Impact of the US Subprime Crisis on the Global Economy and the Caribbean Christina Daseking* ([email protected]) 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 iews

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

2

Strains in global financial market

The troubles started with a housing market correction—which is still underway... U.S. and European House Price Inflation (Percent year-on-year) 30%

30%

United Kingdom

25% 20% 15%

25%

United States

Europe ex-U.K.

Futures implied

10% 5%

20% 15% 10% 5%

0%

0%

-5%

-5%

-10%

-10%

-15%

-15%

-20% 1989

-20% 1994

1999

2004

2009

Source: Global Financial Stability Report, 2008 Note: Europe ex-U.K.: unweighted average of Spain, Germany, Italy, Netherlands, Greece (from 1995), Ireland (from 1997).

3

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

U.S. 2006

U.S. 2005

20

U.K. 2006

15

U.S. 2004

U.S. 2007 10 5 0 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.

4

Strains in global financial market

...and lending standards tighten. Net Percentage of Banks Tightening Lending Standards 90

90 Residential mortgages Commercial real estate

70

70

50

50

30

30

10

10

-10

-10

-30 1990

1993

Source: Haver Analytics.

1996

1999

2002

2005

-30 2008 5

Strains in global financial market

Aggregate potential losses from financial crisis estimated at US$ 945 billion 1000

Comparison of Financial Crises

800

40

Other financials

35 30 25

600

Banks 400

20 15 10

200

5 0

U.S. savings and loan (1986-1995)

Japan banking crisis (1990- Asia banking crisis (1998- U.S. subprime crisis (20071999) 1999) present)

Losses (in billions of U.S. dollars, left scale)

Percent of GDP (right scale)

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.

6

←

Global economic outlook Housing and financial market pressures are interacting to slow Re-pricing of Risks growth. Declining House Prices 1200

240 220 200 180 160

240 220

CaseShiller 10 cities index

140 100 80 2000

1000

200

2003

2006

4 3

High-yield CDS

600

140 120

400

100 80

200

2009

0 2000

2001

2002

2003

2004

IMF Financial Conditions Index 6 Real GDP; 12-month % change

4

1

3

0

2

-2 -3

Financial conditions index

(Loan stds., LIBOR, HY spread, equities, ...)

1992 1994 1996 1998 2000 2002 2004 2006 2008

2005

2006

2007

2008

5

2

-1

High-yield bonds

800

180 160 Futures market prices

120

(Spreads, in basis points)

1 0 -1

7

Global economic outlook

Advanced economies are most affected by financial turbulence... 4

4

(Percent change)

Annual growth Potential GDP growth

3

3

2

2

1

1

0

1

07 08 09 United States Source: WEO

1

07 08 Euro area

09

1

07

08 Japan

0

09 8

Global economic outlook

...but other countries will be affected, too... Recent Changes to Growth Outlook Difference from Current projections

J an. 2008 projections

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

9

Global economic outlook

...and the balance of risk to global growth remains tilted to the downside. 6

6

Baseline forecast

5

5

4

4

3

3

50 percent range

70 percent range

2

2

90 percent range 1

1

2004 Source: WEO.

2005

2006

2007

2008

2009 10

←

Caribbean stock markets saw little impact from the financial turbulence... Stock Prices Impact on the Caribbean

(In percent change; local currency) 1/ 50

50 J uly 1, 2007 - April 11, 2008

40

40 30

30

20 20 10 10 0 0

-10

-10

-20

-20

-30 S&P

MSCI Latam

MSCI EMEA

MSCI Asia

J AM

T&T

BAR

ECSE

11

Impact on the ...although sovereign spreads on Caribbean internationally traded bonds have risen Emerging Market Sovereign and U.S. High Yield Spreads

(Basis points) 1600 EMBI Latam

1400 1200

J amaica

1000 800 600 400

U.S. high-yield

200 Trinidad 0 2000

2001

2002

2003

Sources: Bloomberg; and Datastream.

