Transcript THE ECONOMIC IMPACT OF GLOBAL FINANCIAL CRISIS ON …

THE ECONOMIC IMPACT OF
GLOBAL
FINANCIAL CRISIS ON FIJI
T.K.JAYARAMAN
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INTRODUCTION
FACTORS INFLUENCING IMPACT
IMPACT
POSSIBLE POLICY RESPONSES
CONCLUSIONS
INTRODUCTION
• ORIGIN OF THE CRISIS: US SUBPRIME
MORTGAGE BOOM & BUST: “CASINO
CAPITALISM”
• EXPOSURE OF DEVELOPED COUNTRIES TO
US DEBT
• SPREAD OF CONTAGION
• FAILURE OF FIN INSTITUTIONS: COLLAPSE
• BAILOUT MEASURES: “SOCIALISM FOR
THE RICH AND THE WALL STREET (WHERE
PROFITS ARE PRIVATIZED AND LOSSES
ARE SOCIALIZED”)- NOURIEL ROUBINI
Introduction (contd)
• CREDIT CRUNCH: RELUCTANCE OF
BANKS TO LEND
• HIGH SPREAD BETWEEN INTERBANK
LENDING RATE & TB RATE
• CENTRAL BANKS’ EFFORTS TO
UNFREEZE CREDIT FLOWS
• PANIC: STOCK MARKET COLLAPSE:
CONTINUOUS FALL
• WHERE IS THE BOTTOM?
• Uncertain conditions and Uncertain
Projections
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TABLE 1 HERE
• Can the past predict the future?
• Table 2 here
TWO CHANNELS OF TRANSMISSION
• FINANCIAL CHANNEL
• NO LAGS: ALMOST IMMEDIATE
• DEPENDS ON EXPOSURE TO US DEBT &
INTRICATE PRODUCTS: SECURITIZATION ETC.
• TRADE CHANNEL:LAGS
• DEPENDS ON ROLE OF EXPORTS IN THE PAST
• EXPORT LED-GROWTH COUNTRIES : LIKELY TO BE
HURT MORE THAN DOMESTIC DRIVEN ONES
• DEPENDENCY ON IMPORTS: TRADE DEFICITS &
BOP PROBLEMS:20 COUNTRIES LISTED BY IMF
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Table 3
HEALTH OF BANKING & FIN. SYSTEM IN FIJI
• RBF ANNUAL REPORT: SOUNDNESS OF
BANKS
• WELL CAPITALISED: CAPITAL ADEQUACY
RATIO: 14.3% AGAINST MANDATORY 8%
• NON-PERFORMING LOANS AS A RATIO OF
TOTAL LOANS IS 6% : LOW BY
INTERNATIONAL STANDARDS.
• SUPERVISION OF BANKS
• PARENT BANKS:GOOD RATING
• AUS BANKING FOURTH SOUNDEST BY
WORLD ECONOMIC FORUM SURVEY
HEALTH OF FINANCIAL SYSTEM IN FIJI (contd)
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AVAILABILITY OF DOMESTIC LIQUIDITY
NO TRUST FUND OF THE KIND AS IN TUVALU
FNPF’S ASSETS MOSTLY DOMESTIC
WILL FOREIGNERS HOLDING ASSETS IN FIJI PULL
OUT? RISK OF FLIGHT OF CAPITAL?
• PORTFOLIO INVESTMENTS NEGLIGIBLE
• REAL ESTATE: IF FOREIGNERS’ NEED LIQUIDITY
PULLING OUT BECOMES INEVITABLE
• IMPACT ON FOREIGN RESERVES: SIMILAR TO
1997/98 INDONESIA
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INSERT Table 4 on Trade with Industrial countries
TRADE CHANNEL IN FIJI
• TRADE IS HEAVILY ORIENTED TOWARDS IMPORTS
• FIJI’S GROWTH IS NOT EXPORT-LED AS CHINA’S
• RECESSION OVERSEAS WILL NOT AFFECT FIJI IN
MAJOR WAY
• FIJI DOES NOT EXPORT HIGH VALUED RAW
MATERIALS AS IRON ORE, CRUDE OIL OR GAS
• IF USA CONSUMPTION SPENDING GOES DOWN,
EFFECT ON FIJI MINERAL WATER EXPORTS?
