global financial crisis - - e mbyllur - faqja
TRANSCRIPT
Global Financial Crisis:
Causes and Consequences
Dr. Prajapati TrivediSenior EconomistThe World Bank
Presentation Outline
• Meaning of Global Financial Crisis
• Causes • Consequences
– Saudi Arabia– India
Global Financial Crisis
• The global financial crisis of 2008 is the worst of its kind since the Great Depression
• Began with failures of large financial institutions in the United States
• Rapidly evolved into a global crisis resulting in a number of European bank failures
Meaning of Global Financial Crisis
• The term financial crisis is applied broadly to a variety of situations
• Usually, some financial institutions or assets suddenly lose a large part of their value– Banking Panics (and recessions)– Stock market crashes– Bursting of financial bubles– Currency crisis– Sovereign defaults
Banking Panics (and recessions)
• Commercial banks suffer a sudden rush of withdrawals by depositors, this is called a bank run– September 7, 2008:
• Two United States Government sponsored enterprises (GSEs), Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), into conservatorship run by FHFA
– September 14, 2008• Lehman Brothers files for bankruptcy.• Sale of Merrill Lynch to Bank of America
– September 16, 2008• AIG faces severe liquidity crunch
• Financial institutions lost a large part of their value in coming days and weeks
Banking Panics (and recessions)
1 year ago RBS paid $100 billion for ABN Amro.
For this amount it could now buy:
Citibank $22.5 billion Morgan Stanley $10.5 billion Goldman Sachs $21 billionMerrill Lynch $12.3 billionDeutsche Bank $13 billion Barclays $12.7 billion
And still have $8 billion change......with which it would be able to pick up GM, Ford, Chrysler and the Honda F1 Team.
Speculative Bubbles and Crashes
• A bubble exists when the price of stock exceeds the value of the future income (such as interest or dividends) that would be received by owning it to maturity– Dutch tulip mania– Wall Street Crash of 1929– Japanese property bubble of the 1980s, – Crash of the dot-com bubble in 2000-2001, and now the – United States housing bubble.
Speculative Bubbles and Crashes
Speculative Bubbles and Crashes
Causes
• Leveraged Investment• Asset-Liability Mismatch• Regulatory Failures• Fraud
– Medford
• Contangion• Œcopathy• Self-fulfilling Prophecy
Sub-prime Mortgage
Why History is Repeated?
• Schumpeterian Creative Destruction
• Regulatory Evolution• New markets• Nature of competition
Consequences
Readerscomments
All you need is cashThe increasingly desperate search for the stuff is changing
modern management?
Consequences for the Saudi Economy
• Government Investment • Consumer Demand• Private Sector Demand
Impact on the Demand Side of Development Process
Consequences for the Saudi Economy
Impact on the Supply Side of Development Process
• Capital Flows • Liquidity – working capital flows• Skilled Labor• Unskilled labor• Energy• Raw Materials
Impact of the crisis on the reform of the Saudi economy
Consequences for the Saudi Economy
• Government Investment – Long pipeline of funded Government projects– Funds from budget surpluses also committed for
projects
Hence neutral impact is expected in the medium term.
Impact on the Demand Side of Development Process
Consequences for the Saudi Economy
• Consumer Demand – No reason for Saudi consumption spending to
change.– Expatriate consumer spending may decrease as
some private sector projects may be postponedGiven that the Saudi economy was till recently
facing an excess demand situation, on balance this may be a positive factor.
Impact on the Demand Side of Development Process
Relationship between Individual Consumption and GDP
-200.00
0.00
200.00
400.00
600.00
800.00
1000.00
1969
A19
71A
1973
A19
75A
1977
A19
79A
1981
A19
83A
1985
A19
87A
1989
A19
91A
1993
A19
95A
1997
A19
99A
2001
A20
03A
Years
Saud
i Riy
als
Abroad
Clothes
Rent
Food
Furniture
Medical
Other
Entertainme
Transport
GDP
Consequences for the Saudi Economy
• Private sector Investment– Private sector investment in real estate sector
likely to be affected adversely. However, this may be a good outcome given that the Saudi real estate market was over-heated and was suffering from speculative fever.
