The Impact Of Subprime In Latin America

The impact of Sub-prime crisis on Latin America: A structural overview
Sebastián Nieto Parra Research Associate OECD Development Centre

Paris – February 2008

Overview
1 2 3 4 5 6 Objective The Subprime Crisis and OECD countries US & Latin America: A new turn to a long story? Current Account Channel Financial Channel Conclusions
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Two core questions
• The Subprime crisis could beinterpreted as an exogenous shock for Latin American economies. It is a ¨stress testing¨ scenario for Latin American countries. • What is the impact of this crisis on real sector and on financial sector? • Above all, have Latin American economies improved the credibility of economic policies during last years?

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Overview
1 2 3 4 5 6 Objective The Subprime Crisis and OECD countries US & LatinAmerica: A new turn to a long story? Current Account Channel Financial Channel Conclusions
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OECD developed countries
• Slowdown of the OECD developed countries in 2008. Recovery of GDP growth would be in 2009. • Risks are on the downside scenario given financial and real factors.

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OECD Housing Markets
• Real housing investment is slowing in most countries. • The upswing in housingmarkets has been highly correlated across countries.

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Overview
1 2 3 4 5 6 Objective The Subprime Crisis and OECD countries US & Latin America: A new turn to a long story? Current Account Channel Financial Channel Conclusions
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Latin America and US GDP
• Latin American GDP growth is highly correlated to US economic growth. However, it is not the same across Latin Americancountries.

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Latin American countries and US GDP
• US GDP growth exhibit higher correlation with Mexico and Central America GDP growth than with South America GPD growth.

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Latin American countries and US GDP
• In the past Latin American exposure to US recessions has been considerable. • Recessions do not have the same impact as slowdowns.

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Strong Latin America Internal Conditions• Today Latin American Internal Demand is acting as a cushion to external shocks. • Private consumption and Private Investment are important drivers of Latin American economic growth.

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Supported by the credibility of economic policies
• Credible monetary (inflation targeting policy) and fiscal (sustainability of the debt) policies. • Reduction of inflation rates and fiscal deficitsduring last years

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Supported by the credibility of economic policies
• Favourable external conditions have been exploited to accomplish remarkably good public debt management. • Buybacks of external debt, international bonds in local currency,…

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Supported by the credibility of economic policies
• Excellent debt management improves the Solvency of the State and challenges the“original sin”.
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Overview
1 2 3 4 5 6 Objective The Subprime Crisis and OECD countries US & Latin America: A new turn to a long story? Current Account Channel Financial Channel Conclusions
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Current Account Channel
Three determinant aspects: 1. US and Latin America trade channel (Direct)

2. Remittances (Direct) 3. China and Commodity Prices (Indirect)

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Latin Americanexports to US
• Latin American countries’ partnership with the US is closer than for other emerging countries. • This has a high cost in times of recession.

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Trade channel
• More than 40% of Latin American exports are going to the US. • Differences across Latin American countries are considerable: Mexico, Venezuela, Colombia and Central American countries vs. Argentina, Chile, Brazil andPeru.
Latin American exports by destination
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

China

EU

US

Rest of World

Source: OECD Development Centre based on WITS data , 2008

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Trade channel and Industrial Production
• The result is a considerable connexion (no connexion) between...