the global financial and economic crisis: implications...
TRANSCRIPT
3/26/2009
1
The Global Financial and
Economic Crisis: Implications for
SADC Economies and
Development Finance Institutions
Keith Jefferis
Econsult Botswana/USAID Southern African Trade Hub
March 26, 2009
Structure of Presentation
� The Global Financial and Economic Crisis�Origins of the crisis
� Unfolding of the crisis
� Impact of the Crisis on Developing Countries
� Implications for SADC Economies� Exports
� Balance of payments & financing
� Fiscal position
� The Bright Side!
� Implications for DFIs
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Global Financial & Economic Crisis
Global Growth Slowdown
� World economy now in deep recession
� Global growth forecasts for 2009 revised down from 3.9% to 0.5% (IMF)
� Developed country growth forecasts slashed to -2.0%
� Emerging / developing faster growth at 3.3%, but still affected
� Trend of downward revision of forecasts not yet over
� IMF forecasts the most optimistic, e.g. JP Morgan -2.6% for 2009
-3-2-10123456789
%
IMF Growth Forecasts, 2009 (July 2008 & Jan 2009)
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Global Growth Slowdown
� News snippets – this week� EIU – 30% chance of global depression (developed country growth <1% to 2013)
� SA new vehicle sales est. at 385 000 in 2009, down by almost 50% from 714 000 in 2006
� Sony Ericsson handset sales down by 50% from 2008Q4 to 2009Q1
� Japanese vehicle exports down 70% in February 2009 compared to a year earlier, and total exports down 49%
� Premium air travel down 25% in January on a year earlier
Global Growth Slowdown
-8
-6
-4
-2
0
2
4
6
8
Annualised real GDP growth, qoq
World Developed Emerging markets
Source: JP Morgan
� Depths of recession –4Q2008 and 1Q2009
� Now widely acknowledged to be worst recession since 1930s
� Stronger growth in emerging markets, but still big drop
� Weak recovery projected towards end of 2009
� Sluggish but positive growth in 2010
� Robust world growth (>3%) only likely in 2011
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Global Growth Slowdown - Advanced economies
-16
-14
-12
-10
-8
-6
-4
-2
0
2
42Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
Annualised real GDP growth, qoq
USA Euro Japan
Source: JP Morgan
� Four quarters of negative growth, with total decline in GDP of:
� USA – 3.4%
� Euro zone – 3.7%
� Japan – 8.3%
� Even when recovery starts, there will be a long “catching up” process
� 2008-9 recession likely to be deeper than slowdowns of 2001, 1991 & 1981
Origins of the Crisis
� The global financial economic crisis has its origin in three interconnected areas:
� Financial Sector Issues
�Global macroeconomic imbalances
� Commodity Prices
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Financial sector
� Sub-prime mortgage lending� New models of financial behaviour (originate-to-distribute -> off balance sheet)
� Complex new financial instruments (CDOs)
� Misaligned incentives (selling of loans not repayments; determination of bonuses)
� Credit explosion� Lax monetary policy� Asset price bubbles (housing, equities)� Defective risk assessment (rating agencies)� Weak regulation
Global imbalances
� Mismatch between surplus and deficit nations
X – M = S - I
� Surplus nations:� high savings (> investment)
� = current account surpluses
� capital exports to RoW
� Fx reserve accumulation
� Deficit nations:� low savings (< investment)
� = current account deficits
� capital imports from RoW
� debt accumulation
� Two sides of the same coin� Capital outflows from surplus nations financed deficits in low-savings nations, contributed to low interest rates and credit expansion
� e.g. China, oil exporters buying US T-bills and bonds
� Exchange rate inflexibility :� Asian currencies (managed) undervalued
� US dollar overvalued
� EUR-USD rate bears burden of adjustment
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Commodity price bubble
� Commodity prices at historically high levels by 2007/early-2008:� Oil
� Metals
� Foodstuffs
� Structural change effects –e.g. Rapid growth and infrastructure investment in China
� Long growth upswing
� Credit-induced spending
� Supply inelasticity
� Accentuated global imbalances, e.g. raised savings by commodity exporters
How the crisis unfolded - 1
� Financial Sector� Sub-prime defaults, triggered defaults on wide range of financial instruments
� Risk exposure and risk mis-pricing apparent
� Credit ratings inaccurate
� Uncertainty in markets
� Inter-linkages between institutions amplified problems
� Credit crunch, collapse of financial institutions, rescues, de-capitalisation
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How the crisis unfolded - 2
� Global imbalances� Rising savings in deficit nations:
� rebuilding HH and corporate balance sheets
� reduced consumption, lower demand
� Desire to accumulate reserves� perceived as economic strength
� but we can’t all run surpluses!