2004

2005

2006

2007

2008 12

Impact on the Caribbean

The banking systems in the region are well capitalized and profitable...

Financial Soundness Indicators, end-2006 Capital Adequacy ECCU 1/ Bahamas Barbados 2/ J amaica Trinidad and Tobago

19.2 33.9 10.8 16.1 18.0

NPLs/Total Loans Return on Assets 6.1 4.2 2.9 2.2 1.1

2.6 4.0 2.3 3.5 2.2

1/ Based on end-2007 data. 2/ Preliminary data as of September 2007.

13

Impact on the Caribbean

...and the recent credit expansions have been funded largely through domestic deposits. Contributions to Private Sector Credit Growth (in Percent), 2005-07 1/ Private sector of which: contributions from credit Private Net foreign Net liabilities growth, total deposits liabilities to public sector ECCU Bahamas, The Barbados J amaica Trinidad and Tobago

16.5 13.8 13.2 24.2 22.1

13.9 9.0 20.0 21.3 24.8

0.6 0.2 1.4 -1.4 -5.3

Other

-2.6 -0.5 -1.5 -5.9 -2.3

4.6 4.8 -6.7 10.2 4.9

Source: International Financial Statistics. 1/ Computed as simple average over the period. Data for J amaica and Barbados for 2007 are for end-November.

14

Impact on the Caribbean

Canadian banks with representation across the region dominate the system... 14

12

CARICOM: Country Presence of Regional Banks, 2005 (In number of countries)

10

8

6

4

2

0 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

Impact on the Caribbean

...but have been relatively protected from losses thus far. Global Bank Losses, as of March 2008 (In billions of U.S. dollars) Total Reported

Remaining Subprime-Related

Losses

Losses Expected

Country/Region Europe Of which: United Kingdom

80

43

19

22

United States Canada

95 7

49 0

Asia Of which: J apan

11

3

10

0

GCC

1

0

Total

193

95

Sources: Goldman Sachs; UBS; and IMF staff estimates.

16

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

Impact on the Caribbean

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

18

M an ald d iv Ba Ba es ha rbu m as da N et , he S Th rla t. L e nd u s cia An Ba till rb es a Le dos S t S ban .K e o itt ych n s an elle d s St Ne .V in Gr vis ce e nt na & da G re Va ns nu . at u M al C ta yp J a rus m ai C ca ro D ati om a in ic a G am bi F iji a, T Sã Sa he o m T o D omé B a om e in & P lize ic an rín R cipe ep ub l J o ic rd an

An tig ua

Impact on the Caribbean

Tourism will be adversely affected by slowing growth in advanced economies 60

Travel Receipts for Tourism Dependent States (in Percent of GDP), Average1980-2005

50

40

30

20

10

0

19

←

Impact on the Caribbean

FDI inflows are sizable and could also be adversely affected Foreign Direct Investment in Percent of GDP, 2000-06 24

18

12

ECCU 1/ Barbados

J amaica

The Bahamas

6

0 2000

2001

2002

2003

2004

2005

Source: World Economic Outlook, IMF. 1/ Computed as a simple average of six IMF member countries.

2006

20

←

0

Source: World Economic Outlook; and Fund staff calculations.

Bulgaria

Trinidad and Tobago Suriname

Haiti South Africa

Ecuador

Thailand Indonesia

Malaysia Colombia

Bahamas, The Mexico

Phillipines Panama

Uruguay

Brazil Turkey

Argentina St. Lucia

Barbados St. Vincent and Grens.

Egypt Belize

Dominica

200

Grenada Antigua and Barbuda

Lebanon J amaica

St. Kitts and Nevis

Impact on the Caribbean

High public debt exposes countries to liquidity pressures and constrains fiscal space. Public Debt in Percent of GDP, end2006

160

120

80

40

21

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

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

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

Thank you!