The World Economic & Financial System: Risks & Prospects

Transcription

1 The World Economic & Financial System: Risks & Prospects Dr. Jacob A. Frenkel Chairman & CEO Group of Thirty (G30).Bank Indonesia 7th Annual International Seminar Global Financial Tsunami: What Can We Do? Bali, Indonesia, June 13-14, 2009 AIG 1

2 Global Financial Markets Deteriorating Equity Markets Widening Credit Spreads Is the worse over? AIG 2

3 Global Equity Markets 14,000 (close - price) (close - price) 13,000 Dow Jones 1,600 12,000 1,400 11,000 10,000 S&P 500 1,200 9,000 8,000 1,000 7, ,000 Standard & Poors 500 Composite Index (Right) Dow Jones Industrial Average Index (Left) 600 Source: Bloomberg, Market Data, Last Update Jun AIG 3

4 Global Equity Markets 180 (US$ returns, 12/31/2008 = 100) Latin America 100 Asia Europe 40 EM Asia EM Europe EM Latin America Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Source: Bloomberg, Market Data, Last Update Jun AIG 4

5 U.S. Credit Market Spreads 20 (percentage points) (percentage points) High Yield High Grade BarCap High Yield Spreads vs. Treasuries BarCap High Grade Spreads vs. Treasuries May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May FactSet Research Systems Source: Barclay's Capital, weekly averages, last observation Jun AIG 5

6 Spread between 3 Month LIBOR & T-Bills (basis points) Wave of redemptions in Money Market Funds Foreclosures accelerate from 5.5% to 6.9% First Federal Reserve Auction, $20bn Bear Stearns Collapses Lehman Brothers files for Bankruptcy Countrywide Financial "Risks Bankruptcy" IndyMac seized by US Regulators Subprime Crisis Liquidity Crisis 7/07 10/07 1/08 4/08 7/08 10/08 1/09 4/09 Source: Federal Reserve, Reuters, last observation Jun AIG 6

7 Emerging Market Credit Spreads 1,000 (Basis points, index 1/1/2007=100) Europe Asia Latin America Latin America Europe Asia 0 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Source: JP Morgan, last observation Jun AIG 7

8 Subprime Crisis, Housing, and Banks Size of the Subprime Market Housing Prices and Household Wealth Delinquencies and Foreclosures Write-downs and Capital Raised AIG 8

9 U.S. Mortgage Market: Subprime, 7.9% Alt-A, 2.2% FHA/VA, 5.6% Subprime, 18.2% Alt-A, 6.3% FHA/VA, 4.5% Subprime, 20.0% Alt-A, 12.2% FHA/VA, 2.9% Prime, 78.8% Prime, 58.9% Prime, 53.2% Source: Inside Mortgage Finance, Last update February 8, 2008 AIG 9

10 U.S. Mortgage Market: Alt-A, 13.4% FHA/VA, 2.7% Alt-A, 11.3% FHA/VA, 4.2% Subprime, 7.9% Subprime, 20.1% Prime, 49.3% Prime, 62.1% Source: Inside Mortgage Finance, Last update February 8, 2008 AIG 10

11 Changes in U.S. Home Prices 20 (% change from a year ago) Apr % Source: Nat'l Association of Realtors, quarterly averages, last observation 4/2009 AIG 11

12 U.S. Household Real Estate Wealth 140 (percent) Q % Source: Federal Reserve, last observation Q4/2008 AIG 12

13 U.S. Delinquencies (% of total loans) (% of subprime loans) Total Delinquencies as a % total Loanas (Right) Subprime Delinquencies as a % Subprime loans (Left) Q % (left) Q % (Right) Source: Mortgage Bankers Association, Last Observation Q1/2009 AIG 13

14 U.S. Foreclosures (% of total loans) Foreclosures - Prime Foreclosures - subprime Foreclosures - total Q % Subprime Q % 2 0 Total Prime '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 Q % Source: Mortgage Bankers Association, Last Observation Q1/2009 AIG 14

