Transcript Global Outlook, Spillovers, and Vulnerabilities in Israel

Global Outlook,
Spillovers, and
Vulnerability in Israel
M.K. Tang (IMF)
May 5, 2009
Roadmap



Outlook for the world economy
Impact on Israel
Constraints on Israel’s fiscal options and
implications for fiscal rules
10
-5
20
00
20 M1
00
20 M7
01
20 M1
01
20 M7
02
20 M1
02
20 M7
03
20 m1
03
20 m7
04
20 m1
04
20 m7
05
20 m1
05
20 m7
06
20 m1
06
20 m7
07
20 m1
07
20 m7
08
20 m1
08
20 m7
09
m
1
20
00
20 M1
00
20 M7
01
20 M1
01
20 M7
02
20 M1
02
20 M7
03
20 m1
03
20 m7
04
20 m1
04
20 m7
05
20 m1
05
20 m7
06
20 m1
06
20 m7
07
20 m1
07
20 m7
08
20 m1
08
20 m7
09
m
1
Free Falling Activity
Industrial production
(oya growth; percent)
World trade
(oya growth; percent)
30
5
World
20
Trade value
0
10
Adv. economies
0
CPB trade vol. index
-10
-10
-15
-20
-20
-30
Extent of Crisis Catching Forecasters
Off-guard
5
4
Evolution of IMF 2009 growth projections
(percent)
3
2
1
0
-1
-2
World
US
-3
Apr 2008 Jul 2008 Oct 2008 Nov 2008 Jan 2009 Apr 2009
Deep Recession, Tepid Recovery…
10
10
World Real GDP growth
8
8
6
6
4
4
2
2
0
0
World
-2
Advanced economies
Developing economies
-2
-4
-4
1970
1980
Source: WEO April 2009
1990
2000
2010
…with Substantial Downside Risks
6
6
-3
-3
-4
-4
-5
-5
Source: WEO April 2009
2011Q3
-2
2011Q1
-2
2010Q3
-1
2010Q1
-1
2009Q3
0
2009Q1
0
2011Q3
1
2011Q1
1
2010Q3
2
2010Q1
2
2009Q3
3
2009Q1
3
2008Q3
4
2008Q1
4
Downside Scenario--World Growth (oya; percent)
2008Q3
5
2008Q1
Downside Scenario--US Growth (oya; percent)
5
Global Downturn Weighs on Israel
Synchronization of economic cycles:
Annual real GDP growth
12
10
(Percent)
ISR
US
Euro area
8
Proj.
6
4
2
0
-2
-4
-6
1995
1997
Source: IMF
1999
2001
2003
2005
2007
2009
1. Trade Linkages
Growing trade linkage: Exports value
36
(Percent of GDP)
30
24
18
12
6
0
1995
1997
1999
2001
2003
Source: IMF Direction of Trade Statistics
2005
2007
2. External Asset Exposures
120
Foreign assets: Gross IIP assets - excluding
reserve assets
Income from abroad: Investment income
receipts - excluding returns on reserve assets
6
(Percent of GDP)
(Percent of GDP)
100
PI assets
80
4
DI assets
OI assets
60
2
40
20
0
0
1998
2000
2002
Source: Bank of Israel.
2004
2006
2008
1996
1998
2000
Source: Bank of Israel.
2002
2004
2006
2008
Main External Determinants
Response of Israel Quarterly Growth...
1.5
...to a 1 ppt increase in
US quarterly growth.
...to a 1 ppt increase in
EU quarterly growth.
1.5
(Percent)
(Percent)
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
1
2
3
4
5
6
(Periods)
7
8
9
1
10
3
4
5
6
(Periods)
7
8
9
10
...to a 5 ppt increase in quarterly gains on
major stock indices.
...to a 5 ppt rise in quarterly
oil price inflation.
1.5
2
1.5
(Percent)
(Percent)
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
1
2
3
4
5
6
(Periods)
7
8
9
10
1
2
3
4
5
6
(Periods)
7
8
9
10
Strength of Spillovers
Variance decomposition of Israel quarterly growth
over 1-8 quarters of forecast horizon
100%
80%
60%
40%
20%
0%
1
Oil price inflation
2
3
US grow th
4
EU grow th
5
6
Returns to major stock indices
7
8
Domestic factors
Counteractive Policy Reponses Can
Boost Recovery
Fiscal policy and strength of recovery
Monetary policy and strength of recovery
15
10
5
0
-10
-5
0
-5
-10
Change in real interest rate (ppt)
Source: WEO April 2009
5
10
Cumulative growth after output
trough (percent)
Cumulative growth after output
trough (percent)
15
10
5
0
-10
-5
0
5
10
-5
-10
Change in government consumption (percent)
15
20
Israel’s External Position Robust
Rising buffers against short-term external debt
280
230
ST external assets as percent
of ST external debt
180
130
Reserves assets as percent
of ST external debt
80
30
2005
2006
2007
2008
Spreads on 5-7 year bond
0.5
0
2009M2
2008M9
2008M4
2007M1
2007M6
2007M1
2006M8
2006M3
Spread on 10
year bond
2005M1
2
2005M5
Israel sovereign bond spreads (over US Treasurys; percent)
2004M1
85
2004M7
100
Israel
Italy
2004M2
Ireland
2003M9
Romania
Brazil
2003M4
400
2002M1
Lithuania
2002M6
2002M1
500
4/25/2009
200
3/25/2009
300
2/25/2009
1/25/2009
1.5
12/25/2008
11/25/2008
10/25/2008
9/25/2008
8/25/2008
7/25/2008
6/25/2008
5/25/2008
1
4/25/2008
3/25/2008
2/25/2008
1/25/2008
12/25/2007
11/25/2007
10/25/2007
9/25/2007
8/25/2007
7/25/2007
Ap
r- 0
Ju 6
n0
Au 6
g0
O 6
ct
-0
De 6
c0
Fe 6
b0
Ap 7
r- 0
Ju 7
n0
Au 7
g0
O 7
ct
-0
De 7
c0
Fe 7
b0
Ap 8
r- 0
Ju 8
n0
Au 8
g0
O 8
ct
-0
De 8
c0
Fe 8
b0
Ap 9
r- 0
9
800
6/25/2007
2.5
5/25/2007
4/25/2007
But Some Market Signs of Discomfort...
900
Sovereign CDS spreads (5-year; bps)
700
600
100
Exchange rates
2.00
95
2.50
0
90
3.00
REER (index)
3.50
3
80
75
4.00
70
4.50
NIS/USD (reverse scale; RHS)
65
5.00
60
5.50
Source: IMF
0
Ukraine
Romania
Lithuania
Korea
Ireland
Spain
Mexico
Poland
Sweden
UK
Poland
Austria
Canada
France
US
150
Hungary
Israel
Greece
Italy
Japan
…as Fiscal Sustainability a Concern…
180
Gross general government debt
(2008; percent of GDP)
120
90
60
30
…and Global Financial Flows Could
be Fragile
Procyclical financial flows: Gross financial inflows
20
18
(Percent of GDP)
16
14
12
10
8
6
4
2
0
1996 1998 2000 2002 2004 2006 2008
Source: Bank of Israel.
Implications for Fiscal Rules
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Economic gloom and uncertainty on nearterm horizon
Automatic stabilizers could cushion the blow,
even so financing risks nontrivial
Benefits of structural fiscal loosening hinge
on impacts on sustainability and market
confidence