Transcript The Sectoral Impact of the Crisis

The Impact of the Crisis on Economic
Growth in 2009 in ESCWA Countries
By
Mahmoud ABEL- FADIL
Professor of Economics at Cairo University - Egypt
A presentation to the Regional Meeting on the Impact of the Financial Crisis on ESCWA
Countries
Damascus: (5- 7 May 2009)
Contents
 The Differential Impact of the Crisis on Growth
Prospects in Countries of the ESCWA region
 The Sectoral Impact of the Crisis
 The mechanism of the recessionary cycle
 The way forward
1- The Differential Impact of
the Crisis on Growth
Prospects in Countries of the
ESCWA region
3 Depressing Factors Affecting
Growth in ESCWA Countries
(1)
The Impact
of Skewed
Income
Distribution
(2)
Impact of the
Negative
"Wealth Effect"
Prospective
Growth
in 2009 - 2010
(3)
The oil
income
effect
The impact of the crisis on growth prospects in
countries of the ESCWA region in 2009 and beyond:
a) The oil income effect
The "income effect" of the decline in oil revenues would exercise a depressing effect on
GDP growth in ESCWA countries. Such impact would vary across countries of the
region according to the degree of dependence on oil revenues. The impact would be most
felt in countries of the GCC, and to a lesser degree on other ESCWA countries more
dependent on worker's remittances (i.e. Syria, Lebanon, Egypt, and Yemen).
Oil prices currently fluctuate within the range 40 – 60 US dollars per barrel. According
to some estimates, a more fair and stable price should revolve around 75 US $ per barrel
through 2010.At any rate , such decline in oil revenues would result in major delays in
planned mega projects financed by public expenditure in Gulf countries, thus affecting
GDP growth.
The impact of the crisis on growth prospects in
countries of the ESCWA region in 2009 and beyond:
Cont.
b) The Dampening Impact of the Negative "Wealth Effect" on Private Spending
Decisions
The impact of the negative "wealth effect" on the household and the corporate sectors
was severe in many countries of the ESCWA region. The great decline in prices of
financial assets and real estate. would certainly affect future spending decisions by the
private and the corporate sectors, compounded by the low state of expectations and the
prevailing mood of risk- aversion during the years 2009 – 2010.
That would signal the end of the bubbles in real state and financial markets which
prevailed during 2006 – 2007 and most of 2008.
The impact of the crisis on growth prospects in
countries of the ESCWA region in 2009 and beyond:
Cont.
c) The Impact of the Skewed Income Distribution on Consumers Demand
As a result of the highly skewed income distribution pattern in most ESCWA countries,
consumer demand in such countries is highly segmented. We can identify at least three
main segments:
(i) The subsistence consumption:
for the poor strata of the population, which is most likely going to suffer a major
decline due to higher rates of unemployment and the decline in the level
remittances due to "return migration";
(ii) The middle class consumption demand
which most likely is going to suffer a major squeeze due to the recession and the
end of windfalls derived from the previous boom in real estate and financial
markets;
The impact of the crisis on growth prospects in
countries of the ESCWA region in 2009 and beyond:
Cont.
(iii) The affluent consumer demand
Which is mainly confined to the upper strata (10 – 15 top percent of the
population), which may prove to be resilient, given the irreversibility of the
prevailing consumption patterns which are mainly fuelled by "business income"
and by drawing upon old savings.
In the light of such composition of consumer demand in ESCWA countries, there
would be little room for consumer demand expansion throughout 2009 – 2010,
given the high "import – intensity" of the consumption baskets of the affluent
sections of the society.
The differential impact of the crisis on the growth forecasts for countries of
ESCWA region is summarized in table (1).
Segments of Consumer Demand in ESCWA
Countries
(1)
Subsistence
Consumption
“Declining”
(2)
Middle Class
Consumption
“Squeeze"
(3)
Affluent
Consumption
“Persisting”
Table (1)
Forecasts of Real GDP Growth rate in ESCWA countries
*
Country
Forecasts
(2009)*
Country
Forecasts
(2009)*
Bahrain
2
Egypt
4.5
Kuwait
0.7
Iraq
5
Oman
1.5
Jordan
3.6
Qatar
7
Lebanon
3
Saudi Arabia
0.7
Occupied Palestinian
Territory
-1
United Arab Emirates
0.5
Sudan
4.2
GCC countries
1.01
Syrian Arab Republic
3.2
Yemen
2
Total ESCWA region
2.1
March 2009 forecasts.
Source: Summary of the survey of Economic and social Developments in the ESCWA region 2008- 2009.
The forecasts for Egypt, Iraq and Sudan seem to be a bit
optimistic. On the other hand, the forecast for Saudi Arabia
seem to be too low, given the diversified nature of its economy.
The UN World Economic Situation and Prospects for 2009
forecast a rate of 2.8% for real GDP growth for Saudi Arabia
in 2009, and 2.7 rate of growth of real GDP for the whole
region of Western Asia in 2009 (including other non – ESCWA
countries).
Hence, an average 2% real GDP growth for the whole ESCWA
region in 2009 seems to be a realistic assumption.
