Transcript MTBPS Presentation

The global economy in crisis:
implications for South Africa
National Treasury
October 2008
Overview
• The global economy in crisis
• Impact of the international environment on South Africa
• Economic scenarios
• What is to be done?
Crisis unleashed in August 2007 with sub-prime losses
•
Share prices fall as sub-prime exposure becomes clearer
•
BNP Paribas suspends three funds with €2 bn exposure
•
Global Central Banks in coordinated liquidity injection: Fed = US$43
billion, ECB = US$214bn, BoJ = US$8.4bn
•
Run on UK bank, Northern rock - £2bn withdrawn in 3 days.
•
BoE offers additional reserves
•
Mark-to-market losses of $200bn predicted on US mortgage-related
securities
October
•
Merrill Lynch loss of US$5.5bn, later revised to US$8.4
/ November
•
Write downs announced at UBS, Deutsche Bank, Merrill Lynch, Nomura
and Citigroup.
December
•
Fed, ECB, BoE, Bank of Canada and Swiss National bank announce
coordinated action to address short term funding markets and establish
temporary currency swap arrangements.
•
Sovereign Wealth Funds provide funding for UBS, Morgan Stanley and
Merrill Lynch.
August
September
…and steadily deepens through 2008
January
•
•
•
Investment banks announce further losses
Largest one day losses on stock markets since 9/11
US Fed cuts rates by 125bps in two steps over nine days
March
•
•
More coordinated interventions by CBs
Bear Stearns acquired by JP Morgan Chase for $2 a share
September
•
•
•
•
Fannie and Freddie taken into ‘conservatorship’ by US govt.
Lehman Brothers files for bankruptcy
Remaining investment banks apply to become bank holding companies
US Fed loans $85bn to AIG
October
•
•
•
DJIA loses 22.1% in one week and highest day’s volatility in history
World central banks make coordinated interest rate cuts
G7 agrees on five point plan of action, including capital injections,
provision of liquidity and guarantees of bank deposits
G20 Finance Ministers and Central Bank governors called to extraordinary meeting, addressed by President Bush
G7 interventions precipitate stronger flight of capital away from emerging
markets
•
•
Financial crisis turning to real economy crisis
•
IMF estimates that US losses will amount to $1.4 trillion
•
Financial market crisis affecting several other sectors in the real economy as
credit becomes harder to obtain
•
Danger signs:
•
In the quarter to September 2007, Volvo sold about 42 000 trucks. In the same
period this year, they sold just 175
•
House sales in the UK have fallen by close to 70 per cent from a year ago
•
Costs of dry bulk charter rates plunged 71.9 per cent in October
•
The General Motor’s share price has fallen 88% this year, to US$3, its lowest
since 1946
•
GM, Chrysler and Ford have requested a US$ 25 billion bailout
… and deteriorating economic growth prospects
6
•
Unemployment in the US and the EU has risen to 6.5% and 7.5%
•
Industrial production in the U.S. fell by 2.8% (m-o-m) in Sept
•
Industrial production in China slowed to its lowest level in a decade
•
Growth in the US slowed to -0.3% in the 3rd quarter
•
Germany and the UK formally in recession
•
World output to fall from 4.8% in 2007 to 2.5% in 2008 to 2.4% in 2009
•
Advanced economies GDP growth at 0.3 in 2008 and 2009
•
African growth expected at 5.2% for 2008 and 4.7% for 2009
•
All growth in 2009 set to come from emerging markets
Policy responses have been unprecedented
7
•
Initial responses dealt with preventing financial markets from seizing up

Governments have already committed to $4 trillion to support the financial system

Individual country actions may be optimal for that country, but harmful from a global
perspective

Guarantees of bank deposits can cause withdrawals on banks in other countries

Impact of G7 decisions impacts on emergent countries (eg currency depreciation)
–
Chinese package aimed at investment in infrastructure
–
Globally coordinated interest rate cuts

