Jordi Prat Principal Economist March, PDF Free Download

Jordi Prat Principal Economist March, 2018

Agenda Economic Growth and Human Capital Foreign Banking in CADR and Financial Convergence Effect Favorable External Context Possible Shocks for CADR

Favorable External Context Agenda

CADR EMBI and BLZ vs LAC EMBI 1,800 1,600 CADR vs LAC BLZ vs LAC Favorable region s outlook is eroding 1,400 1,200 1,000 800 600 400 200 0-200 Jan-18 Nov-17 Sep-17 Jul-17 May-17 Mar-17 Jan-17 Nov-16 Sep-16 Jul-16 May-16 Mar-16 Jan-16 Source: CID/IDB Staff with data from Bloomberg.

International Economic Outlook for 2017 6.8 however, external context seems to be positive 3.4 3.7 1.5 2.4 2.9 2.9 6.2 2.2 2.3 World Euro Zone LA* China USA Oct-16 Jan-18 Source: CID/IDB Staff with data from International Monetary Fund (WEO, October 2016 and January 2018). Note: *Growth Simple Average for Latin America, Venezuela not included.

Oil International Price (US$ per barrel) 120 105.1 furthermore, commodities prices are stable 100 80 60 40 61.9 20 0 Feb-18 Sep-17 Apr-17 Nov-16 Jun-16 Jan-16 Aug-15 Mar-15 Oct-14 May-14 Dec-13 Jul-13 Feb-13 Sep-12 Apr-12 Nov-11 Jun-11 Jan-11 Aug-10 Mar-10 Source: CID/IDB Staff with data from Energy Information Administration

economic outlook is positive World Economic Outlook United States Economic Outlook 6.0 3.0 5.5 2.8 2.6 5.0 2.4 2.2 4.5 2.0 4.0 1.8 1.6 3.5 1.4 1.2 3.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 1.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Observed Jan. 2018 Forecast Oct. 2016 Forecast Observed Jan. 2018 Forecast Oct. 2016 Forecast Source: CID/IDB Staff with data from International Monetary Fund (WEO, October 2016 and January 2018).

Real Monetary External Fiscal Slight downward adjustment 4.8 4.6 CADR Economic Growth 4.7 2017 Economic Outlook 4.4 4.2 4.0 3.9 Long pattern of sluggish growth 3.8 3.6 3.4 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: CID/IDB Staff with data from International Monetary Fund (WEO, October 2017).

Real Monetary External Fiscal Belize Economic Growth Slight downward adjustment 5.0 4.0 3.3 2017 Economic Outlook 3.0 2.0 1.0 2.3 Long pattern of sluggish growth 0.0-1.0-2.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: CID/IDB Staff with data from International Monetary Fund (WEO, October 2017).

Real Monetary External Fiscal Inflation Inflation is not a threat to the region 14 12 10 8 6 4 2 0-2 2000 2001 2002 2003 2004 2005 2006 CADR Belize 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CID/IDB Staff with data from International Monetary Fund (WEO, October 2017).

Real Monetary External Fiscal Balance current and oil account, % GDP Foreign Direct Investment, % GDP 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 5.4 6.1 6.2-2 -4-6 4.2 3.3 3.0 3.4 4.3 4.3 3.7 4.1-8 -10-12 5.3 5.0 4.8 5.0 4.8 4.7 Balance Current Account Oil Balance Account 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: CID/IDB Staff with data from International Monetary Fund (WEO, October 2017) and Secretariat of the Monetary Council of Central America..

Real Monetary External Fiscal Balance current and oil account in Belize, % GDP Foreign Direct Investment in Belize, % GDP 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10.5 11.4 10.9 12.4 12.3 0-5 7.0 8.9 8.1 6.9 6.4 8.8-10 5.5-15 -20 2.8 2.7 3.6 1.7-25 Balance Current Account Oil Balance Account 2000 2001 2002 2003-1.1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: CID/IDB Staff with data from International Monetary Fund (WEO, October 2017), ECLAC (2018), and IMF (Article IV, September 2017).

Real Monetary External Fiscal Fiscal Deficit in CADR, % GDP 4.5 2.3 Public Debt in CADR, % GDP 46.2 45.3 41.9 40.3 39.4 37.1 35.0 36.1 37.4 35.1 37.1 43.9 50.0 53.8 60.3 55.2 50.6 51.1 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Fiscal deficit is close to 2.3% of GDP. 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Debt increased 6.9% of GDP between 2013 and 2017 Source: CID/IDB Staff with data from International Monetary Fund (WEO, October 2017).

