Transcript The Current Global Financial Crisis .(English)

The Current Global Financial
Crisis and Its Impacts on the
OIC Countries
Dr. Murat Yulek
Organization
Background
Current Crises
Case in Point: 1929
Case in Point: UK, Now
Case in Point: USA, Now
Threats, Opportunities and Strategic
Choices for OIC Countries
Background
World Economy: Post-2001 period characterized by
• Relatively high growth rates
– Generally across the board with exception of some countries
such as in Europe
• Increasing fuel, metal and subsequently other
noncommodity prices
• Rapid increase in credit and generally low interest rates
(the latter especially until mid-2004 in the USA)
• Increasing asset prices
– Financial assets: Stock exchange indices & market
capitalizations
– Non-financial assets: Residential, commercial and industrial
property
Background
• Rapid expansion of credit, unethical banking practices
and weaknesses in regulation and monitoring of banks
fed bubbles in housing markets, notably in the US and
the UK
• Artificially increased housing prices fed by the credit
boom started a vicious circle of inflated bank balance
sheets, increased funding of banks as their housing
loans were recycled back to them through securitization
in the secondary markets
• Banks’ asset quality in the US worsened when
temporarily increased policy rates by the US Fed
between mid-2004 and mid 2006 led to repayment
difficulties in low quality housing credits (subprime)
Current Crises
• Banking sector crises in western economies
– Investment banks closed down in the USA
– Significant pressure on commercial banks including
bank runs and close downs
• Collapsing and volatile stock exchanges
• Serious slowdown in western economies
– Growing unemployment
– Lower domestic absorption (consumption and
investment)
Post Crises Episode: What is Next?
Western Economies:
• Significant crises resolution costs already
underway
– Serious budgetary consequences
• Negative Wealth Effects coupled with lower
confidence will lead to maintained contraction in
consumption & investment and hence imports
• Fall in production may feed into downward
income generation spiral
Case in point: 1929 Crises
For some European economies, it took more than six years to
recover from the 1929 depression imported from the USA
120
Industrial Production in Selected Countries
(Index: 1929=100)
110
100
90
80
70
UK
France
Germany
60
US
Italy
Source: OECD
50
1927
1928
1929
1930
1931
1932
1933
1934
1935
Immediate effects of Current Crises
Case in Point: The UK
• Unemployment increased by 164,000 between
May and August 2008; almost a 10 percent rise
from 1.63 million
• Most hard hit is London where number of jobless
looking for jobs increased by 42 percent in
September 2008
• Some estimates put 1.5 million additional
unemployment generated by end-2010 leading
to an unemployment rate of 10 percent from
current 5.7 percent.
Immediate effects of current crises
Case in Point: USA
• Slowdown in GDP
– Current 2008 projection 1.6 % (down from 2.8 %
projection in April 2007)
– 2009 projection: 0.06 %
– Consumer confidence lowest since 1978
• October 2008 UMich consumer sentiment
index: 57.5 from 70.3 in September
• Construction activity much worse: Q208 new
constructions starts are 40 % less than post
9/11 (Q401)
Immediate effects of current crises
Case in Point: USA
• Slowdown in GDP (Continued)
– Housing market in shambles
• Case-Schiller Index back to 2004 levels
• Construction activity much worse: Q208 new
constructions starts are 40 % less than post
9/11 (Q401)
Financial crises and the OIC
Countries
While the crises is being weathered,
strategic directions for post-crises
episode should be developed
Financial crises and the OIC
Countries
• Opportunities
• Threats
• Strategic Directions
OIC Countries: Threats from the
crises
• Slow down in western economies will lead to lower
imports from OIC countries
• Some commodities exported by OIC countries may
suffer lower prices
– Non-diversified exporters may be exposed to risk
• OIC based sovereign wealth funds will flow to the
USA and Europe to chase cheap assets
OIC Countries: Opportunities from
the crises
• Many OIC countries
• Do not have high exposure to financial crises in their
own homes
• Have good fiscal positions
• A number of OIC countries have significant
amount of liquid capital accumulated over the
last few years
• They also still have significant amounts of oil
wealth
• Valued even at USD 50 / barrel, Middle Eastern
proven oil reserves stand at a value of USD 38 trillion
OIC Countries: Strategic Directions in
the Post Crises Episode
• Strong policy coordination needed among OIC
countries
• Bad example from US and EU: coordination problems and
sluggish and ad hoc responses to crises in the USA and
Europe have further deteriorated the situation
• Some East European countries such as Hungary and
Ukraine has started talks with the IMF
 Introduction of a macroeconomic safety network
among OIC countries may be needed to reduce
possible fall outs of the crises on weaker members
 Policy coordination among central banks, ministers
of finance and banking regulators is essential
OIC Countries: Strategic Directions in
the Post Crises Episode
• Strong policy coordination needed among OIC
countries (continued)
 Strengthened Intra-OIC Trade and investment
flows will prove more valuable during the global
slowdown following the current crises
 Sovereign wealth funds from OIC countries should direct
more capital to OIC countries where returns are relatively
higher and their capital can be put at use for the development
of the member countries
OIC Countries: Strategic Directions in
the Post Crises Episode
• Strong policy coordination needed among OIC
countries (continued)
 There will be a new round of reengineering of the
international and national financial architectures
 OIC countries can play a role in proposing more role for profit
sharing mechanisms that are less prone to crises