Extensive currency swap arrangements between large central banks and the US Fed
•
Different fiscal stimulus packages in different countries
–
US and UK packages aimed at reducing tax rates and supporting social security
–
Some countries looking at supporting key sectors
Resulting in rapidly falling commodity prices
Platinum and oil prices
3000
160
Platinum Price (lhs)
Oil Price (rhs)
No
v
Se
p-
Ju
l-0
Ma
y-0
Ma
r
Ja
n-0
No
v
Se
p-
Ju
l-0
Ma
y-0
Ma
r
Ja
n-0
8
-08
40
08
600
8
60
8
1000
-08
80
8
1400
-07
100
07
1800
7
120
7
2200
-07
140
7
2600
…and major capital outflows in the near term hitting share prices
Global equity markets
-10
-20
-30
-40
-31.0 -31.4 -33.3
-33.8
-50
-37.7 -37.9 -40.0
-40.7
-50.4 -51.5 -52.7 -52.8
-60
-65.0
9
Tu
rke
y
Hu
ng
ary
Ind
ia
Br
az
il
Ar
ge
nti
na
Ja
pa
n
Au
str
ali
a
S&
P
50
0
UK
Me
xic
JS
o
E
Do
All
w
Sh
Jo
ar
ne
e
sI
nd
us
tria
l
-70
Ch
ina
% change since 1Jan 2008
0
… resulting in large exchange rate movements worldwide
•
Reduced risk appetite creating flight to the dollar and the yen
20
Exchange rates vs. the dollar and
rand/euro and rand/sterling
14.0
% change since 1 Jan
10
0
-4.5
-10
-10.2
-14.0
-20
-15.0
-16.3
-18.5
-19.2
-19.9
-30
-22.4
-23.2
-25.3
-25.7
-27.2
-29.8
-33.8
10
Ra UK
nd
Ne /Eu
ro
w
Ze
ala
n
Au d
str
al
ia
Tu
rk
ey
K
So ore
a
ut
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Af
ric
a
Ja
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Ar an
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Cz tina
ec
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Ra uro
nd
/G
BP
M
ex
ico
Po
lan
Hu d
ng
ar
y
Br
az
il
-40
China’s contribution to world growth still high
•
On average, China has contributed about a fifth of world output growth
•
Growth in Chinese imports has started to moderate, putting downward
pressure on commodity prices
•
Chinese GDP growth has also moderated to 9.0% in 3rd quarter 2008
from 11.9% in 2007 and 11.6% in 2006
•
11
The IMF forecasts Chinese growth of 8.3% in 2009.
… cools demand for commodities and results in rapidly falling prices
800
700
Gold
Crude
Platinum
Index Jan 2002=100
600
500
400
300
200
100
13
08
20
08
20
07
20
07
20
06
20
06
20
05
20
05
20
04
20
04
20
03
20
03
20
02
20
20
02
0
… even as income accruing to South African exporters remains relatively
high for now
125
Terms of trade
120
115
110
105
100
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
95
14
•
•
Terms of trade refers to the ratio of our export prices to our import prices
If it is going up, we earn relatively more from trade
… and inflation is likely to fall resulting in lower interest rates over time
16
CPIX inflation & its components
Contributions to annual CPIX inflation
Jul-08
Aug-08
Food
5.1
5.3
Transport
3.2
3.1
Other
4.7
5.2
Total
13.0
13.6
14
Percent (y-o-y)
12
Sep-08
5.0
2.7
5.3
13.0
1.1 %pts due to electricity
10
8
6
20
08
20
07
20
06
20
05
Second round
effects &
electricity raise
core inflation
20
04
20
03
20
02
15
20
00
2
20
01
4
CPIX excluding food and petrol
CPIX excluding petrol
CPIX
Upper target limit
CPIX excluding food
…as household debt levels continue to moderate
90
80
Household debt and service costs
Household debt
Household interest payments (RHS)
14
12
60
10
50
8
40
6
30
4
20
10
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
0
16
2
0
% of disposable income
% of disposable income
70
… slower growth would lower the current account deficit. Policy aimed at
maintaining investment in future and sustaining financing.
Gross savings & investment
Gross saving & investment
35
GFCF
Gross saving
per cent of GDP
30
25
20
15
17
20
10
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
10
The critical question for SA is… where should we be when the global
cycle turns?
•
Financial crisis giving way to real economy slowdown… for some countries =
lending & borrowing seizing-up
• Effects on South Africa:
