What Does the Global Credit
Crisis Mean for Poor
Countries?
DAC Network on Poverty
Reduction,
20th October 2008
Helmut Reisen,
Head of Research
OECD Development Centre
20 October 2008

What Does the Global Credit
Crisis Mean for Poor Countries?
1. Crisis & Contagion
2. Global Slump? Asian Drivers to the Rescue?
3. ‘Good’ Local Fundamentals & Vulnerabilities
4. Private Finance for Development
5. Multilateral & Bilateral ODA
6. Aid Architecture
OECD Development Centre 2

Crisis & Contagion
• Crisis of global debt deleveraging, ultimately breakdown of money &
interbank markets
• With slight delay, contagion to poor countries
OECD Development Centre 3

Crisis & Contagion
Three channels of contagion:
1. Pure contagion (risk aversion, VAR, Basel II).
2. Financial contagion (channels: bank assets/deposits, balance-sheet
mismatches, debt characteristics and the share of foreign investors in
domestic equity markets).
3. Real/trade contagion (global growth =>trade account, export volumes
and prices, remittances, M&A). For PovNet focus crucial.
OECD Development Centre 4

Global slump?
Asian drivers to the rescue?
• IMF WEO ‘08: Global growth down to
3% in 2009 from >5% in 2006
• IMF WP/08/224: avg. cumulative
output loss of banking crisis = 4.5%
GDP
• Rising global growth share, yet Asian
Drivers not big enough
OECD Development Centre 5

Global Slump?
Asian Drivers to the Rescue?
Lower global growth
• lower food & oil prices
• lower headline inflation
• more monetary scope
• lighter M & X
• lower tax receipts
• lower remittances
• lower savings
• lower output & Ers
• higher debt ratios
OECD Development Centre 6

Food & Oil Subsidies
How Much Scope for Cuts?
• UNDP, G24, BMZ: First food & fuel
crisis, now on top global credit crisis
=> more ODA needed.
• Yet no sound evidence on
‘fundamental’ fuel & food prices in
deleveraged world.
• Current redemptions lead to
undershooting prices.
• Still, possible scope for cuts &
reorientation of fuel & food subsidies.
OECD Development Centre 7

Dismal Science: ‘Good’ Local Fundamentals &
Vulnerabilities
Quick ratio below one in :
• DRC, Cote d’Ivoire, Eritrea, Gambia,
Guinea, Guinea-Bissau, Kenya, Lesotho,
• Higher FX reserves => can & do Niger, Rwanda, Sao Tome and Principe,
melt rapidly. Swaziland, and Zambia; Belarus,
Ecuador, Jamaica, and Sri Lanka.
• Not only quick ratio counts in open • Foreign debt mix (share of 60 to 85non
guaranteed liabilities from
private
per
markets. cent of total debt outstanding): Eastern
Europe, CIS, HIPCs Bolivia, Zambia;
• Debt/Y ratios: endogenous to g & India.
ERs; => raw material (rm) prices • Carry trades unravel.
crucial.
• Fiscal balances: taxes often
pegged on X, C & rm.
• Growth: highly dep on low spreads
& high rm prices.
OECD Development Centre 8

Private Finance for Development
Impact of deleveraging:
• 2005-08 avg net flows EM:
• Short term: emerging-market bond
• portfolio equity flows 8%, finance and net syndicated bank
loans abruptly halted in III/08.
• FDI 35% (mostly M&A), Trade finance blocked.
• loans from banks (32%), • Mid term: push 2/3; pull 1/3
=>with global growth down, flows
• and non-banks (26%), plus down.
charities. • ‘Hunger for yield’ satisfied.
• Time to rebuild bank capital.
• DAC private flows 2006: 186 bn $. • FDI picks up first post-crises.
• Helped by SWFs (no debt leverage)?
OECD Development Centre 9

Multilateral ODA:
The Comeback Kids?
Past: Official lenders were crowded out by private (% total lending)
Bn $ One-year Commit Potential
forward ted , loan
commitme latest book
nt capacity extensio
8/08 n
IMF 201 8 193
IDA IDA 15: 41.6 11.2 47
Internal:16.
5
Sum: 58
Other:
AfDB
ADB
IDB
OECD Development Centre 10

Bilateral ODA - some evidence:
- No significant Y-dependence
- But mind the impact of deep slumps
OECD Development Centre 11

Aid Architecture
• Ask yourself: How looks the aid architecture in a deleveraged world? And
how would you like it?
• Representation, inclusiveness, overlap: Do we need to build from
scratch?
• => Hints: use development banks more, with new soft-loan features
(AfD); lever FX reserves.
• FX reserves non-OECD: 5000 bn$; 2% = 100; ratio loan/ IFIs capital =
2.5; => 250 bn $ soft loans.
• IMF surveillance, biased (Asian view)?
• OECD, FSF, etc. standards: Can international soft law bite?
OECD Development Centre