2- The Sectoral Impact of
the Crisis
The Sectoral Impact
Depressed Sectors
construction, real estate,
financial services and trade
Most Affected Sectors
Textiles and Apparel
Surviving Sectors
Telecommunications, IT
and others
The Sectoral Impact of the Crisis
As Gulf states are more integrated than other ESCWA
countries in global trade and global financial markets,
they are bound to suffer a "slow – down" in certain
booming sectors, namely: construction, real estate,
financial services and trade.
Such activities are likely to hit the "Recessionary
barrier" with a lag effect in late 2009.
The Sectoral Impact of the Crisis
Cont.
Other ESCWA countries would face balance of
payments difficulties due to the decline of foreign direct
investment and tourist income, thus exercising a
"dampening effect" on the growth prospects and
employment opportunities, with the associated negative
"multiplier effects".
The Sectoral Impact of the Crisis
Cont.
On the other hand, as a sequel of the international financial
Crisis, non – oil ESCWA countries would face a decline in
certain important lines of export activities, notable among
them the exports of textiles and apparel products from
Egypt, Jordan and Syria.
Some lines of activities like telecommunications, and IT,
would continue to expand at lower rate and survive the crisis
in 2009 and beyond.
3- The mechanism of the
recessionary cycle
3. The mechanism of the recessionary
cycle
Usually the crisis starts first within the financial sector, with
all its components, then after a lag period, the crisis shifts to
the real economy, (i.e. production, exporting, investment,
activities), and then the crisis spills- over to the social sector.
This leads to high levels of unemployment, lower wages,
depletion of savings, and cultural impoverishment. In brief,
these feedbacks in the social sector lead to the
impoverishment middle and poor sections of the population.
Figure (1)
The spill - over of the financial crisis across different sectors
The
Financial
Sector
Contagion
effect
The Real
Sector
Spill - over
2009 will witness shift of the crisis to the
real economy.
The Social
Sector
In this way, the above-mentioned three sectors will suffer from the
recessionary impact of the crisis through 2009, and such difficulties
may persist to occur for the most of 2010.
The negative impact of the crisis on the real economy and its spills –
over effects into the social sector would be severe in 2009 and 2010, as
the reduced financial resources available to the states of the ESCWA
region would reduce the volume of social spending on employment
creation and social safety nets. This would result into a rise in poverty
rates and less social protection for the vulnerable groups of the
population.
The anticipated deterioration of the employment situation in the
ESCWA region would have adverse effects on female unemployment
rates.
From a Macro – view point, figure (2) illustrates the negative feedback
effects within the recessionary cycle in ESCWA countries, which
normally takes a cumulative form, as well as the role of the "liquidity
squeeze" within the system.
[5] cf. summary of the ESCWA survey, p. 11.
Figure (2) The Feedback Effects of the Financial Crisis
on the Economies of the ESCWA Region
External
Sector
Deterioration of External Resources (Oil revenue + Tourism + FDI)
Governmen
t
Deterioration of
Taxes Revenues
Private Sector
Reduced Demand
of Household
Sector
Delays in Debt Payments
Banking
Sector
Decline of
Workers
Remittances
Squeeze on Credit
lines
Household
Sector
Reduced Incomes
and Increased
Unemployment
Reduced
Demand for
Exports
Production
Sector
Reduced Social and Public Spending
Demand contraction for Inputs
Production
4- The way forward
The way forward
To break the current recessionary cycle, as described in
the previous section, a number of initiatives and
corrective measures need to be taken without delay;
notable among them are the following moves within the
Macro Policy Space:
The way forward
First, the role of the public sector need to be enhanced
in order to assist in dealing with problems of global
recession in ESCWA region.
The role of the fiscal stimulus becomes crucial in this
respect, and Keynesian type policies need to be pursued
in order to break the current recessionary cycle.
Such types of policies would lead to a crowding – in of
private investment and reduce the level of aggregate
uncertainty in the system;
The way forward
Cont.
Second, social spending on infrastructure, employment
creation, education, and basic health care need to be
expanded in order to stimulate demand for goods and
services and mitigate problems of increasing
unemployment and rising poverty;
The way forward
Cont.
Third, there is room for more rationalization of
investment policies by the private and corporate sectors
by shifting away from reliance on "speculative funds"
and "speculative outlets", and focusing more on the best
use of "investible funds" designed to expand productive
capacities and to expand sustainable employment
opportunities.
The way forward
Cont.
Fourth, More coordination and cooperation among
ESCWA countries (oil and non- oil) is badly needed
to survive the crisis. New regional policies in trade
and finance need to be designed to intensify inter –
Arab (and intra – ESCWA countries) exchanges to
compensate for the loss of export markets and
financial investment outlets in Europe and USA.
The way forward
Cont.
Fifth, Monetary and fiscal policies, need to be
closely coordinated among ESCWA countries, in
order to increase their efficiency at the country level
to counter the negative impacts of the crisis and stop
the slippage from recession to a generalized and
lengthy depression, as show in figure (3).
Figure (3)
Scale of phases of the crisis
Slow - down
1
Contraction
2
Recession
Depression
3
4
Slippage
Thanks for your attention