Transcript The Impact of the Global Crisis, the Responses

The Impact of the Global Crisis, the
Responses of Caribbean
Governments, and the Choices
Available to Caribbean Business
DeLisle Worrell
Caribbean Centre for Money and
Finance
March 2009
I will argue that ..
• The Caribbean just started to feel the effects of
the massive global economic hurricane
• That hurricane strengthened suddenly to
Category 5 in mid-Sept 2008, it continues to rage,
and the end is not yet in sight
• Caribbean gov’ts are trying to cope with the
impact, within their means
• Caribbean business should be in hurricane
protection mode, until the storm is over, and we
can assess the damage
In Sept 2008 a manageable financial
crisis became an uncontrolled
economic disaster
• By mid-2008 the world financial system was in
deep crisis, but the real economy appeared
sound
• On Sept 15, Lehman Bros was allowed to fail
• That triggered calls on guarantees by AIG of
securities issued by Lehman
• US gov’t forced to lend to prevent AIG’s collapse
• Seniority of US gov’t loan depressed AIG’s shares
by 40% overnight, triggering world-wide
depression
– Johnson (2009)
How the outlook has worsened since
Sept 2008
• World economy expected to grow by < 1%; now
expected to contract by 2 – 3%
• US job losses < 1 million; now approaching 3
million
• US economy expected to recover in 2nd ½ of
2009; now nobody knows
• Companies with moderate leverage and good
liquidity expected to manage on their own; now
even the most conservative need gov’t assistance
Impact on the Caribbean to Date
• Tourist arrivals below comparable period one
year earlier since Q4 of 2008
• A major regional financial conglomerate & a small
Antiguan bank have been intervened
• The Jamaican exchange rate depreciated about
20%
• Regional stock exchange indices fell drastically,
but they are small
• However, foreign exchange reserves did not
decline
Worse is expected
• Most Caribbean economies are expected to
contract in 2009
• In the exceptional cases where growth is
expected, it will be slower than in 2008
• Demand for tourism, manufactures and mineral
exports expected to fall
• FDI and foreign borrowing will be lower than in
2008
• Unemployment rates to increase
• Foreign exchange reserves expected to decline
It could be much worse if recovery in
North America and Europe is delayed
• Monetary policy has been taken to the limit in
the US, UK and Japan, with no effect
• While it is essential to prevent financial
systems from collapsing, cash injections to the
financial system will have no impact on credit,
because there is no demand for credit from
households (whose jobs are at risk) or
businesses (whose markets are collapsing)
The uncertain outlook for North
America and Europe, continued
• The expenditures on job creation have so far
resulted in few new permanent jobs, compared
to the rate at which jobs are being lost, so
economies remain in a downward spiral
• Knowledgeable estimates suggest that the fiscal
stimuli so far announced are significantly less
than required (businesses and households are
attempting to save more than the amount that
gov’ts intend to spend, so total spending will
continue to fall)
• As of today, things are still getting worse
There is insufficient information about
major sources of risk to the Caribbean
financial sector
• Risks arising from difficulties experienced by
foreign owners (AIG, Stanford, losses of some
Canadian banks)
• Risks of contagion via conglomerate networks (CL
Financial; 8 of the 10 largest conglomerates listed
on regional stock exchanges are financial)
• Lack of timely information reporting by
nonbanks, which are a large % of financial assets
in Jamaica and T’dad & Tobago
We cannot assess the extent of the
economic impact on the Caribbean
until the hurricane passes
• Tourist bookings are down, but how much
worse they will become is unclear
• Investment in the tourism sector continues to
fall
• The future trend in commodity prices is very
unclear, even in the near term
• There will be foreign reserve losses in 2009,
but the extent depends on the unknown
factors
Caribbean gov’t responses
• Support for export producers and providers of
tourism service
• Spending designed to protect living conditions
of the most vulnerable
• Intervention of financial institutions
Limitations on gov’t responses
• Because of the high import content of
consumer and investment spending, any
additional spending will result in an even
greater loss of foreign exchange. Too low a
level will imperil exchange rate stability
• No Caribbean country is limited in its ability to
intervene the financial sector, because that
results in no expenditure, merely a switch in
ownership of assets
What advice can an economist offer to
businessmen?
• Before you can begin to think about the future you
have to survive the current global economic hurricane
• It is too late to prepare (reduce debt, cut obligations,
increase liquidity). You are constrained to craft your
survival strategy with what you have
• Eliminate any spending or obligations that are not vital
to survival as soon as that may be done without
prejudice
• Re-evaluate the situation continuously; the longer the
leading economies take to get back on their feet the
more drastic survival strategies will need to be
It is becoming clear what activities are
socially desirable and environmentally
necessary for the future
• Human development – health, education,
sanitation
• Alternative energy
• Energy conservation
• Recycling and reusable materials
• Cultural heritage & development
• Public transportation, especially rail & buses
• Etc
But major social, economic and
psychological changes are not in place
• The pricing and distribution system does not
favour recycling, alternative energy or
conservation
• The global investment in the infrastructure of
fossil fuel production, distribution and use is
enormous. Alternative energy has no chance of
being competitive
• Public preferences for wasteful and
environmentally destructive practices are well
entrenched
Offering unrealistic advice will not
make things better
• Focus on getting past the hurricane alive,
however long it lasts
• Stick to what you know best, or something very
close to it
• If you decide to look to activities for the future,
secure heavy gov’t backing
• Even so, take no new initiatives until the
hurricane passes, unless you have enough of your
own resources to survive the storm and make
new investment