Transcript Standard-Präsentation des FZ-Geschäftsbereiches

Preserving Access to Finance during the Global Crisis
Session 2
Preserving Access to Finance – Financial Institutions and its clients
2009 KfW Financial Sector Development Symposium
Berlin, X December 2009
Ishrat Husain
Director, Institute of Business Administration,
Karachi, Pakistan
OUTLINE
●Impact of the crisis on the poor
●Impact on the Financial Sectors of the Emerging and Developing
Economies (EDEs)
●What happened to the Low Income Countries?
●The latest situation
●Future outlook
PRESERVING ACCESS TO FINANCE
IMPACT OF THE CRISIS ON THE POOR
●World Bank estimates that 90 million more people will be living in
extreme poverty (less than $1.25 a day) by end of 2010.
●Over 25m people may have lost jobs in 30 rich nations.
●ODI estimates that by the end of 2009, developing countries may
have lost incomes of at least $750 billion.
●As the poor are less able to insulate themselves against shocks
the current crisis has endangered progress towards millennium
development goals.
●Collective net worth of US Households (HHs) was eroded by $13 trillion
between 2007 and 1st quarter 2009. Consequently, they had to cut their
spending and resort to saving. Every extra percent point of saving
reduces annual spending by $109 billion. So aggregate demand has
contracted violently creating record rate of unemployment. Remittances
by workers to Central America and Caribbean have slowed down.
●From the start of 2008 to the spring 2009 the crisis knocked $30 trillion
value of global shares and $11 trillion values of homes. These losses
amounted to 75 percent of world GDP. Many households have fallen below
the poverty line due to loss of their homes.
●To the extent the level of credit flows to private firms and households
was reduced because of heightened risk aversion job losses and lower
demand for labor did indirectly affect the poor.
●As social safety nets are almost non-existent in most of the EDEs those
marginally above the poverty line may have fallen back below the line after
the crisis.
●The poor segments of the population in most EDEs have not benefitted
from the organized financial sector in any case. World Economic Forum
Report has found that EDEs are significantly weaker with respect to the
retail access to finance such as small enterprise, micro-finance, etc.
Therefore, the crisis did not directly affect the access in any traumatic
way.
●Despite buoyant growth in China it is estimated that 25 million migrant
workers were laid off lowering the remittances flow to the rural areas. 10
million more people will remain below poverty than projected and
unemployment will reach about 23.6 million. 670,000 small firms went out
of business.
IMPACT ON THE FINANCIAL SECTORS OF THE
EMERGING AND DEVELOPING ECONOMIES
Except for the Central and Eastern European countries majority of
the countries in this group were relatively insulated from the global
financial crisis although the contagion and spill over effects were
quite positive. The factors responsible for this limited damage can
be summarized as follows:
●The regulatory and supervisory framework was much stronger
and as commercial banks formed the bulk of financial
intermediation the regulation of banks was well focused. The
weight of non-bank entities such as investment banks, hedge
funds, private equity firms, insurance companies was almost
negligible.
●The banks did not follow the originate and distribute business
model through Securitization and retained relationship with the
borrowers throughout the credit cycle.
•The off-balance sheet exposures and special investment vehicles
did not loom large in their businesses.
•Excessive risk taking by the banks was kept under active vigilance
by the regulations. Although it was resented at the time as too
much intrusion and micromanagement this approach proved to be
an ultimate savior of the system.
•Complex financial instruments such as collateralized debt
obligations and high degree of leverage were discouraged.
•The market share of the large financial conglomerates (that were
too big to fail) was kept limited by design and therefore direct
exposure of the financial institutions to global financial markets
was quite low. The damage to the domestic financial system was
consequently not significant.
•Partial Capital Controls and lack of full capital account
convertibility in China, India, Pakistan, Bangladesh did not allow
large exposure to foreign currency denominated assets.
•The sources of funding by the commercial banks were relatively
more stable relying on retail deposit base rather than wholesale
financing.
•The banking systems were relatively well-capitalized, the quality of
assets had improved by segmenting and spinning off nonperforming loans to separate asset management companies such
as in China.
•Those well integrated into the world economy recorded high growth
during the upswing and thus it is logical that they would be adversely
affected when the global economy is in its downturn. The pace, extent and
the nature of integration determines the level of economic distress or relief
arising from global financial and economic shocks.
•Creditor banks in advanced economies reduced their exposure in
emerging countries. Cross border flows did decline from the pre-crisis
levels affecting liquidity in the system.
•Central Banks lowered policy rates, provided ample liquidity.
relaxed credit ceilings.
China
•Credit growth has stabilized in several Asian economies as private
domestic demand picked up and banks benefited from ample liquidity and
sound capital positions.
WHAT HAPPENED TO THE LOW INCOME
COUNTRIES?
A group of forty three, smaller, poorer countries, conflict countries,
fragile countries depend a lot on aid and remittances.
-
Growth slowed down in 2008 and is forecast to be no better in
2009.
-
They witnessed a lot of volatility in commodity prices prior to
2007.
-
Food prices in August 2009 are still 57.6% higher than in 2005
while energy prices are 27.5% above their average in 2005.
Terms of trade have somewhat improved in 2009 due to lower
oil prices. Oil exporters saw their incomes fall by 5.4% of GDP.
Balance of Payments
- Exports from LICs are down between 5 to 10 percent in volume
and 14 percent in value terms. This has led to lay offs in export
oriented industries.