15 Write-downs & Credit Losses vs. Capital Raised: All Financials 500 (Billions Usd, Quarterly Value) Capital Raised Writedowns & Credit Losses Q3/07 Q4/07 Q1/08 Q2/08 Q3/08 Q4/08 Q1/09 Q2/09 Source: Bloomberg, Quarterly, Last update Jun 9, 2009 AIG 15

16 Credit Market Losses: All Financials (bill. Usd) Credit Turmoil Losses Since Beginning of 2007 Europe Asia Americas Europe, Americas, Asia, 38.4 Source: Bloomberg, Quarterly, Last update Jun 9, 2009 AIG 16

17 Capital Raised: All Financials (bill. Usd) Capital Raised Since Beginning of 2007 Europe Asia Americas Europe, Americas, Asia, 74.9 Source: Bloomberg, Quarterly, Last update Jun 9, 2009 AIG 17

18 Cumulative Write-downs & Credit Losses vs. Capital Raised: By Region 1000 (Billions Usd, Accumulated value starting Q3/07) Capital Raised Writedowns & Credit Losses Source: Bloomberg, Quarterly, Last update Jun 9, 2009 Europe Asia Americas AIG 18

19 U.S. New Home Sales and Housing Starts (Tsd. units) (Tsd. units) New Home Sales:.35M Housing Starts:.46M Housing Starts (Right) New Home Sales (Left) Source: US Dept. Commerce, Nat'l Assoc. of Realtors, quarterly avg., last observation 4/2009 AIG 19

20 The Global Economic System Global Growth Projections The Rise of Developing Countries Unemployment Global Trade AIG 20

21 Global GDP Growth (%) 6 (% change year ago) IMF Forecasts 2009: : Source: IMF, av. Annual growth rates, last update Apr , WEO (2009 Estimate 2010 Forecast) AIG 21

22 Real GDP Growth (%) World Economy Country World Industrial Countries Developing Countries Source: IMF, av. Annual growth rates, last update Apr , WEO (2009 Estimate 2010 Forecast) AIG 22

23 Real GDP Growth (%) Industrial Countries 8 (% from a year ago) 6 Asia NICs 0.8% 4 2 Japan 0.5% 0 US 0.0% -2 Eurozone -0.4% -4-6 US Eurozone Japan Asian NIC Source: IMF, av. Annual growth rates, last update Apr , WEO (2009 Estimate 2010 Forecast) AIG 23

24 Real GDP Growth (%) Industrial Countries Country US Eurozone UK Japan Asian NICs Source: IMF, av. Annual growth rates, last update Apr , WEO (2009 Estimate 2010 Forecast) AIG 24

25 Real GDP Growth (%) Developing Countries (% from a year ago) 10 8 Developing Asia 6.1% Africa 2.0% Latin America -1.5% Central & East. Europe 0.8% -6 Russia Developing Asia Africa Central & Eastern Europe Latin America Russia 0.5% Source: IMF, av. Annual growth rates, last update Apr , WEO (2009 Estimate 2010 Forecast) AIG 25

26 Real GDP Growth (%) Developing Countries Country Developing Asia China India Latin America Eastern Europe Russia Africa Source: IMF, av. Annual growth rates, last update Apr , WEO (2009 Estimate 2010 Forecast) AIG 26

27 Global GDP Shares EU, 27.4% Brazil, 3.1% India, 2.8% China, 3.6% EU, 22.1% Brazil, 2.9% India, 5.0% China, 11.4% Japan, 9.1% USA, 22.8% Japan, 6.4% USA, 20.1% Source: IMF, Last Update May 2009 AIG 27

28 Global Growth Contributions (%) 70 (% contribution to GDP growth, based on PPP) 60 Developing Industrial 30 Industrial World Developing World Source: IMF, av. Annual growth rates, last update Apr , WEO (2009 Estimate 2010 Forecast) AIG 28

29 Unemployment Rate (%) (%) U.S. 9.4% 9 8 Eurozone 9.2% U.S. Eurozone Japan Japan 5.0% Source: National Statistical Institutes, last observation Eurozone & Japan 04/09, U.S. 05/09 AIG 29

