Central America, Panama, and the Dominican Republic: Challenges Following the 2008-09 Global Crisis
The banking sector has about one-third foreign bank assets, and these foreign investments are controlled by the United States. To have a medium- and long-term sustainability, Costa Rica needs to have some fiscal adjustments. The average initial abnormal returns of percent exceed those found in the existing literature for both developed and emerging markets IPOs. Although the IPOs' returns over the one-year horizon beat the market index benchmark, they present negative abnormal returns once initial returns are excluded, which is consistent with findings in other industrial and emerging markets.
The empirical models reject the hypothesis that the IPOs' performance is driven by the common independent variables employed in the literature. On the contrary, in the case of the GCC, country- and industry-specific characteristics, in addition to the timing of the offers, play key roles in explaining the abnormal returns of IPOs. This paper's empirical findings support the hypothesis that investors initially tend to be over-optimistic about the performance of IPOs, but grow more pessimistic over time. A partir de la revision de los principales trabajos empiricos, se efectua un analisis de las distintas metodologias aplicables al estudio de las economias de escala en banca, determinandose como mas idonea la estimacion de una funcion de costes multiproducto con una forma funcional flexible translog , acorde con los requerimientos de los teoremas de la dualidad, capaz de representar la tecnologia productiva subyacente de forma equivalente a la funcion de produccion.
La especificacion de dicha funcion se efectua una vez caracterizadas la produccion bancaria con la. Grandfather was a gentleman the ancestry of Michael Matthew Dooley M. Nevertheless, the region faces considerable challenges for the period ahead, including the need to raise medium term growth above historical levels and protect macroeconomic and financial stability.
Central America, Panama, and the Dominican Republic: Challenges Following the 2008–09 Global Crisis
This book argues that meeting these challenges will have to come from within, in light of the anticipated modest demand growth from trade partners. Raising growth in the region will depend on the adoption of structural reforms that generate substantial productivity gains.
Get eTOC Alert. Table of contents Table of contents Close section Volume Get Code Buy. Using structural VAR models, it is found that a one percent shock to U. Spillovers from global shocks and the rest of the region also affect activity in some countries. Spillovers are mostly transmitted through advanced country financial conditions and fluctuations in external demand for Central American exports.
Shocks to advanced economies associated with the financial crisis lowered economic activity in the region by 4 to 5 percent, on average, accounting for a majority of the observed slowdown.
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The impact was almost twice as large as elasticities estimated on pre-crisis data would have predicted. These results underscore the importance of operating credible policy frameworks that enable a countercyclical policy response to external shocks. Calvo identifies a situation as a sudden stop provided there is a net outflow negative inflow and the flows have fallen below a minimum threshold; a minimum threshold defined as the average of the period less a standard deviation. The figure also shows the proportion of countries that experience a sudden stop as a way of measuring the regional scope of the phenomenon.
Figures 10a, 10b, 10c and 10c. Sudden stops in Latin America a Latin America. The charts clearly show that, for the region as a whole, the financial shocks of the s and s were more severe than the current one: although in all three events there is a reversal in regional capital flows, the scale is considerably smaller in the case of the subprime crisis. In fact, although the reversal was significant, the phenomenon does not constitute a sudden stop for the region as a wholesince the amount of outflows does not fall below the minimum threshold.
This is because, as we have seen, once the initial impact passed, capital tended to return to the region in the second half of This contrasts with what happened in the early s and late s in which the reversals did indeed constitute sudden stops. This picture does not change much when the observations are quarterly instead of annual. Aside from this, two South American economies Bolivia and Peru and one Central American economy El Salvador experienced a sudden stop, while another two Argentina and Venezuela experienced capital outflows prior to the international crisis.
While in the latter region the reversal caused net capital flows to turn negative, this was not the case in LAN. However, what is true is that the reversal was quite widespread. The regional scope of the phenomenon is similar to the events of the s although not comparable to the events of the s. The occurrence of sudden stops in a number of economies was reflected in Figure 10b, which shows the proportion of economies that endured the phenomenon in each sub-region. Macroeconomic Vulnerability A macroeconomic shock of given size and characteristics may have a very different impact depending on the vulnerability of the economy that receives it.
Accordingly, as important as characterising the shocks is it to assess the risk factors that determine the degree of vulnerability Edwards, ; ECLAC, ; Ocampo, In the specific case of external shocks, research shows that vulnerability is linked to a set of indicators relating to the fiscal, external and financial fronts ECLAC, Accordingly, we will review a series of regional indicators that are linked to vulnerability. Naturally, we will take the period prior to the external shocks since vulnerability must be evaluated in ex-ante terms.
We will start by discussing fiscal vulnerability. The literature on sudden stops identifies as two key risk factors the relationship between public debt and GDP and the proportion of said debt that is dollar-denominated. However, because in general they were starting from relatively high levels partly as a result of the crises at the end of the s , this did not translate into particularly low government debt levels. In the LAN sub-region the pattern was similar. In particular, countries like Honduras and Costa Rica entered the current crisis with a strength they had not had in the past.