– Private sector investment related to other aspects of population requirements not likely to be affected as the real purchasing power of Saudi consumer is not likely to be adversely affected.
Impact on the Demand Side of Development Process
Consequences for the Saudi Economy
• Capital Flows – There will be a slow-down of private capital flows (FDI)
as the financial crisis decreases the available pool of funds.
– However, from this smaller pool a much larger proportion of funds may be expected to come to Saudi Arabia. This is because of the large and stable buying power of Saudi consumers and Kingdom favorable business climate. According to the World Bank Saudi Arabia is ranked number 16 and is ahead of all countries in the Middle East.
• Impact likely to be neutral.
Impact on the Supply Side of Development Process
Consequences for the Saudi Economy
• Liquidity – Working capital flows – Like all other countries, Kingdom’s banks were also in
danger of a potential liquidity crisis resulting from losses on banks’ foreign investments.
– However, timely intervention by the Saudi government on October 16, 2008 eliminated this risk. The Supreme Economic Council asked SAMA to ensure sufficient liquidity for the Banks and guarantee the security of bank deposits.
• Impact likely to be neutral.
Impact on the Supply Side of Development Process
Consequences for the Saudi Economy
• Skilled labor – Given the global slow down and retrenchment in
OECD countries, the available pool of skilled workers will increase and there would be a downward pressure on their salaries. This would benefit Kingdom.
• Impact likely to be positive.
Impact on the Supply Side of Development Process
Consequences for the Saudi Economy
• Unskilled labor – Given the global slow down and retrenchment in
OECD countries, the available pool of un-skilled workers will also increase and there would be a downward pressure on their salaries. As one of the largest employers of expatriate labor force, this trend would benefit the Kingdom.
• Impact likely to be positive.
Impact on the Supply Side of Development Process
Consequences for the Saudi Economy
• Raw Materials – intermediate inputs – Global slow down will reduce the price of
commodities in general. Hence, the cost of construction materials (steel, copper, etc) will come down and benefit the Kingdom.
• Impact likely to be positive.
Impact on the Supply Side of Development Process
Consequences for the Saudi Economy
• Inflation – Globally inflation rates have started to come
down and that is also the case in Saudi Arabia.– This trend will be further supported by
strengthening of the dollar vis a vis other currencies.
• Hence, on balance, the financial crisis may be good for controlling inflation.
Affect on the welfare and quality of life of citizens
Consequences for the Saudi Economy
• Jobs – Saudi unemployment is not demand driven. Rather, it is a
structural problem. Hence, the dampening of demand is not likely to have any immediate negative impact.
– If Surplus projects are executed and other reform measures implemented, there may be a greater job creation for Saudis.
• Hence, on balance, the financial crisis may be neutral for jobs creation in the Kingdom.
Affect on the welfare and quality of life of citizens
Consequences for the Saudi Economy
• Travel Abroad – Stronger dollar (hence stronger Riyal) makes it
easier for the Saudis to travel abroad.• Hence, on balance, the financial crisis may
be good for citizens who want to travel abroad.
Affect on the welfare and quality of life of citizens
Consequences for the Saudi Economy
– There is a global trend towards accelerating reform agendas for dealing with the financial crisis in the short run as well as in the long-run. Kingdom will benefit from the experience of other countries and be able to upgrade its regulatory environment.
– The recent decrease in oil prices has once again brought the focus to the much needed reforms. Kingdom will now be able to work on a post-oil economy.
– The massive surpluses in the recent pasts ($70.6 billion in 2006 and $47.6 billion in 2007) have made it easier to make investment in these reforms.
• Hence, impact f the crisis likely to be positive.
Impact of the crisis on the reform of the Saudi economy