Real Monetary External Fiscal Fiscal Deficit in Belize, % GDP 8.6 85.8 Public Debt in Belize, % GDP 85.8 93.6 107.5 102.0 100.1 94.2 90.3 84.3 90.9 86.9 82.4 78.5 78.8 77.7 82.6 99.2 95.3-0.1 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Fiscal deficit is close to 0% of GDP. 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Debt increased 16.5% of GDP between 2013 and 2017 Source: CID/IDB Staff with data from International Monetary Fund (WEO, October 2017).

Poverty Reduction Inclusive Growth Economic Growth and Poverty CADR LAC Linear (CADR) Linear (LAC) 15 10 5 The inclusive growth challenge 0-5% -3% -1% 1% 3% 5% 7% 9% -5-10 -15-20 -25 Income Per Capita Growth Source: CID/IDB Staff with data from World Bank.

Opportunities to harness integration 1. 2. The region is the second trade partner of itself: 20% of the regions exports have CADR as final destination Currently, the regional consumption of electricity via Regional Exchange is 5% of total consumption

Conditions of most important primary products to the region Oil as total imports, 2017 CADR 13.2 Oil price is very sensitive to geopolitical conflicts and climate events PAN SLV DOM BLZ NIC 15.8 15.0 13.6 12.3 18.0 GTM 12.3 HND 11.0 CRI 8.0 Source: CID/IDB with data from International Monetary Fund (WEO, October 2017).

Conditions of most important primary products to the region The region is sensitive to climate change events and swings in commodity prices Participation of coffee, bananas, and sugar as in exports, 2016 Coffee Bananas Sugar 1.5 6.9 0.8 0.3 7.8 31.8 2.3 The CADR countries are providers of products, but don t have influence on prices 0.6 4.4 22.9 2.2 6.7 0.1 9.5 10.6 0.9 8.3 2.4 6.2 0.0 4.0 2.0 3.0 0.0 SLV DOM NIC CRI GTM HND PAN CADR Source: CID/IDB with data from Secretariat of the Monetary Council of Central America.

improve the accumulation of human capital? Which OPTIONS does the region have to to harness trade and financial integration? face external shocks?

Economic Growth and Human Capital Agenda

Average Years of Schooling Evolution of School Coverage in Latin America LAC CARD 3 14 2 12 10 8 6 4 2 4.7 3.83 5.2 4.1 5.8 4.7 1 6.5 5.2 7.4 6.2 Final 60 s Primary complete 8.1 6.9 8.4 7.2 8.8 7.5 9.2 7.8 9.8 8.4 Mid 90 s Lower Secondary complete 10.4 9.2 11.5 11 10.3 9.7 2.5 years to USE 0 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 Estimated Year of Graduation Source: CID/IDB Staff with data from the Economic Commission for Latin America and the Caribbean and households surveys

however, coverage rates and school attendance are lagging Population between 20 and 24 years old that graduated from secondary 84 83 79 73 70 64 63 62 62 61 60 57 51 46 43 42 38 33 1.0 0.9 0.8 0.7 0.6 School Assistance in Central America by Student Age Nicaragua El Salvador Costa Rica Panamá 0.5 0.4 Primary Honduras Secondary Guatemala CHL PER BOL VNZ COL ARG ECU BRA PRY DOM PAN CRI MEX SLV HND URY NIC GTM 0.3 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Source: CID/IDB Staff with data from the Economic Commission for Latin America and the Caribbean and households surveys

the quality of primary education is low 600 TERCE Average Grades, 2013 580 560 540 520 500 480 460 440 420 400 CHL CRI URY MEX COL BRA PER ARG ECU GTM HND PAN NIC PRY DOM Reading Mathematics Source: CID/IDB Staff with data from UNESCO

Belize has an interesting educational profile Mean Years of Schooling, 2015 BLZ CHL PAN ARG VNZ PER CRI MEX URY ECU BOL PRY BRA DOM COL SLV NIC GTM HND 6.5 6.5 6.3 6.2 9 8.7 8.6 8.6 8.3 8.2 8.1 7.8 7.7 7.6 9.4 9.9 9.9 9.8 10.5 Source: CID/IDB Staff with data from United Nations. Human Development Reports (2017).

however the educational system needs improvement Education Index, 2015 0.81 0.78 0.72 0.71 0.70 0.69 0.68 0.68 0.67 0.67 0.66 0.66 0.63 0.62 0.61 0.58 0.54 0.52 0.51 ARG CHL ECU MEX VNZ PER URY DOM PAN PRY BLZ CRI COL BRA BOL SLV NIC HND GTM Source: CID/IDB Staff with data from United Nations. Human Development Reports (2017).

