1AIG
The World Economic & Financial The World Economic & Financial System: Risks & ProspectsSystem: Risks & Prospects
Prof. Jacob A. Frenkel Prof. Jacob A. Frenkel Vice Chairman AIG, Chairman G30 Vice Chairman AIG, Chairman G30
Former Governor, Bank of IsraelFormer Governor, Bank of Israel
01/28/20092AIG 2
2006 2007 20086,000
7,000
8,000
9,000
10,000
11,000
12,000
13,000
14,000
800
1,000
1,200
1,400
1,600
S&P 500
DowJones
(close - price) (close - price)
Standard & Poors 500 Composite Index (Right) Dow Jones Industrial Average Index (Left)
Global Equity MarketsGlobal Equity Markets
Source: Bloomberg, Market Data, Last Update Jan 27 2009
01/28/20093AIG 3
Global Equity MarketsGlobal Equity Markets
Source: Bloomberg, Market Data, Last Update Jan 27 2009Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
40
60
80
100
120
140
160
180
Asia
Europe
LatinAmerica
(US$ returns, 12/31/2008 = 100)
EM Asia EM Europe EM Latin America
01/28/20094AIG
FHA/VA, 5.6%
Prime, 78.8%
Alt-A, 2.2%Subprime, 7.9%
U.S. Mortgage Market: 2003-2005U.S. Mortgage Market: 2003-2005
Source: Inside Mortgage Finance, Last update February 8, 2008
Prime, 58.9%
Subprime,
18.2%
FHA/VA, 4.5%
Alt-A, 6.3%
Prime, 53.2%
Subprime, 20.0%
Alt-A, 12.2%FHA/VA,
2.9%
2003 2004 2005
01/28/20095AIG
U.S. Mortgage Market: 2006-2007U.S. Mortgage Market: 2006-2007
Source: Inside Mortgage Finance, Last update February 8, 2008
FHA/VA, 2.7%Alt-A, 13.4%
Subprime, 20.1%
Prime, 49.3% Prime,
62.1%
FHA/VA, 4.2%
Alt-A, 11.3%
Subprime, 7.9%
2006 2007
01/28/20096AIG 6
Changes in U.S. Home PricesChanges in U.S. Home Prices
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-10
-5
0
5
10
15(% change from a year ago)
Dec 2008 -15.3%
Source: Nat'l Association of Realtors, quarterly averages, last observation 12/ 2008
01/28/20097AIG 7
U.S. Household Real Estate WealthU.S. Household Real Estate Wealth
2000 2002 2004 2006 200875
80
85
90
95
100
105
110
115
120
125
130
135
140 (percent)
Source: Federal Reserve, last observation Q3/ 2008
Q3 2008 79.84%
01/28/20098AIG 8
U.S. New Home Sales and Housing StartsU.S. New Home Sales and Housing Starts
1990 1992 1994 1996 1998 2000 2002 2004 2006 20080.2
0.4
0.6
0.8
1
1.2
0.8
1.2
1.6
2
2.4(Tsd. units) (Tsd. units)
Housing Starts (Right) New Home Sales (Left)
New Home Sales: .41M
Housing Starts: .65M
Source: US Dpt. Commerce, Nat'l Assoc. of Realtors, quarterly avg., last observation 11/ 2008 (Sales), 12/ 2008 (Starts)
01/28/20099AIG 9
Credit Market Losses: All Financials (bill. Credit Market Losses: All Financials (bill. Usd)Usd)
Source: Bloomberg, Quarterly, Last update Jan 9, 2009
Credit Turmoil Losses Since Beginning of 2007
Europe, 291.9
Asia, 31.1
Americas, 729.1
EuropeAsiaAmericas
01/28/200910AIG 10
Capital Raised: All Financials (bill. Usd)Capital Raised: All Financials (bill. Usd)
Source: Bloomberg, Quarterly, Last update Jan 9, 2009
Capital Raised Since Beginning of 2007
Europe, 326.9
Asia, 56.4
Americas, 572.1
EuropeAsiaAmericas
01/28/200911AIG
Size of the Derivatives MarketsSize of the Derivatives Markets(Billions Usd, Total Contracts, Gross Market Value)
