ed h di i mk how did emerging markets cope in the crisis?

H Did E i M k How Did Emerging Markets Cope in the Crisis?

Ferhan Salman

Cope in the Crisis?

Ferhan SalmanStrategy, Policy, and Review Dept.

K o c U n i v e r s i t y – T U S I A D E c o n o m i c R e s e a r c h F o r u mIstanbul , January 21 , 2011

Outline

Vulnerability Index Methodology3

O llOverall Vulnerability

Index

External sector index

Public sector index

Corporate sector index

Financial sector indexindex

(weight=0.45)index

(weight = 0.25)index

(weight = 0.15)index

(weight = 0.15)

Reserves in percent of ST

debt + CA deficit (weight = 0.24)

CA in % of GDP (weight = 0.25)

External debt in % of GDP

(weight = 0.11)

External debt in % of exports

(weight = 0.20)

REER misalignment

(weight = 0.20) (weight 0.24)

Re-decoupling

120

Median Stock Market Indices

100

120Lehman Brothers G20 Summit -

London

Fedrateat zero

IMFReform Lending Facilities

60

80

St t f i i

40

EM Low & Medium VulnerabilityAM

Start of crisis,August 9, 2007

0

20

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10

AMEM High Vulnerability

Source: “How Did Emerging Markets Cope in the Crisis?” IMF (2010), www.imf.org.

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10

Impact Policy response Recovery Exit challenges

Stronger fundamentals – hit later

Proportion of Countries with Negative Quarterly Growth by L l f E t l V l bilit

80

90

100

gory

Level of External Vulnerability

50

60

70

nt o

f VE

cate

20

30

40

Perc

en

0

10

2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1

High vulnerability Medium vulnerability Low vulnerability




Stronger fundamentals cushioned crisis impact

Real GDP

EM: L & M Vul.

102

104

106 (2008q2 = 100, seasonally adjusted, medians)

All EM

98

100

102

Past Crises

AE

EM: High 94

96

98

Vulnerability

90

92

2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1



2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1

Explaining impact: Linkages and fundamentals mattered

0 Percent Change in Output (peak to trough)

-2

0

Top quartile average Determinants

Financial -6

-4

rcen

t

Bigger

External Vulnerabilities(Lower reserve coverage)

Linkages (Higher foreign bank claims)-8

6

Per contraction

Trade Linkages (Advanced partner country

-12

-10Bottom quartile average

(Advanced partner country growth)



Reserves helped, but up to a point

50 100 200 300 400 500 600 700 800 900

0

risis

, pea

k to

-10

-5

GD

P du

ring

crgh

(per

cent

)

-15

nge

in re

al G

trou

After excluding outliers: y = 3.66ln(x) - 22.40R² = 0.22t-stat = 3.23***

For full sample:y = 3.37ln(x) - 21.25R²= 0.25 t-stat = 3.65***

-25

-20Cha

R / (STD t RM + C t A t D fi it) 2007


Reserves / (STD at RM + Current Account Deficit), 2007Source: “How Did Emerging Markets Cope in the Crisis?” IMF (2010), www.imf.org.

Reserves helped, but up to a point

Low-reserve coverage(reserves/STD at RM < 100)

High-reserve coverage(reserves/STD at RM >= 100)

15/ /

10

15

, pea

k to

al

s

y = 13.676x + 0.0741R² = 0.3378t stat = 2 47**

4

6

k to

trou

gh,

5

DP

chan

ge,

gh, r

esid

ua

t-stat = 2.47**

0

2

chan

ge, p

eak

resi

dual

s

-5

0

Per

cent

GD

troug

-4

-2

erce

nt G

DP

c

-10-0.6 -0.4 -0.2 0.0 0.2 0.4

Log(Reserves/GDP) residuals

-8

-6

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

Pe

Log(Reserves/GDP) residuals

y = 0.1632x - 0.0036R² = 0.0009t-stat = 0.15

Log(Reserves/GDP), residuals Log(Reserves/GDP), residualsSource: “How Did Emerging Markets Cope in the Crisis?” IMF (2010), www.imf.org.



Deleveraging

30

40 Real Credit Growth, Peak to Trough, Median

cent

)

Figure 11. Deleveraging

Exposure of BIS banks (Percent of recipient country GDP, Peak =100)

0

10

20

30

Peak

dit G

row

th (

in p

erc

60

80

100

120Asia (t=Sep 1997) E Europe (t=Mar

2009)

Latin America(t=Dec 1983)

-30

-20

-10

Past crises High V l bilit

Low/Medium V l bilit

AMs

Trough

YoY

Rea

l Cre

d

0

20

40

60

Vulnerability Vulnerability

Source: VEE Spring 2007; IFS; BIS.

