Saturday, May 30, 2009

Latin American Economy on Road to Speedy Recovery

Sources: eGovmonitor.com; Fast-track Recovery from Crisis Likely for Latin America; China View; IMF: Latin America to Recover from Crisis Ahead of Rich Countries

The International Monetary Fund (IMF) stated on Wednesday that Latin America will recover more rapidly than the rich countries even though the region has not escaped the current global financial crisis unscathed. Certain economic policies Latin American countries had previously adopted better equipped them to deal with the crisis. These countries strengthened their fiscal circumstances and solidified their economic systems. In turn, the measures improved the integrity of the political base and resulted in a reduction of projected inflation rates.

As compared to prior financial crises, and other emerging economic regions, Latin America has shown itself less vulnerable to the negative consequences of the current global crisis. While the region has prevented a systemic meltdown, it cannot prevent economic deceleration.

Stimulus packages in Brazil, Mexico, Peru, Chile, and Chile, as well as other countries in the region, will lessen the harmful social and economic effects of the economic decline. Countries without the ability to put incentive plans into practice will receive significant economic support from multilateral organizations. National assets should also attract foreign investors as exchange rate flexibility facilitates dynamic domestic economies.

The IMF projected contraction rate of 3.8 percent for 2009 in developed countries is worse than the 1.5 percent for Latin America. Further, in 2010, the IMF has projected a 1.5 percent growth rate for the Latin American economy.

Discussion Questions:
1) How and to what extent will the recovery of the Latin American economy affect other less resilient emerging economies?
2) As the economic development of Latin America renews, how might the region change its current economic policies?

Tuesday, May 26, 2009

IMF Concerned for Development Goals in Shadow of Global Crisis

Sources
Financial Times: Fragile Development Gains in Danger
IMF: New Risks from Global Crisis Create Development Emergency
New York Times: Rising Powers Challenge U.S. on Role in IMF

The financial crisis currently gripping the globe is poised to cause disproportionate harm in the developing world. Emerging economies are closely tied to the financial stability of developed economies and dependent upon inflows of capital and aid. As the largest developed economies in the world struggle through a severe recession, developing countries are feeling the sting of evaporating export markets, frozen credit lines and the erosion of their hard-fought financial stability gains.

Developing world growth is projected to fall from an average of 8.1 percent in 2006-2007 to 1.6 percent in 2009. The African Development Bank (AfDB) expects export revenues to shrink by 40 percent for the continent as a whole this year—an estimated loss of $251 billion. Private capital flows to the developing world have waned dramatically and could be more than $700 billion lower in 2009 than their peak 2007 level. Stock prices in emerging markets have also plummeted, the MSCI Emerging Market Index dropping over 50 percent in 2008.

These figures, shocking on the page, translate to humanitarian disaster on the ground. Analysts expect the number of chronically hungry people to rise to over 1 billion this year, reversing earlier progress in the global fight against malnutrition. Because of the recession, an additional 55 to 90 million people will suffer from extreme poverty in 2009. African leaders feel anxiety about the resurgence of violent conflict and the failure of fragile governments. Many also fear that the financial crisis will curtail development efforts where the prospects are gravest—in combating HIV/AIDS, maternal and infant mortality and malaria.

In 2000, the UN established eight Millennium Development Goals (MDG), emphasizing the eradication of hunger, health and education objectives, and environmental priorities. On April 24th, the IMF voiced concern about MDG progress in the face of global financial crisis. IMF officials worry about “painfully slow” recovery in the developing world, and a lack of infrastructure and social safety nets for coping with the downturn. Both IMF and World Bank leaders are speaking out about the importance of maintaining MDG progress. At their April meeting, the G20 agreed to triple IMF resources to reach $750 billion and supported a general allocation of $250 billion, $100 billion of which will go directly to developing countries. The IMF pledged to scale up its funding to the developing world, doubling its concessional lending capacity. The IMF highlights the World Bank’s new Infrastructure Recovery and Assets platform as having the potential to bolster developing world infrastructure, where current needs exceed $900 billion yearly. Citing G20 commitments, the IMF also emphasizes trade liquidity support for the developing world and calls for the availability of $250 billion in trade financing over the next two years. Despite these commitments, some developed countries are falling behind in providing promised aid.