30 Unemployment Rate (%) Country US Eurozone Japan Source: National Statistical Institutes, last observation Eurozone & Japan 04/09, U.S. 05/09 AIG 30

31 World Trade Volume (annual percentage change) 10 5 IMF Forecasts 2009: -11% 2010: +0.6% Source: IMF, av. Annual growth rates, last update Apr , WEO (2008 Estimate, 2009 forecast) AIG 31

32 Global Payments Imbalances Current Accounts Imbalances Foreign Exchange Reserves Who Holds US Treasuries? Savings Imbalances AIG 32

33 Current Account of Balance of Payments 800 ($B) Asia $622B 600 Asia & Oil Exporters Save ME Oil Exp. plus Russia $75B Europe Balances Eurozone -$135B U.S. - $397B -600 US Spends Source: IMF, av. Annual growth rates, last update Apr , WEO (2009 Estimate 2010 Forecast) AIG 33

34 Current Account of Balance of Payments 700 US$ billions, 2009 $ Of which: China $497 Japan $ $ $134 -$73 -$77 -$ US Eurozone Africa Latin America Middle East + Russia Asia Source: IMF, av. Annual growth rates, last update Apr , WEO (2008 Estimate, 2009 forecast) AIG 34

35 Accumulation of Foreign Exchange Reserves ($B) 2,200 2,000 1,800 1,600 ($B) $1,954 Stock May ,350 1,100 ($B) $1,344 Flow ( ) 1, ,200 1,000 $ $386 $313 $ $168 $265 $71 $ China Japan Russia Taiwan South Korea -150 China Japan Russia Taiwan South Korea Source: Nat'l Statistical Institutes 05/2009 (China 03/2009), Foreign-Exchange Reserves ex. Gold AIG 36

36 Global Treasury Holdings $900 (Levels, bill. Usd) $800 $768 $700 $687 $600 $500 $400 $300 $200 $128 $214 $192 $127 $138 $100 $0 China Japan UK Caribbean OPEC Brazil Russia Source: US Treasury, Last Observation February, 2009 AIG 37

37 Global Treasury Holdings 25% (% of Total) 24% 21% 20% 15% 10% 7% 6% 5% 4% 4% 4% 0% China Japan UK Caribbean OPEC Brazil Russia Source: US Treasury, Last Observation February, 2009 AIG 38

38 National Savings Rate Comparison 60 Gross Domestic Savings: 2008 (% of GDP) CHINA INDIA KOREA, REP. OF JAPAN GERMANY UNITED STATES Source: EIU estimates, annual average rates, Last update 5/2009 AIG 39

39 Inflation Headline Inflation Oil and Commodity Price Inflation Core Inflation AIG 40

40 Headline CPI Inflation (%) (%) 6 4 Eurozone -0.02% 2 0 Japan -0.1% -2 U.S. -0.6% Eurozone U.S. Japan Source: U.S. Dept. of Labor, Eurostat, Japan MIC, last observation Eurozone 05/09, U.S & Japan 04/09 AIG 41

41 Global Headline Inflation (%) 10 (Cpi % Change - Percent Per Annum) 8 Developing Countries Developing 6.7% 6 4 World World 3.% 2 Industrial Countries 0 Developing Countries Industrial Countries World Industrial 0.0% Source: IMF, Last Observation 2/2009 (Developing), 3/2009 (World), 4/2009 (Industrial) AIG 42

42 Oil Price per Barrel Q $ Jun '09 $ av. $ av. $ av. $ av. $ av. $ Source: Reuters, Gold, USD/troy oz, Last observation Jun AIG 43

43 Reuters/CRB Commodities Index 220 (Index, 100 = Q1 2000) Reuters/CRB RJ/CRB Index Jun ' Source: Commodity Research Bureau, Quarterly Averages, last observation: 10 Jun 2009 AIG 44