School Attendance Factors Marginal Effects of Household Characteristics to the Probability of Assitance to Primary School Marginal Effects of Personal Characteristics to the Probability of Assistance to Primary School 15% 8% 10% 5% 0% -5% -10% -15% 9% 2% -1% -2% -3% -3% -5% -5% 11% 7% 6% -4% -2% -4% -4% -3% -4% -3% -5% -7% -8% -9% -9% Costa Rica El Salvador Guatemala Honduras Nicaragua Panamá Resp. main breadwinner HH head is unemp. Remittances as % of househ. income Household is poor 6% 4% 2% 0% -2% -4% -6% -8% -10% 5% 6% 3% 3% -1% -4% -5% -6% -7% -8% -8% -9% Costa Rica El Salvador Guatemala Honduras Nicaragua Panama Respondent is female Respondent is indigenous Source: CID/IDB Staff with data from CEPALSTAT and household surveys. Source: CID/IDB Staff with data from CEPALSTAT and households surveys.

22% 21% 21% 21% 20% 20% % of population between 15 and 18 years old that neither work nor study, circa 2013 Early school dropout generates a high percentage of young people that neither work nor study 18% 17% 17% 16% 16% 15% 15% 13% 13% 12% 12% 6% Bolivia Brasil Ecuador Argentina Chile Panamá Nicaragua Paraguay Colombia Venezuela Uruguay Costa Rica R. Dominicana México El Salvador Perú Honduras Guatemala Source: CID/IDB Staff with data from the Economic Commission for Latin America and the Caribbean and household surveys.

% of informal workers, circa 2012 84 77 76 71 A large share of workers are in the informal sector 66 61 55 54 54 51 46 45 41 40 38 23 23 18 Chile Uruguay Costa Rica Brasil Venezuela Paraguay Argentina Panamá Colombia Perú Ecuador Rep. Dom. México El Salvador Bolivia Guatemala Nicaragua Honduras Source: CID/IDB Staff with data from the Economic Commission for Latin America and the Caribbean and household surveys.

% of informality associated with different variables in Central America Factors that influence informality CRI SLV GTM HND NIC PAN DOM 22% 22% 23% 19% 18% 17% 18% 16% 16% 16% 15% 16% 14% 14% 11% 11% 10% 9% 9% 10% 5% -0.7% -0.7% -0.5% -0.4% -0.5% -0.6% -0.7% -9% -11% -11% -19% -20% -23% -22% % Occupied women % Labor Population % Labor Population with Secondary Min. Wage / Average Wage % Labor Popuation in Agriculture Source: CID/IDB Staff with data from the Economic Commission for Latin America and the Caribbean and household surveys.

Health and Economic Growth Higher productivity comes with better health 30 28 26 27.2 25.4 Infant Mortality Rate (deaths by each 1,000 live births) LA CADR BLZ 24 22 20 18 20.4 16.7 16 14.5 HIGHER Economic growth 14 12 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 13.4 2015 2014 Source: CID/IDB Staff with data from the Economic Commission for Latin America and the Caribbean.

Health and Economic Growth Higher productivity comes with better health What reasons are behind the better performance of health indicators in CADR? i. Better housing conditions HIGHER Economic growth ii. iii. Control and prevention of illnesses Prenatal control and access to improved sources of water

Health and Economic Growth Determinants of health services demand 1. 2. The higher level of education of the mother, the better the children s health. Living in urban areas decreases the probability of getting infected (closeness to health centers). 3. Factors like: the higher patient s age, health auto perception, and presence of chronical illnesses, increase the demand for health services.