� Imbalances will have to be unwound:� exchange rate misalignments must be corrected (but flight to quality has led to strengthening dollar);
� needs rising consumption in high savings nations
How the crisis unfolded - 3
� Commodity Prices
� Rising inflation
� Declining real income in oil-consuming countries, hence reduced real expenditure
� E.g. on automobiles
� Tighter monetary policy (higher interest rates exacerbated credit problems)
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Impact of the Crisis
� Three phases
� Financial crisis (systemic)
� International financial flows/risk aversion
� Economic crisis (collapse in real growth rates, trade flows)
Systemic
banking
crisis
Cross-
border
financial
flows
Growth &
trade
effects
Advanced
countries
I III
Emerging
markets
II III
Less-
developed
countries
II III
Financial Contagion - Markets
� Aversion to emerging market (EM) risk + liquidity calls
� Capital flow reversals as foreign investors withdraw
� Falling equity markets
� Pressure on exchange rates (weaker)
� Rollover risks for existing borrowers (corporate and sovereign)
� Higher cost of funds (EM spreads)
� Trade finance scarce
� Inflows of FDI much reduced
� IIF estimates net private capital flows to EMs to fall sharply� $930bn in 2007
� $467 bn in 2008
� $165 bn in 2009
� EMs that used commercial finance to fund CADs esp. vulnerable
� In Africa, small but growing
� Ghana & Kenya� postponed planned international
bond offerings
� SA, Nigeria� external financing for companies,
banks scarce & expensive (higher interest rates)
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Financial Contagion – Other Flows
� Of particular importance to LDCs� ODA flows under pressure� Donor country budgets under pressure
� Commitments to increase ODA now doubtful
� Remittances falling sharply� Falling employment and real incomes in advanced economies
� Greater reliance on MFIs � IMF
� World Bank
� IFC
� AfDB
Trade & Growth Effects
� Reduced prices and volumes for major commodity exports
� Major ToT deterioration for commodity exporters (reduced real incomes)
� General reduction in trade flows worldwide
� World trade expected to decline in 2009� First time since 1982� Largest fall for 80 years� 2008Q4 saw major falls in exports in many countries
� Compounded by drying up of trade finance
� Risk of protectionism & slow progress on DDA negotiations
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Minerals prices way down....
$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000
$10,000
Source: LME
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
Source: LME
Copper ($/tonne) Nickel ($/tonne)
Trade & Growth Effects - Africa
� SS Africa growth forecast to remain positive in 2009 (IMF 3.5%)
� but much reduced from 2007 levels
� Changing employment patterns
� from dynamic export sectors to lower productivity sectors
� reversal of urban-rural migration
� Higher poverty due to:
� reduced employment
� lower wages
� lower remittances
� Concern about fragile states (Zim, DRC, Burundi, Guinea-Bissau, Liberia)
� Reduced availability of finance will inhibit investment in infrastructure & human capital
-4
-2
0
2
4
6
8
10
2007 2008 2009 2010
%
Real GDP Growth (IMF)
SS Africa Developing
Advanced
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Global Growth Slowdown – Key risks & uncertainties
� Depth and duration of recession� - how long and how deep?
� V-shape or L-shape?
� Shape of Financial Sector� Institutions?� Regulation?� Public/private ownership?
� Impact on international trade� Reversion to protectionism?
� Prospects for DDA?
� Macroeconomic Impact� Monetary expansion -> inflation
� Fiscal stability & future taxes
� Exchange rate realignment
� Unemployment
Implications for SADC Economies
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Impact on SADC Economies
� Domestic financial sector� Limited impact, at least initially
� Trade� Impact of global recession and ending of commodity price boom
� Export slowdown� Protectionism?