The current crisis will undoubtedly have a global impact. It remains to be seen however, whether the IMF, World Bank and greater international community can forestall a potentially devastating impact in the developing world.

Discussion:
1. Many economists were initially hopeful, hypothesizing that emerging economies would be less affected by the crisis. Emerging markets absorbed fewer of the “toxic” assets that plagued Wall Street, capital flight showed signs of slowing, and a chronic skills shortage seemed to be reversing as foreign-educated professionals returned home to developing countries. Why does this hypothesis fall short? Developing countries are feeling severe effects of the crisis. What factors contribute to their vulnerability?
2. The developed world has, for decades, dictated the path of global financial architecture. That structure is now in crisis and many developing world leaders, in African nations and China in particular, are questioning the role of American and European leaders in the IMF and World Bank. Is this the right time for institutional reform? Should this crisis impact the role of the United States in international organizations?

Uncertainty Surrounds China’s Efforts to Pull from Its Economic Downturn

Sources: Reuters, China Cheerleading Gives Way to Caution on Economy; Forbes.com, China Shares Fall As Data Raises Recovery Doubts

Troubling signs have raised doubts as to whether recovery is on the horizon for China's economy. Chinese shares fell 0.9% on May 14, retreating from a nine-month high, in light of unfavorable U.S. economic data. Low retail sales in the U.S. have weakened investor confidence in China’s economy. The annual domestic product growth also dropped in the first quarter, slowing from 6.8 percent in the last three months of 2008 to 6.1 percent.

Falling exports and weak industrial output growth in April diminished news of increased retail sales and investment. While the figures generally suggest economic renewal, many investors are concerned that the government will wait to assist weaker areas.

China’s industrial output growth may rise to the double digits in the second half of 2008 from the single digits where it has been since October. However, rebound is not certain. We must arrive at the conclusion that the Chinese economy has reached its bottommost point cautiously. To the extent that quarter-on-quarter growth had ceased to slow down, the economy may reasonably be said to have bottomed out.

While Premier Wen Jiabao has continuously voted for confidence in the Chinese economy, Vice Premier Li Kequiang was hesitant to say last Thursday whether the country is headed for economic recovery, though the 4 trillion yuan ($585 billion) stimulus plan had produced initial results. Li said, “There are still huge uncertainties, and the process of economic recovery may be tortuous and complicated.”

Discussion Questions:

1) What steps might China take to strengthen investor confidence while U.S. spending figures remain low?
2) How does doubt about China’s economy translate into doubt about other world economies?

Sunday, May 24, 2009

European Economy Recovers After Low GDP Numbers, But UK Looks Shaky

Sources: Bloomberg, Europe's Economy Contracts 2.5%, The Most Since 1995; AFP, European Stocks Pick Up After Heavy Losses; Reuters, Euro Turns Higher, Hits Session High vs. Dollar; Reuters, Economic Worries Pause Europe Stocks' Winning Run; Bloomberg, UK May Lose AAA Rating at S&P As Finances Weaken

Numbers released late last week showed a 2.5% contraction in Europe's GDP between the fourth quarter of 2008 and the first quarter of 2009, the largest since 1995. The impetus for this decline includes falling production and increased job losses in reaction to falling consumer demand and demand for European exports. Germany and Italy were hardest hit, with 3.8% and 2.4% GDP declines respectively.

European stocks declined significantly in response to the news, but rallied by the end of this week to finish strong, as did the euro. Another event also contributed to the shakiness of European stocks, as S&P reduced its outlook on the UK's sovereign rating from stable to negative based on government debt. The country's long-term rating, however, remains AAA. S&P stated that there is a one in three chance that the rating will fall.

Britain's problem centers on its debt, which is approaching 100% GDP. The country will need to raise $344 billion through selling bonds between now and March 2010, and the budget deficit is projected at 12.4% GDP. This problem needs a political solution, and part of the reason for S&P's outlook reduction lies in its uncertainty in the political arena. Prime Minister Gordon Brown's popularity is shrinking as the UK's economic problems continue, and House of Commons Speaker Michael Martin just resigned from his post. On the other hand, Moody's and Fitch are retaining their UK outlook at stable.