• BETTER MACRO-MNGMT. IN AUS WOULD HELP FIJI
TRADE CHANNEL (CONTD)
• POTENTIAL DECLINE IN OIL & COMMODITY PRICES WILL
HELP FIJI
• RISING FOOD PRICES : MORE LIKELY TO BOOST IMPORT
COSTS
• DECLINING EXPORTS MAY CAUSE TRADE DEFICITS
• TRADE DEFICITS DEPEND ON GROWTH IN EXPORTS &
GROWTH IN IMPORTS
• PRESENT BOP SUPPORT COMES FROM TOURISM &
REMITTANCES
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Table 5 Tourism Remittances here
CURRENT ACCOUNT BALANCE
• RECESSION IMPACT ON BOP SUPPORT
• TOURIST ARRIVALS WILL BE AFFECTED
• RECESSION IN NZ AND SLOW DOWN IN AUS
WOULD REDUCE HOLIDAY TRAVEL
• REMITTANCES WILL DECLINE
• EMPLOYMENT IN NZ IN FARM LABOUR
WILL BE MORE FROM THE GROWING
DOMESTIC UNEMPLOYED POOL
• IMPACT ON OFFICIAL DEVELOPMENT
ASSISTANCE
• DONORS LIKELY TO REVISE SPENDING
ALLOCATIONS & CUTBACKS IN AID
• ADVERSE IMPACT ON FDI INFLOWS
• Table 6 AID & FDI
VULNERABILITY TO PRESSURES ON
RESERVES
• FIJI’S FIXED ER RATE REGIME
• DEPENDS ON COMFORTABLE LEVEL
OF INTERNATIONAL RESERVES
• FIXED ER REGIME HAS HELPED FIJI
• DEPRECIATION WOULD HURT
ECONOMY MORE
• PRESSURES ON ER TO BE AVOIDED
• Table 7 on Reserves
PRESSURES ON INTL. RESERVES
• FALL IN EXPORTS AND RISING EXPORTS
AND DECLINE IN REMITTANCES, TOURISM,
FDI INFLOWS WOULD LEAD TO PRESSURES
ON RESERVES
• REPAYMENT OBLIGATIONS OF OVERSEAS
BOND IN 2011 : EQUVLNT OF ONE MONTH
IMPORTS
• EXPANSIONARY POLICIES HURT RESERVE
LEVEL
• CONSERVATION OF RESERVES IS CRITICAL
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INSERT TABLE 8 on Budget Balance etc
POLICY RESPONSE
• FALLING WORLD OIL PRICE HELPS TO REDUCE
INFLATIONARY PRESSURES.
• HIGH FOOD PRICES STILL CONTINUING
• CAN FIJI RESORT TO KEYNESIAN REMEDIES AS
AUSTRALIA DID?
• ANSWER IS NO: FIJI HAS NOT BUILT
ANY BUDGET SURPLUS OVER THE PAST YEARS
• MAJOR FISCAL STIMULUS BE AVOIDED
• BUDGET DEFICITS BE MODEST CONSIDERING
LIKELY FALL IN TAX REVENUE COLLECTION IN
RECESSION & IMPACT ON CURRENT A/C BALANCE
POLICY RESPONSE (CONTD)
• LOWER CAPITAL INFLOWS NECESSITATE
CONTINUING PRESENT CAREFUL
MACROECONOMIC MANAGEMENT
• MONETARY POLICY CHANGES: LIKELY
PRESSURES ON RESERVES & EXCHANGE RATE
STABILITY BE KEPT IN VIEW
• ANY FURTHER RELAXATION OF EXCHANGE
CONTROL MEASURES WARRANTED ONLY IF
RESERVE POSITION VASTLY IMPROVES
• AMERICAN DOLLAR IS STILL A RESERVE
CURRENCY
POLICY RESPONSE (CONTD)
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AGAINST WEAK POUND & EURO, US DOLLAR GAINS STRENGTH
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OIL IMPORTS WILL BE CONTINUED TO BE QUOTED IN US DOLLAR
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RESERVES BECOME CRITICAL
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DOMESTIC LIQUIDITY BE UTILISED RATHER THAN RESORTING TO
ANY FRESH EXTERNAL BORROWING
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EXCHANGE RATE RISKS : VOLATILITY IN STOCK MARKETS AS
SPECULATORS WOULD SHIFT TO OIL & FOOD GRAINS
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ALL EXTERNAL DEBT HAS TO BE PAID IN HARD CURRENCY
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EXTERNAL DEBT CAN BE JUSTIFIED ONLY IF SPENT ON PROJECTS
GENERATING FOREIGN EXCHANGE
NEED FOR REGIONAL INITIATIVES
• EARLY FINALISATION OF BULK PROCUREMENT OF
FUEL PROGRAM
• NEED FOR CENTRAL BANK COORDINATION
• PICS : SWAP ARRANGEMENTS
• SIMILAR TO THE ONE IN THE EARLY 1980s
WHEN FIJI HELPED SAMOA TO TIDE OVER
TEMPORARY INTERNATIONAL RESERVES CRISIS
FINAL WORD
• DAYS OF LIVING ON CREDIT ARE OVER
• USA IS RETURNING TO PURITAN ETHICS:
THRIFT
• WE BEGAN WITH A CARTOON FROM USA &
NOW END WITH A RUSSIAN CARTOON:
LAND OF ORIGINAL MARXISM!
• MESSAGE: TIGHTEN THE BELT
• THANK YOU!