Global Financial Crisis:

Transcription

1 Global Financial Crisis: Causes and Consequences Dr. Prajapati Trivedi Senior Economist The World Bank

2 Presentation Outline Meaning of Global Financial Crisis Causes Consequences Saudi Arabia India

3 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

4 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

5 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

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7 Banking Panics (and recessions) 1 year ago RBS paid $100 billion for ABN Amro. For this amount it could now buy: Citibank Morgan Stanley Goldman Sachs Merrill Lynch Deutsche Bank Barclays $22.5 billion $10.5 billion $21 billion $12.3 billion $13 billion $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.

8 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 , and now the United States housing bubble.

9 Speculative Bubbles and Crashes

10 Speculative Bubbles and Crashes

11 Causes Leveraged Investment Asset-Liability Mismatch Regulatory Failures Fraud Medford Contangion Œcopathy Self-fulfilling Prophecy Sub-prime Mortgage

12 Why History is Repeated? Schumpeterian Creative Destruction Regulatory Evolution New markets Nature of competition

13 Consequences

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17 All you need is cash The increasingly desperate search for the stuff is changing modern management?

18 Consequences for the Saudi Economy Impact on the Demand Side of Development Process Government Investment Consumer Demand Private Sector Demand

19 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

20 Consequences for the Saudi Economy Impact on the Demand Side of Development Process 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.

21 Consequences for the Saudi Economy Impact on the Demand Side of Development Process Consumer Demand No reason for Saudi consumption spending to change. Expatriate consumer spending may decrease as some private sector projects may be postponed Given that the Saudi economy was till recently facing an excess demand situation, on balance this may be a positive factor.

22 Relationship between Individual Consumption and GDP 1971A 1973A 1975A 1977A 1979A 1981A 1983A 1985A 1987A 1989A 1991A 1993A 1995A 1997A 1999A 2001A 2003A 1969A Years Abroad Clothes Rent Food Furniture Medical Other Entertainme Transport GDP Saudi Riyals

23 Consequences for the Saudi Economy Impact on the Demand Side of Development Process 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.

24 Consequences for the Saudi Economy Impact on the Supply Side of Development Process 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.

25 Consequences for the Saudi Economy Impact on the Supply Side of Development Process 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.

26 Consequences for the Saudi Economy Impact on the Supply Side of Development Process 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.

27 Consequences for the Saudi Economy Impact on the Supply Side of Development Process 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.

28 Consequences for the Saudi Economy Impact on the Supply Side of Development Process 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.

29 Consequences for the Saudi Economy Affect on the welfare and quality of life of citizens 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.

30 Consequences for the Saudi Economy Affect on the welfare and quality of life of citizens 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.

31 Consequences for the Saudi Economy Affect on the welfare and quality of life of citizens 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.

32 Consequences for the Saudi Economy Impact of the crisis on the reform of 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.

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