Macroeconomic Impact of Improvements in Human Capital Closing the IMR gap with LAC would increase the GDP per capita Reducing secondary dropouts to 0%would increase the GDP per capita 0.38 0.42 4.08 4.08 4.08 0.32 2.48 2.72 2.98 1.68 1.76 0.06 0.08 0.10 0.11 0.09 HND CRI* NIC DOM GTM SLV* PAN* CARD Source: CID/IDB Staff with estimates from O Hare et al. (2013). Note: *The gap closes with respect to Chile. CRI PAN SLV DOM GTM HND NIC CARD Source: CID/IDB with estimates from Baldacci et al. (2008).

Year Percentage Points Demographic Dividend: Opportunities and challenges Window of opportunity differs by country People in age to work (% of total population) Demographic Transition in CADR 2050 2045 2040 2035 2030 2025 2020 8 7 6 5 4 3 2 1 2015 Belize Guatemala Honduras El Salvador Dominican Rep. Nicaragua Panama Costa Rica 0 Peak Year Increase between 2016 and peak year (rigth axis)

Forward Looking Options CADR biggest challenge is expand high school education. Technical Education, dual and/or internships To improve the link between education and labor demand Demographic dividend is an opportunity to bolster economic growth To maximize it, it is necessary to increase the stock of human capital Infant mortality limits force labor growth It is necessary to put special attention to problems like diarrhea and malnutrition To enhance the development of physical and cognitive skills

Agenda Foreign Banking in CADR and Financial Convergence Effect

Financial Integration Related with higher financial convergence Financial Convergence Countries financial cycles are more synchronized. Affects the countries s exposition A higher association between financial variables (credit, capital, past due, margin, among others) and a common cycle in the region. A higher synchronized exposition in the region and contagion possibilities.

The share of foreign Banking in CADR is stable, but with a higher participation from Colombia Banking Foreign Assets in CADR (% del total) Banking Assets by origin in CADR (% del total) 50 48 46 44 42 40 38 36 34 32 30 2008 2009 2010 2011 2012 2013 2014 2015 2016 CADR CA 8.6 9.2 7.8 8.6 15.0 16.7 18.3 9.1 9.2 10.0 9.4 19.0 20.2 8.8 8.8 8.1 18.2 19.0 18.5 18.5 6.5 6.6 10.8 13.0 3.5 3.4 6.1 2008 2009 2010 2011 2012 2013 2014 2015 2016 COL CADR Rest USA MEX Source: CID/IDB Staff with data from Central Banks.

2004M12 2005M06 2005M12 2006M06 2006M12 2007M06 2007M12 2008M06 2008M12 2009M06 2009M12 2010M06 2010M12 2011M06 2011M12 2012M06 2012M12 2013M06 2013M12 2014M06 2014M12 2015M06 2015M12 2016M06 2016M12 2017M06 What financial variables are more synchronized? Credit Cycle and Common Cycle 3 Credit related variables are more synchronized with the common cycle. Credit, Credit/assets, past due portfolio and financial margin: 40% on average. Credit: 53%. 2 1 0-1 -2-3 -4-5 CRI SLV GTM HND NIC PAN DOM Common Cycle

What variables explain credit convergence? 1. Convergence with real sector 2. Real activity and trade partners 3. Financial Index Integration with Colombia 4. Credit growth

Agenda Possible Shocks for CADR

Looking forward scenarios Sensitivity Analysis and policy actions in face of a deterioration of external conditions i. ii. iii. iv. The economic performance of the US has a high impact on the region s growth International oil price has a significant impact Changes in coffee, sugar, and bananas prices have also a relevant impact Higher global risk aversion has an important impact on growth

Forward Looking Scenarios Effects on GDP Economic growth of selected shocks (percentage points). 1.1 0.9 0.7 0.5 0.3 0.1-0.1-0.3 USA Growth Increase of 1 pp Coffee Price Increase of 10% Bananas Price Increase of 10% Sugar Price Decrease of 10% Oil Price Increase of 10% Risk Global Aversion (VIX) Increase of 20% Range Average

Forward Looking Scenarios To consider 1. External demand outlook and commodities markets are positive to CADR. 2. Some events would be a risk for CADR, such as the new immigration and trade policy of United States. In ten years a restrictive trade policy from USA would reduce the region s output in 5.8% The tightening of US immigration policy, would reduce the growth of the Northern Triangle 0.6%

Gracias. Publication available at: https://publications.iadb.org/handle/11 319/8779?locale-attribute=es