44 Core CPI Inflation (%) 3 2 (%) United States U.S. 1.9% 1 Eurozone Eurozone 1.8% 0-1 Japan United States Japan Euro Zone Japan -0.4% Source: U.S. Dept. of Labor, Eurostat, Japan MIC, last observation 04/09 AIG 45

45 Monetary Policy Response Global Interest Rate Cuts Central Banks Balance Sheets Fed s Liquidity Measures AIG 46

46 Coordinated Global Rate Cuts 6 (%) Eurozone 1.0% 2 1 UK 0.5% Canada 0.25% US 0.25% 0 Canada United Kingdom United States Euro Zone Japan Japan 0.1% Source: Bloomberg, Market Data, Last Update Jun AIG 47

47 U.S. Federal Reserve Balance Sheet Assets (in $Bil.) 2,000 1,500 1, Federal Reserve, U.S. Treasury Holdings Federal Reserve, Total Assets Source: Federal Reserve, Last Update Jun 5, 2009 FactSet Research Systems AIG 48

48 Total Assets of Key Central Banks 400 (indexed July 2007=100) BoE Fed ECB BoE ECB Federal Reserve Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Source: ECB, BoE, Federal Reserve last observation Jun 5, 2009 AIG 49

49 Fed Liquidity Measures 2500 (Liquidity Measures, in $bil.) 2000 Treasuries New Bank Liquidity Facilities Money Market Facilities Traditional Liquidity Measures Direct Lending Activity Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Source: Federal Reserve, Last Update June 5, 2009 AIG 50

50 Interest Rates (%) Interest Rates Country Jun-09 US 3mo yr Spread Eurozone 3mo yr Spread Japan 3mo yr Spread Source: Bloomberg Market Rates, end of period values of govt bonds and T-bills, Spread in bps, last update 0 AIG 51

51 Fiscal Policy Response Budget Deficits and Debt Global Fiscal Positions AIG 52

52 U.S. Government Deficit as % of GDP (% of GDP) Source: Federal Reserve, US Department of Commerce, last observation Q1/2009 AIG 53

53 Fiscal Positions Budget Balance (% of GDP) Country US Eurozone Japan Public Debt (% of GDP) Country US Eurozone Japan Source: IMF, av. Annual growth rates, last update Apr , WEO (2009 Estimate 2010 Forecast) AIG 54

54 Fiscal Positions 2 (%) Eurozone -6.1% -6-8 U.S. -9.7% Japan -9.8% -16 United States Japan Eurozone Source: IMF, av. Annual growth rates, last update Apr , WEO (2009 Estimate 2010 Forecast) AIG 55

55 Risks and Policy Challenges: Exit Strategy (1) It is essential that the Governments and the Monetary Authorities specify and clarify promptly their commitment to adopt and implement an effective exit strategy from the policy detours that have resulted in an extremely rapid and non-sustainable rates of monetary and fiscal expansions. A Failure to do so, will deepen the markets loss of confidence and trust in policy makers and in their policy strategy and will delay the improvement of the functioning of the economic and financial systems. AIG 56

56 Risks and Policy Challenges(2) A Failure to drain and absorb in a timely manner the huge amounts of liquidity that were injected by Central Banks, will result in Inflation, will erode the credibility of Central Banks, and might bring rise to political attempts to restrict the independence of Central Banks. AIG 57

57 Risks and Policy Challenges(3) The huge increase in budget deficits induce a rapid increase in the size of the public debt. A Failure to restore budgetary discipline will worsen this undesirable trend. It will necessitate the imposition of higher taxes, as well as a greater reliance on government borrowing which, in turn, is likely to result in higher real rates of interest. Such developments are typically associated with a heightened degree of uncertainty and are likely to have adverse consequences for investment and growth. AIG 58

58 Risks and Policy Challenges(4) The increased Government ownership of financial institutions poses significant challenges to the appropriate Governance of these institutions. It also sends confusing signals as to the the government intentions about their own role in the economic/financial systems. AIG 59

59 Risks and Policy Challenges(5) Protectionism Slow Regulatory Reform AIG 60