� External balance (BoP)� Wider CAD� Financing constraints
� Fiscal balance� Revenue slowdown� Higher spending� Larger deficits
� GDP � Growth slowdown very likely
� Positives� Inflation� Power supplies� Oil imports
SADC Economies – GDP per capita, 2006
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
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Export Slowdown
� Main impact on mineral producers
� Huge declines in:� Oil prices (-70%)
� Base metal prices (copper, -70%; nickel, -80%)
� Diamond sales volumes, to a lesser extent prices
� Slow recovery forecast in commodities markets, but no return to 2007/8 peaks
� E.g. Stanchart f’casts2009 avg. vs. end-2008� Nickel +0%
� Copper +18%
� Oil +56%
� Lower than 2008 avgprices
Export Slowdown
Country Commodity % of exports
Angola Oil, diamonds 99%
Botswana Diamonds, copper, nickel 90%
Congo DR Diamonds, oil 64%
Mozambique Aluminium, gas 74%
Namibia Diamonds, copper, uranium 59%
South Africa Gold, platinum, coal <50%
Zambia Copper, cobalt 77%
Mineral Exporters
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Other Exports
� Tourism� Slowdown in long-haul tourism due to recession
�Mauritius, Seychelles most dependent
� Also Botswana, SA, Zambia, Namibia, Mozambique, Tanzania
� Motor vehicles (SA)� sharp fall in new vehicle sales due to credit crunch
� Other exports also impacted, but less so� Food, clothing
� Being more diversified helps, but a matter of degree
Current Account Deficit (2009)
-40
-30
-20
-10
0
10
20
% of GDP
Source: IMF Regional Economic Outlook for Sub-Saharan Africa, Oct 2008
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Financing of Current Account
� Short-term portfolio flows (MICs)� Tightening of credit markets and
“flight to quality” has hit emerging markets
� Higher cost of funds (risk premium)
� FDI (all ex. Zimbabwe)� Credit crunch
� Project viability (esp. minerals)
� Reduced inflows, esp. in natural resource sectors
� Donor funds & concessionary borrowing (LICs)� Fiscal pressures in donor countries
� Limited IMF and World Bank funds
� Remittances (Lesotho, Madagascar, Malawi, Zimbabwe)� Rising unemployment in
developed countries
� Reduced remittance flows expected in 2009
� FX reserves� Cannot provide prolonged
financing of deficits
Foreign Reserves, 2008
0
1
2
3
4
5
6
7
8
9
10
Months of import cover
Botswana approx. 25 months
Source: IMF Regional Economic Outlook for Sub-Saharan Africa, Oct 2008
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Fiscal Balance (2007)
-10 -5 0 5 10 15
Zambia
Tanzania
Swaziland
South Africa
Seychelles
Namibia
Mozambique
Mauritius
Malawi
Madagascar
Lesotho
DRC
Botswana
Angola � Initial fiscal position reasonable:� Several countries with surpluses
� Deficits mostly manageable
� Benefits of ongoing fiscal reforms
Fiscal Balance & Financing
� Lower revenues likely due to reduced trade and growth
� Higher spending, e.g. social safety nets
� Vulnerabilities:� Commodity-revenue dependence
� Donor dependence
� Existing budget deficits
� High debts
� SACU revenues
� Deficit financing may be a problem� Access to international capital markets (eurobond issues) limited
� Domestic financing capacity –varies from country to country
� Banks – depends on many other factors
� Bond markets - generally underdeveloped – but now may be a good time to develop
� Danger of crowding out of private sector
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Donor dependence
� Donor funds of great importance to low-income SADC countries:� Malawi, Lesotho, Mozambique, Madagascar, Zambia, Tanzania
� Funding of budget, BoP, crucial for development projects
� Previous commitments to increase donor funding now questionable
� Need for donor funding rising
� Need for effective lobbying to – at a minimum –preserve donor funding levels
Role of MFIs
� MFIs have a crucial role given adverse markets
� Source of concessional finance for LICs
� Less risk-averse than banks
� WB & AfDB for infrastructure finance, but slow
� IMF more flexible and can provide budget and BoP support� Exogenous shocks facility
� Under-funded; need for recapitalisation
� G20 Agreement to increase IMF funding
� Still issues over “voice” and US veto
� Conditionality issues – esp. in the context of exogenous shocks
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Summary of negative impacts
� Slower / negative GDP growth
� Reduced investment� Increased current account deficits; financing constraints
� Exchange rate weakness� Fiscal deficits; financing constraints
� Rising unemployment & poverty
� Uncertainty over depth and duration of crisis
