Impact of the US Subprime Crisis on the Global Economy and the Caribbean

Transcription

1 Impact of the US Subprime Crisis on the Global Economy and the Caribbean Christina Daseking* Western Hemisphere Department International Monetary Fund ews expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its manag

2 Outline Strains in financial markets Weakening of global economic outlook Impact on the Caribbean Conclusions and policy recommendations 2

3 The troubles started with a housing market correction which is still underway... U.S. and European House Price Inflation (Percent year-on-year) 3% 25% 2% 15% 1% 5% % -5% -1% -15% -2% Europe ex-u.k. United Kingdom Strains in global financial market United States Futures implied 3% 25% 2% 15% 1% 5% % -5% -1% -15% -2% Source: Global Financial Stability Report, 28 Note: Europe ex-u.k.: unweighted average of Spain, Germany, Italy, Netherlands, Greece (from 1995), Ireland (from 1997). 3

4 Strains in global financial market... as mortgage delinquencies continue to rise U.S. and U.K. Nonconforming Delinquencies by Mortgage Vintage Year (In percent of original balance) 25 2 U.S. 26 U.S. 25 U.K U.S. 27 U.S Months after origination Sources: Global Financial Stability Report, IMF, 28. Note: U.K. delinquencies for 9+days; U.S. delinquencies for 6+days. 4

5 Strains in global financial market...and lending standards tighten. Net Percentage of Banks Tightening Lending Standards 9 7 Residential mortgages Commercial real estate Source: Haver Analytics. 5

6 Strains in global financial market Aggregate potential losses from financial crisis estimated at US$ 945 billion 1 8 Comparison of Financial Crises Other financials Banks U.S. savings and loan ( ) Japan banking crisis ( ) Asia banking crisis ( ) U.S. subprime crisis (27- present) - Losses (in billions of U.S. dollars, left scale) Percent of GDP (right scale) Sources: Global Financial Stability Report, IMF, 28. Note: U.S. subprime costs represent staff estimates of losses on banks and other financial institutions. All costs are in real 27 dollars. Asia includes Indonesia, Malaysia, Korea, the Philippines, and Thailand. 6

7 Housing and financial market pressures are interacting to slow growth. Re-pricing of Risks 12 Declining House Prices Case- Shiller 1 cities index 14 Futures 12 market 1 prices IMF Financial Conditions Index Real GDP; 12-month % change Global economic outlook (Spreads, in basis points) High-yield bonds High-yield CDS Financial conditions index (Loan stds., LIBOR, HY spread, equities,...)

8 Global economic outlook Advanced economies are most affected by financial turbulence... 4 (Percent change) Annual growth 4 3 Potential GDP growth United States Source: WEO Euro area Japan 8

9 Global economic outlook...but other countries will be affected, too... Recent Changes to Growth Outlook Difference from Current projections J an. 28 projections World Advanced economies Emerging and developing economies Source: World Economic Outlook, IMF 9

10 Global economic outlook...and the balance of risk to global growth remains tilted to the downside Baseline forecast percent range 7 percent range percent range Source: WEO. 1

11 Caribbean stock markets saw little Caribbean impact from the financial turbulence... Stock Prices (In percent change; local currency) 1/ Impact on the J uly 1, 27 - April 11, S&P MSCI Latam MSCI EMEA MSCI Asia J AM T&T BAR ECSE -3 11

12 Impact on the...although sovereign spreads Caribbean internationally traded bonds have risen Emerging Market Sovereign and U.S. High Yield Spreads (Basis points) EMBI Latam 12 1 J amaica U.S. high-yield 2 Trinidad Sources: Bloomberg; and Datastream. 12

13 Impact on the Caribbean The banking systems in the region are well capitalized and profitable... Financial Soundness Indicators, end-26 Capital Adequacy NPLs/Total Loans Return on Assets ECCU 1/ Bahamas Barbados 2/ J amaica Trinidad and Tobago / Based on end-27 data. 2/ Preliminary data as of September