0
5000
10000
15000
20000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
June 2008
20.3 Trill.
June 1998
2.5 Trill.
Source: BIS, 6 month levels, Last Observation Jun 2008
01/28/200912AIG 12
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 20090
1
2
3
4
5
6 (% change year ago)
Global GDP Growth (%)Global GDP Growth (%)
Source: IMF, av. Annual growth rates, last update Jan 28 2009, WEO (2008 Estimate, 2009 forecast)
01/28/200913AIG 13
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-4
-2
0
2
4
6
8 (% from a year ago)
US Eurozone Japan Asian NIC
Real GDP Growth (%) Industrial CountriesReal GDP Growth (%) Industrial Countries
Asia NICs 3.9%
Japan -2.6%
Eurozone -2.0%
US -1.6%
Source: IMF, av. Annual growth rates, last update Jan 28 2009, WEO (2008 Estimate, 2009 forecast)
01/28/200914AIG
Real GDP Growth (%) Developing CountriesReal GDP Growth (%) Developing Countries
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-2
0
2
4
6
8
10
(% from a year ago)
Russia Developing Asia Africa Central & Eastern Europe Latin America
Central & East. Europe -0.4%
Developing Asia 5.5%
Russia -0.7%
Africa 3.4%
Latin America 1.1%
Source: IMF, av. Annual growth rates, last update Jan 28 2009, WEO (2008 Estimate, 2009 forecast)
01/28/200915AIG 15
Real GDP Growth (%) World EconomyReal GDP Growth (%) World Economy
Country 2003 2006 2007 2008 2009
World 3.6 5.1 5.2 3.4 0.5
Industrial Countries 1.9 3.0 2.7 1.0 -2.0Developing Countries 6.3 7.9 8.3 6.3 3.3
Source: IMF, av. Annual growth rates, last update Jan 28 2009, WEO (2008 Estimate, 2009 forecast)
01/28/200916AIG
Global Growth ContributionsGlobal Growth Contributions
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
30
40
50
60
70
Industrial
Developing
(% contribution to GDP growth, based on PPP)
Industrial World Developing World
Source: IMF, av. annual growth rates, last update October 9 2008
01/28/200917AIG
World Trade Volume (annual change)World Trade Volume (annual change)
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010-4
-2
0
2
4
6
8
10
12
14 (annual percentage change)
Source: IMF, av. Annual growth rates, last update Jan 28 2009, WEO (2008 Estimate, 2009 forecast)
01/28/200918AIG 18
Source: Conference Board, BEA, Qrtly averages; last observation Consumer Spending (11/08), consumer confidence (1/2009)
U.S. Consumer Confidence and SpendingU.S. Consumer Confidence and Spending
1992 1994 1996 1998 2000 2002 2004 2006 2008-2
-1
0
1
2
3
4
5
6
20
40
60
80
100
120
140
160
ConsumerConfidence
(Right)
RealConsumerSpending
(left)
(% from year ago) (Index)
01/28/200919AIG 19
Oil Price per BarrelOil Price per Barrel
2000 2001 2002 2003 2004 2005 2006 2007 20080
20
40
60
80
100
120
140
160Q2 2008
$140
2006 av.$65
2005 av.$59
2001 av.$24
2007 av.$95
2004 av.$39
Source: Reuters, Gold, USD/ troy oz, Last observation Jan 28 2009
28 Jan '09 $41.6
01/28/200920AIG
Coordinated Global Rate CutsCoordinated Global Rate Cuts
2005 2006 2007 2008
0
1
2
3
4
5
6 (%)
Canada United Kingdom United States Euro Zone Japan
UK 1.0%
Eurozone 2.0%
Canada 1.5%
US 0.25%
Japan 0.1%
Source: Bloomberg, Market Data, Last Update Jan 27 2009
01/28/200921AIG
U.S. Government Deficit as % of GDP U.S. Government Deficit as % of GDP
Source: Federal Reserve, US Department of Commerce, last observation Q3/2008
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008-6
-5
-4
-3
-2
-1
0
1
2
3
4 (% of GDP)
01/28/200922AIG 22
Current Account of Balance of PaymentsCurrent Account of Balance of Payments
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-800
-600
-400
-200
0
200
400
600
800 ($B) Asia$682B
ME Oil Exp. plus Russia
$434B
Eurozone -$54B
U.S. - $485B
Asia & Oil Exporters SaveAsia & Oil Exporters Save
Europe BalancesEurope Balances
US SpendsUS Spends
Source: IMF, av. annual growth rates, last update October 9 2008, WEO (2008 estimate, 2009 forecast)
01/28/200923AIG 23
$1,280
$153
$321
$39$2
0
100
200
300
400
500
600
700
800
900
1,000
1,100
1,200
1,300
1,400
China Japan Russia Taiwan South Korea
($B)
$200$281
$441
$977
$1,890
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
China Japan Russia Taiwan South Korea
($B)
StockStock FlowFlow(2005 – 2007)(2005 – 2007)
Accumulation of Foreign Exchange Reserves ($B)Accumulation of Foreign Exchange Reserves ($B)
Source: Nat'l Statistical Institutes 11/ 2008 (China 12/ 2008), Foreign-Exchange Reserves ex. Gold
November 2008
01/28/200924AIG 24
% of income
56.2
35.1
30.0 28.6
21.9
10.0
0
10
20
30
40
50
60
CHINA INDIA KOREA, REP.OF
JAPAN EURO AREA(AGG.)
UNITEDSTATES
Source: EIU estimates, annual average rates, Last update 3/2008
National Savings Rate Comparison National Savings Rate Comparison Gross Domestic Savings: 2007 (% of GDP)Gross Domestic Savings: 2007 (% of GDP)
01/28/200925AIG 25
1992 1994 1996 1998 2000 2002 2004 2006 2008 20100
20
40
60
80
100
120
140 (US$ Bil.)
India China
Export Strategy: China and IndiaExport Strategy: China and India
Source: yearly avg., National Bureau of Statistics, Ministry of Commerce and Industry, (01/ 2009)
India $11.5B
China $111.2B