� Risks mostly on the downside
The Bright Side
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Financial Sectors
� Mostly untouched by first round of crisis:
� commercial banks sound
� much improved regulation and supervision
� limited cross-border banking linkages
� limited exposure to complex financial products
� deposit-funded lending
� money markets functioning normally
� Vulnerability - protracted downturn elevates risk:
� falling incomes, borrowers less able to service debts
� sectoral concentration of bank portfolios
� market volatility if banks have lent for investment in stock markets
� withdrawal of funds from parent banks
� equity markets following global trends
Inflation Forecasts
0
5
10
15
20
25
30
35
%
2008 2009
Source: IMF REO for SSA (October
2008)
� Inflation will fall due to:� Lower oil prices
� Lower food prices
� Sharply declining global inflation
� Will lead to lower interest rates
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Electricity
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
MW
Reserve Net capacity Peak Demand
� Reserve margin rapidly eroded
� Eskom now expects no growth in demand in 2008-2009
� New capacity of 40000MW needed over next decade (almost doubling)
� Slowdown provides breathing space
� But commercial financial markets currently closed
Import Bills
� Lower commodity prices:
� All except Angola & DRC net oil importers
� Fuel approx 20% of total imports on average
� Will help CAD
� Mainly oil, but also other commodity-related imports (e.g. steel)
� Net food importers also aided by lower world food prices
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Summary of Country ImpactsANG BWA DRC LES MAD MAL MAU MOZ NAM SEY SA SWZ TAN ZAM ZIM
Exports
Minerals XX XX XX X XX X XX
Tourism X X XX X X XX X X X
Finance
CAD XX XX X X XX XX X X XX X
FDI X X X X X X X X X X X X X X
Remittan-
ces
X X X X
Donors X X X X
Reserves X X X X X X X
Positives
Inflation � � � �
Power � � � � �
Oil
Imports
� � � � � � � � � � � � �
Summary of Impacts
� All countries will be hit, but impact will vary from country to country, depending on:� trade structure, fx reserves, fiscal position
� Impact less if:� sound policies in place� good reserves & low debt� more diversified
� Vulnerability from previous high inflation and CADs
� Most vulnerable are mineral exporters with high dependence on foreign capital
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Policy Responses - 1
� Internationally, lobby for:
� No protectionism!
� Resume DDA
� Additional resources for IMF/WB, that can be disbursed quickly and flexibly
� Preservation of donor funding commitments
� Fair treatment for migrant workers
Policy Responses - 2
� Domestically:� Exchange rate flexibility – to support adjustment
� Use monetary policy to support growth when inflation is low
� Fiscal policy – can be expansionary s.t. sustainability constraints
� Ensure quality of government budgeting & spending
� Renewed focus on financial sector supervision & regulation – banks & non-banks
� Need for high quality, timely economic and financial data
� Contingency planning & monitoring of evolving conditions
� Sustain reforms
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Implications for DFIs
A very different environment ....
� Constrained access to international financial markets increases demands on domestic sources of finance
� Domestic banking systems vary in ability to provide additional funds (liquidity, risk appetite, parent co’s)
� E.g. infrastructure projects, power projects
� Provides new opportunities for:� DFI finance
� SMMEs� MLS private sector projects
� Infrastructure
� Domestic bond markets
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Availability of finance for DFIs?
� DFIs also face reduced access to int’l markets� Scarce & expensive
� Govts also tapping debt markets
� DFI reliance on gov’tfinance may also be a problem:� Competing demands on public funds
� Limits on public sector debt/guarantees
� Most SADC countries have savings shortage (S<I)� Dependent on foreign finance to bridge gap
� Only a few countries with high savings (S>I) � Botswana, Namibia, Angola (?)
How can DFIs strengthen their ability of raise finance?
� Improve ability credit standing & ability to compete:� Strengthen balance sheets
� Consider credit rating
� Tap domestic bond markets
� Talk to governments
� Improve project selection� Increased demand and possibly reduced supply of finance puts pressure on ability to select projects� Sound projects
�Minimise risks
� Contribute to LT economic growth