Transcript Second Round Effects of the Global Financial Crisis

Second Round Effects of the Global Financial
Crisis; Coping Mechanisms for the Business
Community & Exploiting the Opportunities
By Emmanuel Mutahunga
Presentation to an ACTADE Dialogue on ‘The
Causes & Effects of the Fuel Crisis on the
Business Community in Uganda’
6th June 2011
The Global Financial Crisis; what is all
about
 The genesis of the crisis can be traced to the availability of
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cheaper credit in the world financial system since 2000
The situation encouraged banks to undertake riskier projects;
riskier because their true risks were not analyzed or
appropriately priced
Specifically, mortgage lending to borrowers who in ordinary
circumstances would not have been eligible for these facilities
pushed up housing prices
While housing prices were on the rise, institutions could
easily realize the underlying security
Institutions that originated the mortgages would securitize
them i.e. issue mortgage backed securities that other
institutions would then invest in
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The Global Financial Crisis; what is all
about
 The housing bubble burst; house prices declined in the
United States and it became harder to realize mortgage
securities
 Financial institutions that invested in mortgage backed
securities found themselves holding “worthless assets”
 The crisis escalated against a backdrop of lack of trust
between institutions as the exposures to these assets amongst
the various institutions could not be ascertained
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The Global Financial Crisis; what is all
about
 This resulted in a credit and liquidity crunch as well as
loss of customer confidence
 The effects have spread to consumers who are uncertain
about the future and firms which cannot access credit
 At the household level, the households that acquired
these mortgages have found themselves in negative net
worth
 The crisis: The financial crisis led to a liquidity/
confidence crisis which led to an economic crisis hence
economic recession
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The Global Financial Crisis; what is all
about
 Uganda was insulated from the first-round effects of the
financial crisis because of the underdeveloped nature of its
financial market integrated with international markets
 However, Uganda was vulnerable to the second-round
effects, with main channels being through the balance of
payments
 The main transmission channels of the crisis have included
trade, private capital flows, private transfers and aid
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Manifestation of the Impact of the
Crisis
 Two rounds of shocks
 First Round Effects – Financial in nature
 Exchange rate depreciation
 Rundown on international foreign exchange reserves
 Short-term capital outflows
 Sell off at the Stock Market
 Second Round Effects – economic in nature
 Slow international demand of commodity exports – our major
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exports
Slow down in FDI and ODA inflows
Decline in tourism
De-globalization
Risk averse credit market
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First Round Effects
 Exchange rate fluctuations:
 Pressure on currencies as a result of the global financial crisis as
foreign investors “fled to safety” while consolidating their
finances to meet their obligations abroad
 The US dollar perceived by investors as a safe haven; during
tough economic times, investors often flee foreign currencies
and other risky assets for safe havens like the US dollar. The
increased demand for the US dollar drives its price up relative
to other currencies – ultimately impacts on domestic prices in
cases of imported items
 In Uganda, the market-determined exchange rate acted as an
automatic stabilizer during this crisis
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First Round Effects
 Official Foreign reserves have gone down, however banking sector forex
reserves seems to be holding
 Official forex reserves seem to have mainly gone down
{Reserves – months of imports of goods and services – 7.1 in
2004, 6.6 in 2007, 5.1 in 2008, 6.3 in 2009, 5.6 in 2010,
estimated at 5.0 in 2011 and 5.4 in 2012 – Source – Regional
Economic Outlook – Sub-Saharan Africa, IMF 2011
 Overall impact of First Round Effects
 No significant impact - though relative price movements
expected
 No general panic in East African markets
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Second Round Effects
 The recession in North America and Europe triggered by the credit
crunch may reduce demand for Ugandan exports (total exports to
Europe – US$ 442,466,000; 14.1% of total national exports in 2009)
 This however depends on where the markets for Ugandan exports
are and the price and income responsiveness of the goods being
exported
 Exports to the region (COMESA) projected to remain on an
upward trend – growing from 1,244,532,000 in 2007 to
2,210,354,000 in 2009
 Exports to the Middle East and Asia have suffered considerable
effects – {declining from US$190,847,000 in 2007
to
US$96,384,000 in 2009 for Middle East, but rising from
US$71,937,000 in 2007 to US$102,586,000 in 2009 for Asia
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Second Round Effects
 Donor Flows
 These seem to be declining; we need to ponder over;
 What is the effect of reduced Aid flows on (i) private
consumption (ii) Government expenditure (iii) public
investment?
 IMF Regional Economic Outlook for SSA – ODA as a %age
of GDP - 8% in 2005, 4.6% in 2006, 3% 2008, 2.5% in
2009 and 2010, projected at 2.4% in 2012
 FDI
 Where are the sources of FDI? Regional or OECD region? Will
the region benefit from Chinese FDI ? China a key source, but
so is Europe – which has been hard-hit by the crisis
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Second Round Effects
 Risk averseness during uncertainty
 Some banks are restricting lending during the
slowdown – recent events regarding interest rates
 Some firms, and a number of donor-funded NGOs
have laid off workers
 Remittances; they are pro-cyclical with domestic events
 The rising US dollar has increased the purchasing power
of remittances, allowing migrant workers to send less
money home with similar impact
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Impact of the Crisis on Uganda
 “The global financial crisis affected Uganda’s economy
through reduced capital inflows, including remittances,
portfolio investment, exports and foreign aid, as well as
through capital outflows that include repatriation of profits
by foreign investors and withdrawal of portfolio investments.
Almost all these categories of capital flows decreased and
manifested themselves in a depreciation of the local
currency” - Ssewanyana & Bategeka, (2010), Global
Financial Crisis Discussion Series, Paper 21, EPRC.
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Risks and Opportunities
 Risks
 Reduced foreign aid
 Reduced FDI
 Reduced Export earnings
 Trade Restriction (de-globalization)
 Economic slowdown
 Opportunities
 Economic potential of the Region will continue to attract
FDI
 Uganda, and indeed the EAC, as an investment destination
(from regions less hit by the crisis)
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Coping Mechanisms
 Maintain high spending in the productive sectors,
especially infrastructure development and
increasing energy supply
 Deliberate interventions to reduce the cost of
doing business be maintained and intensified
where necessary; some need to be fast-tracked
 Focus on the regional markets, as well as those
markets least affected by the crisis
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Coping Mechanisms
 Diversify away from dependence on export of primary
commodities – a business led initiative, but with Government
playing a primary facilitating role
 Redefine the role of the State in economic transformation
and development – UNECA/AU Economic Report on
Africa 2011 clearly articulates this
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Conclusion
 Crisis been around, and its effects are still being
felt
 Not the first economic crisis in the world
economy
 Important aspect is how to address its effects; readjustment in approach to economic policy
making and implementation is essential
 Not everybody is a loser out of the crisis
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The end
Thank you
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