14 Impact on the...and the recent credit expansions Caribbean have been funded largely through domestic deposits. Contributions to Private Sector Credit Growth (in Percent), / Private sector of which: contributions from credit Private Net foreign Net liabilities Other growth, total deposits liabilities to public sector ECCU Bahamas, The Barbados J amaica Trinidad and Tobago Source: International Financial Statistics. 1/ Computed as simple average over the period. Data for J amaica and Barbados for 27 are for end-november. 14

15 Impact on the Canadian banks with representation Caribbean across the region dominate the system CARICOM: Country Presence of Regional Banks, 25 (In number of countries) Bank of NovaScotia Royal Bank of Trinidad and Tobago First Caribbean International Bank Royal Bank of Canada Citibank Republic Bank *The Royal Bank of Trinidad and Tobago is in the process of being acquired by the Royal Bank of Canada. 15

16 ...but have been relatively protected from losses thus far. Global Bank Losses, as of March 28 (In billions of U.S. dollars) Impact on the Caribbean Country/Region Total Reported Losses Remaining Subprime-Related Losses Expected Europe 8 43 Of which: United Kingdom United States Canada 7 Asia 11 3 Of which: J apan 1 GCC 1 Total Sources: Goldman Sachs; UBS; and IMF staff estimates. 16

17 Impact on the Caribbean But financial risks remain... Challenges of consolidated and cross-border supervision Regulatory weaknesses in non-bank financial sector Inadequate reporting and disclosure standards, including for off-balance sheet entities (as in many advanced economies) Exposure to sectors affected by the slowdown (real estate) 17

18 ... and there are other channels for the financial crisis to affect the region. Tourism dependence Impact on the Caribbean Reliance on FDI inflows High levels of public debt in many countries 18

19 Impact on the Caribbean Tourism will be adversely affected by slowing growth in advanced economies 6 Travel Receipts for Tourism Dependent States (in Percent of GDP), Average Maldives Antigua and Barbuda Bahamas, The St. Lucia Netherlands Antilles Barbados Lebanon Seychelles St. Kitts and Nevis Grenada St. Vincent & Grens. Vanuatu Malta Cyprus J amaica Croatia Dominica Fiji Gambia, The Samoa Belize São Tomé & Príncipe Dominican Republic J ordan 19

20 Impact on the Caribbean FDI inflows are sizable and could also be adversely affected 24 Foreign Direct Investment in Percent of GDP, ECCU 1/ J amaica Barbados The Bahamas Source: World Economic Outlook, IMF. 1/ Computed as a simple average of six IMF member countries. 2

21 High public debt exposes countries Caribbean to liquidity pressures and constrains fiscal space Public Debt in Percent of GDP, end- 26 Impact on the St. Kitts and Nevis Lebanon J amaica Grenada Antigua and Barbuda Dominica Egypt Belize Barbados St. Vincent and Grens. Argentina St. Lucia Brazil Turkey Uruguay Phillipines Panama Bahamas, The Mexico Malaysia Colombia Thailand Indonesia Ecuador Haiti South Africa Trinidad and Tobago Suriname Bulgaria Source: World Economic Outlook; and Fund staff calculations. 21

22 Policy Recommendations for Financial Supervisors Around the Globe Review financial institutions public disclosure standards Improve access to information to assess health of individual institutions Provide clearer guidance on risk transfer and capital requirements for off-balance sheet entities Improve cross-border information sharing and coordination among regulators Establish contingency plans and conduct fire drills to prepare for liquidity crises 22

23 Conclusions and Policy Recommendations for the Caribbean Notwithstanding resilience thus far, challenges lie ahead Strong coordination between fiscal, monetary, and incomes policy will be crucial to: preserve debt sustainability support the most vulnerable groups contain second-round effects on inflation 23

24 Issues for Discussion Do participants agree with the identified risks and channels of transmission? Are there additional channels? How should policy makers balance the risk to stability (financial and social), growth, and inflation? 24

25 Thank you!