- Aggregate deficit on trade rose from 6.3% of GDP to 9.2% of GDP.
Current account deficits are up from 8.7% to 11.7% of GDP while
the world wide tourism receipts declined by 8% in 2009.
Capital Flows
- Net private flows are down to $13 billion only from $21 billion in
2008 and $30 billion in 2007.
- Equity markets in LICs have fallen along with those advanced
countries.
- ODA flows from all OECD countries reached $120 billion lagging
behind Gleneagles commitment.
- Workers’ remittances an important source of foreign exchange
earnings fell by 5-7% in 2009.
Financial Sector
• Parent-subsidiary relationship where the global banks were
involved resulted in drying up of offshore funds.
• Real economy weaknesses resulted in (i) increase in NPLs (ii)
tightening liquidity due to reduced trade credit flows (iii)
withdrawal of liquidity from local subsidiaries of foreign banks,
(iv) contagion risk for regional banks heightened – South African
Banks own 24% of Africa’s banks.
Fiscal Retrenchment
●Revenues and grants are estimated to have declined by average 2
percent in the last two years. Hard hit are revenues dependent on
commodity exports.
●As the Governments are forced to reduce public expenditures
households are pushed into poverty, health conditions deteriorate
and school attendance declines. Similar effects observed from
decline in remittances from workers overseas.
●In thin domestic credit markets Government borrowing crowds out
private sector as the domestic banks prefer less risky assets.
Poverty
● Difficult to assess the impact of the crisis on the poor but there is
an agreement that the gains made in the period prior to 2007 have
been eroded. The cuts in public expenditures to remain within
fiscal prudential limits are likely to slow down the progress in the
achievement of MDGs.
● Financial sector in these countries has not been particularly
responsive to the credit needs of small farmers, small scale
entrepreneurs, low income housing, micro-enterprises. Tighter
borrowing conditions, rising borrowing costs and increased risk
aversion must have further reduced the loanable funds to the poor
and vulnerable groups of the society.
LATEST SITUATION
● World economy is beginning to move out of recession.
World
GDP will expand by 3.1% in 2010, 1.2 percent points faster than
forecast in April. Emerging economies are projected to achieve
almost 5% growth up from 1.75% in 2009. Downside risks to
growth are receding gradually but remain a concern.
● Global Stock Markets have rallied by 64% since their trough
demonstrating
confidence.
more-rapid-than
expected
improvement
in
● Corporate Finance, once frozen, is thawing fast. Some Big Banks
are beginning to make profits.
● Unemployment is still rising and much manufacturing capacity
remains idle. In the U.S. unemployment rate has reached 10.2
percent despite better than expected GDP growth.
● Many of the sources of today’s growth are temporary & precarious
as they are driven by fiscal and monetary stimulus provided by
the Government.
● Across the globe spending is being driven by government
largesse, not animal spirits. Massive fiscal & monetary stimulus
is cushioning the damage to households and banks’ balance
sheets but the underlying problems remain.
● In US, household debts are worryingly high and banks need to
bolster their capital. That suggests consumer spending will be
lower and the cost of capital higher than before the crunch.
FUTURE OUTLOOK
● Prospects for the EDEs will depend upon which of the two options
is materialized?
Will the world economy return roughly to its pre-crisis rate of
growth without regaining the ground lost?
Or
Growth will stay at permanently lower rate with investment,
employment & productivity growth all feebler than before.
Financial sector problems have not completely unraveled
themselves.
● Persistent damage to economic growth potential as well as its
level will result in sluggish income gains and diminished
expectations.
• Strong policy implementation remains the key and premature
withdrawal of stimulus could jeopardize the recovery. However,
the room for policy manoeurvability for the advanced countries is
limited.
• Budget deficits of G20 countries that account for 80% of the world
economy have risen to 8.1% of GDP. Debt stock has already
reached 100% of GDP and is projected to reach about 120% by
2014. This group of economies would have to generate a surplus
of 4.5% of GDP every year to contain this debt burden.
• Fiscal retrenchment of this magnitude is likely to slow down the
pace of economic growth in the G-20 countries relative to the pre2007 period. The probable outcome therefore is that recovery will
pick up the speed in 2010 but the long term growth rates of the
world economy are likely to remain subdued.
• Investment has already fallen sharply. The rising scrap rates are
reducing effective capital stocks. The stock of capital in the US
has already shrunk by 6%. It is estimated that this alone will lower
potential output by 2% annually.
• The implication of this probable outcome is that we will witness
jobless growth in the OECD countries while the rate of labor
absorption in the emerging and developing economies will be
lower than the recent past trends. The fight against poverty would
prove to be tougher and access to finance by the marginalized and
low income groups would have to be accelerated.
• Historical evidence indicates that there were large permanent hits
to output in the aftermath of past financial crisis. There is no
reason to expect that crisis of this magnitude would not leave its
footprint on the global output potential at least in the immediate
future
- Emerging and developing countries should strengthen their safety
nets and plan their crisis interventions to protect the weakest.
- Financial Sector Development Strategies in these countries
should pursue policies and institutional investments that open
access to the poor and marginal groups.
- Net capital flows $140 billion 2007 shifted to net outflows of $140
billion by June 2008.
- Since 1990, the share of the population living in absolute poverty
has declined from 55% t less than 10% of the population from 873
million to fewer than 200 million.