0t-20 t-14 t-8 t-2 t+4 t+10 t+16 t+22 t+28 t+34


Credit collapse explained by pre-crisis vulnerabilities

00 100 200 300 400 500

rcen

t Credit busts follow credit booms…400ra

tio ...generally foreign financed

-40

-20

0

troug

h, in

per

300

350

cent

of 2

003

r

-80

-60

wth

, pea

k to

t

150

200

250

ratio

in p

cerc

-140

-120

-100

al c

redi

t gro

w

50

100

150

edit

to G

DP

r

-160

140

Y-o-

y re

a

2007 Credit to GDP ratio in percent of 2003 Credit to GDP ratio

00 100 200 300 400

2007

cre

2007 BIS foreign claims to GDP ratio in percent of 2003 ratio




Impact on Spreads

The rise in Spreads is explained by1 – Monetary Policy Regime 1 Monetary Policy Regime Inflation Targeters observed lower spreads2 – Reserve coverage Higher reserves, lower spreads3 – Pre-crisis inflation rate Hi h i fl ti t hi h d Higher inflation rate higher spreads4 – Information (e.g. Indonesia)

POLICY RESPONSE

Substantial stimulus across EMs

Countries with stronger fundamentals were able to

accommodate more

Substantial fiscal reaction in EMs and AEs…

Fiscal accommodation in EMs and AEs (2009)( )

.2

s

Emerging Markets

.2s

Advanced Economies

.15

n of

cou

ntrie

s

.1.1

5n

of c

ount

ries

.05

.1P

ropo

rtion

.05

Pro

porti

on

0

-5 0 5 10Change in primary deficit

0

-5 0 5 10Change in primary deficit



Stronger fundamentals, more accommodationmore accommodation

5

Lower growth4

DP

Top quartile average

Lower public debt3

poin

ts o

f GD

omm

odat

ion

Better primary balance

2

Perc

enta

ge p

Mor

e ac

co

balance1

P

Bottom quartile average

0


Substantial monetary policy reaction…

Monetary accommodation in EMs and AEs (Aug. 2008 – Oct. 2009)

.2rie

s

Emerging Markets

.3rie

s

Advanced economies

.1.1

5tio

nof

cou

ntr

.2tio

nof

cou

ntr

.05Pro

por t

.1P

ropo

rt

0

0 2 4 6 8 10Reduction in policy rate

0

0 2 4 6Reduction in policy rate

S “H Did E i M k t C i th C i i ?”Source: “How Did Emerging Markets Cope in the Crisis?” IMF (2010), www.imf.org.


Lower spreads, more stimulusp ,

Floating regimes had higher adjustment in interest rates1. Countries with a larger output gaps2. Lower inflation rates3 EMBI spread also important (assessment 3. EMBI spread also important (assessment

of country fundamentals)


Better fundamentals, earlier recovery

Proportion of Countries with Negative Quarterly Growth by Level of External Vulnerability

80

90

100

ory

Vulnerability

40

50

60

70

of V

E ca

tego

10

20

30

40

Perc

ent o

0

10

2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009q4




Recovery: fundamentals and stimulus

1. Initial contraction in output 2. Reserve cover of ST liabilities T

3. Domestic demand revival in trading partners

4 Fiscal expansion TPU

4. Fiscal expansion5. Monetary policy (pegs are not

recovering) OU

T

recovering)



Exit Issues and Lessons

Low vulnerability EMsLow vulnerability EMs

High vulnerability EMs

Challenges ahead: sustaining external adjustment

6 Current Acccount Balance(In percent of GDP)

90 External debt to GDP

0

2

4( p )

60

70

80

-4

-2

0

40

50

60

-8

-6 High vulnerability

Past Crises 20

30

Past Crises

/

-12

-10

T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5

Low Vulnerability

0

10

T-3 T-2 T-1 T T+1 T+2 T+3 T+4 T+5

High vulnerabilityLow Vulnerability

1/ Averages



Fiscal adjustment required to stabilize debt

4 Primary Gaps

2

3EM (low vulnerability)

EM (high vulnerability)

1

0

1

nt o

f GD

P

( g y)

-3

-2

-1

Per

cen

-5

-4

2008 2009 20102008 2009 2010Source: “How Did Emerging Markets Cope in the Crisis?” IMF (2010), www.imf.org.


Overheating risks in some emerging markets…

6 Output Gaps in Emerging Markets (Medians)

4

5

1

2

3

High Medium & Low

-1

0

1

-3

-2

2007 2008 2009 2010 2011



Renewed capital flows pose policy dilemmas

2,500US$ b US$ bn

350

450

1 500

2,000

US$ bn US$ bn

150

250

1,000

1,500

-50

50

0

500

-150-500Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Annual change in global liquidity Gross Inflows into EMs (right axis)

Source: IFS and staff estimates.


Food and Oil price increases …

160

200

120

140 Crude Oil (US$/barrel) Food Prices (Index)

120

160

80

100

80

40

60

0

40

0

20

Source: WEO


Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

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ed h di i mk how did emerging markets cope in the crisis?

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