Navigating the Perfect Storm

Transcription

1 Navigating the Perfect Storm Some Ideas on how Mongolia can manage this Presentation to 1/22/2009, by Arshad Sayed, Country Manager, World Bank

2 Today s Presentation 1. Is this just a financial crisis 2. What is the current situation? 3. What can we learn from the past? 4. What prospects for the future? 5. What actions to address this? 6. What can International Institutions like the World Bank do?

3 1. Is this just a financial crisis? Mortgage Defaults? Overleveraging? Lack of risk management? Greed? Low Interest rates? Cheap credit? Lack of regulation? Or breakdown in trust & faith

4 2. A Look at the current situation Financial sector is in shambles Major economies in recession Real sector pain is growing and will continue to grow

5 2. Equity prices have collapsed after peaking in late 2007 (Jan 2007=1) MSCI-Asia-ex-Japan S&P /1/07 6/1/07 11/1/07 4/1/08 9/1/08 Source: Datastream.

6 Q1-08 Q2-08 Q3-08 Q The G3 are in a recession (real GDP, % change, y-y) * US Eurozone Japan Source: DECPG, World Bank.

7 2. The slowdown in growth is substantial and has now lasted several quarters (in percent, year-on-year) 12.0 China 9.0 E. Asia 6.0 NIEs SE Asia 3.0 Q1-04 Q4-04 Q3-05 Q2-06 Q1-07 Q4-07 Q3-08 Source: Datastream and World Bank staff calculations.

8 2. The shocks to the real economy are severe Source: The Economist, Jan 15, 2009

9 2. The shocks to the real economy are severe: the car industry Source: The Economist, Jan 15, 2009

10 3. Learning from the Past What does the past tell us about impact of previous financial crises? More often than not, the aftermath of severe financial crises share three characteristics: First, asset market collapses are deep and prolonged. Second, the aftermath of banking crises is associated with profound declines in output and employment. Third, the real value of government debt tends to explode Ken Rogoff & Cristina Reinhart If the past crises are any indication, it will be a long, tough, path ahead!!

11 3. Financial Crises: Where are biggest adjustments?

12 3. Real housing price declines average 35 percent stretched out over six years

13 3. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years.

14 3. Output falls (from peak to trough) an average of over 9 percent, the duration of the downturn, averages roughly 2 years

15 3. The real value of government debt tends to explode rising an average of 86 percent

16 4.A look to the future Growth and output will decline across developed and developing economies The longest commodity boom in 100 years may have ended but prices may still decline further. Commodity prices what next?

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21 4. Chinese growth and its impact on the rest

22 4. Chinese growth and its impact on the rest Source: DBS Group Research, 22 January 2009

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24 5. What Actions to Address the Crisis? 1. MAINTAIN A FAVORABLE CLIMATE FOR INVESTMENT 2. PROTECT THE POOR & VULNERABLE

25 5. What Actions to Address the Crisis? I. Maintain a favorable climate for Investments: Continue to grow the economy by removing constraints to growth, and deepen and diversify sources of growth: - Support investment in education and human capital - Prioritize develop productivity enhancing infrastructure - Reform the financial system - Support innovation in existing industries - Improve legal framework and government services.

26 5. What Actions to Address the Crisis? II. Protect the Poor & Vulnerable Protect the poor from vulnerabilities, Maintain a just and fair social protection system Reduce dependency for able bodied workers so that they can contribute to society more Create jobs!! Build a social compact for a harmonious society.

27 6. How can World Bank help in this difficult time? Improve safety nets Growth Diagnostics Trade facilitation work program Financial sector support to banks Support Fund-led programs Support structural reform agenda and capacity for change

28 6. How can World Bank help in this difficult time? Shoring up the private sector: Bolster distressed banking systems. IFC can work to recapitalize distressed banks. Shift advisory support to help companies weather the crisis. I IFC is refocusing advisory services programs to help clients cope with the crisis. IFC is working to suppor better corporate governance in Banks and private businesses Ensuring liquidity: MIGA, the Multilateral Investment Guarantee Agency, supports developing country financial sectors by providing guarantees to foreign banks that can help inject much-needed liquidity into these markets.

29 A crisis is a terrible opportunity to waste Paul Romer It must be considered that there is nothing more difficult to carry out, nor more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order. (Machiavelli 1513, ch. 6).