Another very positive fact is that the indebtedness levels did not surge as a result of the instability triggered by the external shock, which contrasts sharply with that that had happened in previous episodes. See, in particular, the case of LAS, where levels of indebtedness spiralled as a result of the instability in the s.
Figures 11a, 11b and 11c.
Fiscal vulnerability in Latin America I : stocks. A fact that probably explains the post-shock improvement in public debt is the lower degree of dollarisation. Dollarisation of debt diminished notably in the region.
Commodity-Led Development in Latin America
The flow indicators also show positive changes with regard to vulnerability Figure Following the aforementioned process to reduce debt, in around the balances turned into surpluses. Consequently, the advent of the subprime crisis found the region's countries with more fiscal manoeuvring room than on previous occasions, when the fiscal balance was slightly in deficit Figure 12a. A sub-regional breakdown shows that the main differences came in the countries of the south. However, this is not the case of the biggest economy in the sub-region Brazil , which despite reducing its fiscal deficit notably, began the subprime crisis in the red.
In the LAN sub-region, meanwhile, fiscal numbers when the crisis began were similar to those of past crises.
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However, it is worth noting that Mexico, the biggest economy of the region, has been showing much less fiscal vulnerability in the last few years. In short, it is safe to say that the effect of fiscal vulnerability has been much less than in the past. Although the situation is far from being homogeneous in all the countries, the fact is that the region appears to have taken advantage of the boom of the s to strengthen its fiscal position, in terms of both flows and stocks.
Figures 12a, 12b and 12c. Fiscal vulnerability in Latin America I : flows. Let us now look at external vulnerability indicators. The figure below shows the performance of external vulnerability using as an indicator the net international financial investment position. This indicator is defined as the difference between external financial assets and financial liabilities of the economy as a whole. This time, though, on average, the region entered the subprime crisis with a net credit position in relation to the rest of the world of a couple of GDP points. Figure External vulnerability in Latin America I : stocks.
Source: own research based on data in Lane and Milesi-Ferretti There were two factors behind this improvement. This kind of self-guarantee was driven by the desire to avoid exposure to sudden stop and contagion episodes such as the ones that occurred between and in a number of countries in Asia, Russia and Latin America.
Privileged instruments of the self-guarantee strategy were the generation of sizeable current account surpluses and the accumulation of reserves Ocampo, The lower end of the panel Figures 13b and 13c shows that there are differences between the sub-regions we are looking at. One of the main differences is that the improvement in the net financial position was considerably greater in LAS. The LAN sub-region shows vulnerability indicators that leave it more exposed. However, it should be taken into account that the regional averages tend to conceal asymmetries. Accordingly, it must be considered that the two biggest economies in the region have somewhat higher-than-average external exposure levels.
In both cases, much of the net debt came not from the public sector as in the crises of the s, but from private sector balance sheets. As for vulnerability indicators based on flows, the evidence regarding the trade balance shows a similar pattern to the stock of net debt: there were considerable improvements in South America, but not in the LAN region Figure For Central American countries, this is none other than the reverse side of the export anaemia and excessive reliance on remittances from the US.
Figures 14a, 14b and 14c. External vulnerability in Latin America II : flows. Finally, we will analyse the changes in vulnerability associated with domestic financial intermediation. When evaluating this point it should be taken into account that the region's financial systems are shallow and less developed than might be expected based on per capita GDP Torre et al.
An important one is the weakness of long-term lending supply and the presence of floating rates, indexation and dollarization in long-term debt markets. Another negative characteristic is that the markets are highly segmented. Only the large corporations have access to corporate bond markets or external markets, while at the same time small firms and households face a significant level of rationing.
In this context of low levels of financial development, there are a number of risk factors which the literature on financial underdevelopment brings to the fore: the spiralling growth in lending —and the fragility of balance sheets which this implies— and the level of dollarisation of the deposits —which can translate into a decoupling between non-transferable assets and liabilities in dollars—. The vulnerability implied by an exaggerated increase in lending appears to be significant in the region.
Lending as a percentage of GDP increased sharply between and , and is higher than it was in previous crises. This is relevant because, as Figure 13a shows, crises systematically end up with massive financial reversals and contractions in lending. The breakdown by regions allows us to pinpoint the greatest vulnerability: in the LAN sub-region.
There, lending has expanded quickly in the last few years, led by an increase in the foreign involvement in the financial system, and when the subprime crisis came it was clearly above the levels of previous crises. In South America, meanwhile, lending expanded during that period, mainly in Brazil and Venezuela, but is in better condition than in previous crises. Figure 15a, 15b and 15c. Financial vulnerability in Latin America I : stocks.
Naturally, since it is a region that is financially underdeveloped, lending growth must in principle be welcome.