System exposure to the Public Sector = Medium= Low DOMGTMCRISLVHONNIC PAN ? Financial Mismatch of the Private Sector Source: Central Banks and EIU ??
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