Questions:

1) Do you think that the recovery this week in terms of stocks and currency is lasting, or will confidence in Europe stay low after poor performance in the first quarter?
2) Is Britain handling its debt problem responsibly, or do you think it could do more?
3) Do you expect that the bad news on Britain's sovereign rating will affect the political fortunes of the Labour party?

Tuesday, May 19, 2009

Eastern European Economies Contract More Than Expected in First Quarter

Sources: Wall Street Journal, CEE GDP Falls Are Even Worse Than They Seem; Reuters, E. Europe's Economies in Free Fall, Exports Hit; Bloomberg, East Europe Economies Shrank in First Quarter on Western Demand; Bloomberg, EBRD Board Says Ready to Consider Raising Capital

Across Eastern Europe, GDP declines were greater than expected for the first quarter of 2009. The year-on-year numbers released Friday by several national statistics offices show that Romania and Hungary were particularly hard hit, with 6.4% declines since this time in 2008. Slovakia's GDP also fell by 5.4%, despite growth in the last quarter of 2008. Czech GDP fell by 3.4%, the greatest decline in the country's history, while Bulgarian GDP fell for the first time in ten years, by 3.5%. Polish GDP is actually expected to have risen in the first quarter, by 1%, but those numbers will not be released until later in the month.

Some of the causes cited for poor performance in these countries including low demand for their exports in Western Europe, especially Germany; lack of foreign investment; frozen credit; low industrial production; low domestic consumption due to difficulty in accessing bank loans and government measures in some countries targeting budget deficits; low government spending; and stagnant wage growth. Companies are forced to lay off employees and cut back on production due to financial freezes and the lack of demand for their products in Western European countries.

A number of solutions have been suggested, ranging from the domestic to the international. Government infrastructure spending is one recommendation, as is central bank interest rate easing in areas where this is still possible, like the Czech Republic. However, the worst hit countries, Hungary and Romania, no longer have room for interest rate manipulation. The IMF already has loans out to Hungary, Latvia, Romania, and Serbia, but may also need to lend to Bulgaria and Lithuania. The EU, World Bank, European Investment Bank, and EBRD are also being targeted for financial assistance.

The EBRD, charged with support to the former communist countries in Europe, is considering raising capital in response to the impact of the global crisis on emerging East European economies. The bank's governors, however, have concerns about what a large lending effort to these countries would do to its capital position, and how much risk raising additional capital would expose the bank to. The EBRD's current focus is on lending to systemically important Western parent banks and larger local institutions, and it has lent $3.13 billion to the region so far this year.

Questions:

1) Do you think that the conditions placed on loans that require harsh measures to get budget deficits in control are harming Eastern European countries by limiting government spending?
2) Do you think that Western European institutions have a responsibility to help their neighbors in Eastern Europe, given that it is shrinking Western demand that in large part caused this decline in the East in the first place?
3) Do you think the EBRD should take the risk of raising additional capital and committing it to Eastern Europe, or should the bank take a more cautious position given the poor performance of these countries?

Thursday, May 14, 2009

New Coordinated Aid Effort For Africa

Sources:
The Examiner
Voice of America

In addition to fresh aid promises from the IMF, Africa will benefit from a new coordinated effort to raise up to $15 billion in capital for the continent. Led by the African Development Bank, major investors include the French Development Agency, the European Investment Bank, the Development Bank of Southern Africa, German Financial Cooperation, the World Bank, and the International Islamic Trade Finance Corporation.

The new funding is also on top of the $5 billion of funding that the AfDB provided in 2008, which was up 14% from 2007. The purpose of the coordination is to pool resources together in order to better serve Africa. As AfDB President Donald Kaberuka said, “Beyond actions taken by individual institutions, the need to join forces and pool resources and expertise cannot be overemphasized. The scope and magnitude of the current global financial crisis compels us to look for innovative means to work with maximum collaboration to increase our support to the private sector in Africa. We must act now. Through this partnership, we can make a difference.”

The $15 billion will go towards two goals. First, to help with humanitarian efforts that seek to address the toll the credit crisis. Additionally, the money will help with long-term structural issues, such as infrastructure, that have slowed Africa’s economic growth in the past. One concern, however, is how the AfDB will divvy the money out, and what the conditions of the loans will be. Regardless, the fund is good news for the credit starved Africa.

