Download Mr. Dominique Desruelle, Advisor, Strategy and Policy Review

The Impact of the Global Financial Crisis
on Low-Income Countries
Dominique Desruelle
International Monetary Fund
United Nations Economic and Social Council
March 9, 2009
Key messages

The third wave of the global crisis is hitting low-income
countries (LICs)

LICs are more integrated than before: trade, foreign
direct investment, and remittances

22 LICs face acute financial constraints in 2009: additional
financing needs of at least US$25 billion

The donor community must act to provide scope for
countercyclical policies
Background: A decade of progress in LICs
Better policies, global growth, and debt relief resulted in:



10.0


60
Debt-to-GDP (in percent, right axis)
9.0
Remittances, FDI, and Exports in percent of
GDP
Real GDP growth
(in percent, left axis)
40
50
8.0
6.0
35
1990
2000
2007
30
25
International reserves
in months of imports
(left axis)
7.0
More exports
More foreign direct investment
More remittances

Higher growth
Higher reserves
Lower debt
40
20
15
5.0
30
4.0
10
5
0
3.0
20
1997
2002
2007
Remittances/GDP
FDI/GDP
Exports/GDP
The global environment is drastically worsening

Net food and fuel
importers were
weakened by the 200708 price shock
450
Selected Commodity Prices
400
(January 2004=100)
350
300
250
Metals
Energy
200


Commodities exporters
now face increased
pressure on external
accounts
150
100
Food
50
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Dec-10
Dec-10
Source: IMF staff projections.
Abrupt slowdown in advanced and emerging partner
countries
2009 global outlook
Lower GDP growth
18
16
14
12
10
8
6
4
2
0
12
10
8
GDP growth (percent)
WEO Spring 2008
Latest projections
6
4
2
0
All LICs
SubSaharan
Africa
Asia
Higher current account
deficits
Middle
Latin
East and America
Europe
Current account deficit
(in percent of GDP)
All LICs
SubSaharan
Africa
Asia
WEO Spring 2008
Latest projections
Middle
Latin
East and America
Europe
Immediate contagion from direct financial channels
limited so far, but risks exist…

Reduced inflows into domestic markets




Hardened terms on foreign borrowing
Reduced availability of trade credit
Rollover risk (sovereign and private debt)
Banking system


Parent banks restricting financing
Second-round effects: Impact of lower growth on the quality of
banks’ credit portfolio
Main transmission channels: Trade, remittances, fdi
110
105
LIC Exports (G&S) index (2007=100)
LIC Rem ittances index (2007=100)
120
Pre-shock (Spring 2008 WEO)
100
115
95
110
90
105
85
Post-shock (Current projection)
Pre-shock (Spring 2008 WEO)
Post-shock
(Current projection)
100
80
95
2007
2008
2009
2007
Sources: WEO Database; and Fund staff calculations
2008
2009
So urces: WEO database; and Fund staff calculatio ns.
LIC FDI index
(2007=100)
140
Pre-shock
(Spring 2008 WEO)
130
120
110
100
Post-shock
(Current projection)
90
80
2007
2008
2009
So urces: WEO database; and Fund staff calculatio ns.
External crisis is rapidly spilling over into a
budgetary crisis…

Drop in revenues—esp.
for commodity exporters
Commodity Revenues to Total Revenue, 2008
(Ratio, in percent of total revenue)

Increased spending
pressures, including to
protect the poor

Tighter financing
conditions (domestic,
external)
Congo, Republic of
Chad
Nigeria
Angola
Yemen, Republic
Azerbaijan
Sudan
Papua New Guinea
Mauritania
Mongolia
Guinea
Vietnam
0
Source: IMF staff estimates.
20
40
60
80
100
…Affecting debt sustainability

Debt indicators are projected to continue improving but
less than before

Moreover, new risks have emerged



Exchange rate depreciation
Support to banking sector
Higher borrowing to offset the impact of the crisis could
pose serious risks
IMF Policy Recommendations

Fiscal stimulus:



Monetary and exchange rate policies:



Some LICs with strong fiscal positions have space to expand
Most LICs face binding financing constraints: need higher aid to help
avoid procyclical policies
LICs with falling inflation may have room for monetary easing
Allow exchange rate to absorb shocks
Closely monitor financial sector risks
22 countries face acute financing needs
And financing needs could rise well above
$25 billion if downsize risks materialize…
Billions of U.S. dollars
Baseline
Downside Risk Scenario
Number of Countries
250
100
200
80
150
60
100
40
50
20
0
0
BOP Shock (all affected LICs)
Financing need of LICs with
acute financing gap
Sources: WEO database, and Fund staff calculations
Number of LICs with acute
financing gap (right side)
The IMF is responding to its members’ needs



Financial assistance to LICs increased substantially in
2008
New or scaled-up loan agreements with several LICs are
expected to be in place soon
We are stepping up provision of non-financial support
(policy advice, technical assistance)
2007
2008
6
5
4
3
2
1
0
30
25
20
15
10
5
0
Total amount
disbursed
New financing
Augmentations of
agreements (number access under existing
of countries, right side) arrangements (number
of countries, right side)
Key messages

The third wave of the global crisis is hitting low-income
countries (LICs)

LICs are more integrated than before: trade, foreign
direct investment, and remittances

22 LICs face acute financial constraints in 2009: additional
financing needs of at least US$25 billion

The donor community must act to provide scope for
countercyclical policies
Thank you