– ▼ commodity prices & ▼ foreign demand for exports = ▼ GDP
– ▼ food and oil prices = ▼ inflation
– But as ▼ rand = ▲ inflation.
•
Short-term adjustments on the demand side: Fiscal deficit supports consumption
& investment, even as both slow relative to recent years.
•
In the long-term, need to be more productive, more export-oriented, with higher
saving and investment, and with more rapid growth at a sustainable current
account… How do we get there?
18
GDP growth slowing with world growth… a gap emerging between what
we need and what we are likely to achieve
SA vs. world growth
7
6
SA growth (NT estimates)
World growth
6% growth target
5
3
2
1
0
-1
-2
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
-3
19
90
% year-on-year
4
What is to be done? Monetary and fiscal options to sustain growth and
macroeconomic stability
What we have done in recent years:
•
Monetary policy focus on keeping inflation low over the long-term and
sustain capital inflows.
•
Fiscal policy to raise saving in the economy & future economic growth.
•
Fiscal space created to address prolonged slowdown in growth.
Where we are heading:
•
With growth slowing now, more difficult to maintain positive saving rate >
focus on public investment.
•
A prudent fiscal deficit to offset weakness in exports and keep long-term
interest rates low.
20
…and sustainably boost exports and investment
35
Exports
30
Investments
per cent of GDP
25
20
15
10
5
22
20
10
20
06
20
02
19
98
19
94
19
90
19
86
19
82
19
78
19
74
19
70
0
Sustaining domestic economic growth in the near-term and growing the
economy for future generations
•
Use fiscal policy to offset short-term economic slowdown while maintaining
positive saving rate.
•
Focus on government contribution to reducing costs of economic activity
and expanding markets with infrastructure.
•
Monetary policy to achieve low and stable inflation and attract foreign
savings.
•
Exchange rate flexibility allows SA to re-price lower to keep in line with other
emerging market economies and maintain competitiveness.
•
Global economic weakness places renewed emphasis on promoting
productivity growth, domestic competitiveness, and efficiency gains…
implement growth recommendations.
23
… and requires addressing the international economic environment with a
renewed commitment to multilateralism and mutual accountability
•
Monetary policy support and fiscal measures, while maintaining fiscal
sustainability.
•
Access to finance for emerging and developing economies including
through liquidity facilities and program support.
•
Support of the development agenda by the World Bank and other
multilateral development banks (MDBs) and new facilities in the areas of
infrastructure and trade finance.
•
Ensuring that the IMF, World Bank and other MDBs have sufficient
resources to continue playing their role in overcoming the crisis.
24
Key Principles for Reform undertaken by G20
25
•
Strengthening Transparency and Accountability
•
Enhancing Sound Regulation
•
Promoting Integrity in Financial Markets
•
Reinforcing International Cooperation
•
Reforming International Financial Institutions.
G20 Action Plan to support Common Principles for National Plans
•
Enlarging participation to emergent economies in Fin Stability Forum/Standard-Setting
institutions
–
Reviewing and aligning global accounting standards
•
Greater Co-operation between regulators
•
Reviewing mandates, governance and resource requirements of the IFIs
•
Agreement on the Doha Development Round moving forward
•
National plans must
–
Addressing pro-cyclical regulatory policy
–
Strengthening transparency of credit derivatives markets and reducing their systemic risks
–
Reviewing compensation practices
–
Defining the scope of systemically important institutions and determining their appropriate
regulation or oversight
–
26
Reviewing the mandates, governance, and resource requirements of the IFIs