Questions:
1) Should the AfDB give preference to African countries that have been strong economically in order to ensure that the big gain are not lost, or should it use the money to offer poorer countries an opportunity?
2) Is the AfDB the best conduit for such a pooling effort?

Oil Importers vs. Oil Exporters in the Credit Crisis

Sources:
Daily Times Pakistan
Financial Times

Whether a country is an oil importer or and oil exporter may have an effect on how the country is being effected by the global credit crunch. Though both types of countries face similar pressures—such as the general lack of financing available and the lower volumes of foreign cash flows into their countries—each type of country faces its own set of problems.

Oil exporting countries in the Middle East and North Africa are facing much lower prices for oil then the record oil prices of 2008 they received. Most of these oil exporting countries’ governments heavily rely on the revenues from oil, and the lower prices mean that they are having a more difficult time raising money to run their countries. Additionally, these countries are facing tightening credit conditions and may have a difficult time funding their oil production. GDP growth in these countries is expected to contract from 5.4% to 2.3% in 2009.

Oil importing countries, on the other hand, are largely benefiting from the lower cost of oil. The lower cost of oil has helped offset the other negative effects of the credit crisis. These negative effects include less demand for their (non-oil) exports, lower levels of direct foreign investment, less tourism and lower levels of remittances. In this region, growth is expected to contract from 5.7% to 2.6%.



In other oil producing news, Nigeria, a major oil exporting country, has recently run into problems with provided its country with finished oil products, such as gasoline. This is something of a paradox; although Nigeria produces large amounts of crude oil, the have to import gasoline because their four, state-owned refineries are old and unable to produce the necessary quantities of oil.

In order to insure that they have enough gasoline for the country, the government gives subsidies to its importers. However, this subsidy system has been inefficient and expensive for the government to maintain given the drop in oil export revenues. For this reason, the Nigerian government recently stopped paying the subsidies. This backfired, though, as the importers stopped importing the finished oil which lead to shortages across the country. These shortages lasted for several weeks, and the Nigerian government was forced to pay the subsidies, although the payments are wrecking havoc on their budget.

Questions:
1) Although the price of oil has decreased over the past 6 months, shouldn’t the funds that oil exporters raised during boom times help them survive this down period?
2) If the subsidies are too expensive for Nigeria, how can they continue to pay them? Are there other ways Nigeria can stop paying for the subsidies that won’t lead to shortages?

Wednesday, May 06, 2009

Venezuela: the used car man's paradise?

Venezuela inflation rises to 28.3 percent in April, Forbes.Com
Venezuela Used Cars Out-Price New, BBC.Com

Venezuela may be the one place used car vendors are thriving these days. With all the gloom and doom news about auto industries around the world during the global economic downturn, Venezuela stands as an anomaly. In Venezuela, every car that rolls out of a showroom immediately increases in value, which makes used cars more valuable than new ones. This is because the waiting list for a new auto in Venezuela can be up to two years long. A year ago my car cost me 54,000 bolivars (around $25,115) and I can already sell it for over 65,000 ($30,230)," says a happy Hernando Camacho, who drives a Renault Clio. As one busy car salesmen explained, “We don’t have to chase down customers anymore!” Car sellers’ phones are ringing non-stop with customers looking for a way to avoid the long waitlist for cars.

One reason for the high demand for cars in Venezuela is the incredibly high inflation rate of around 30%, the highest in Latin America. That rate eats away at savings rapidly, making an appreciable car (yes, only in Venezuela do cars seem to appreciate) a comparatively good investment. Another reason for the increased demand for cars is the new found wealth Venezuela has experienced since the 2007 oil boom. While oil is not nearly as valuable today as in 2007, much of the wealth from the recent boom is still circulating in the country. Finally, imports have been restricted since last year, when the government limited car imports in an effort to stimulate the local auto industry. Unfortunately, the Venezuela auto sector has seriously lagged behind demand for the cars for several reasons, primarily because the foreign currency needed to pay for imported car parts is tightly controlled by the government. Most manufacturers are forced to import on credit. As a result, the industry's debt with its international suppliers has risen to some USD 671 million. Also, as in so many car manufacturing companies, union demands have also played a large role in the state of the country’s car industry.

Discussion:
What is the best way the Venezuelan government can help the local industry? Does the restriction on car imports seem to be working? Whom does the restriction benefit and whom does it burden?