Read below an excerpt from a World Bank and IBRD March 2009 Report on "How Developing Countries are coping with the Global Crisis". Fiji has a double issue to contend with : both the impact of the global crisis and its own domestic crisis.
"The sharp global contraction is affecting both advanced and developing countries. Global industrial production declined by 20 percent in the fourth quarter of 2008, as high income and developing country activity plunged by 23 and 15 percent, respectively. Particularly hard hit have been countries in Eastern Europe and Central Asia and producers of capital goods. Global GDP will decline this year for the first time since World War II, with growth at least 5 percentage points below potential. World trade is on track to register its largest decline in 80 years, with the sharpest losses in East Asia, reflecting a combination of falling volumes, price declines, and currency depreciation.
Financial conditions facing developing countries have deteriorated sharply. The World Bank estimates that developing countries face a financing gap of $270-$700 billion depending on the severity of the economic and financial crisis and the strength and timing of policy responses. Even at the lower end of this range, existing resources of international financial institutions would appear inadequate to meet financing needs this year. Should a more pessimistic outcome occur, unmet financing needs will be enormous.
The financial crisis will have long-term implications for developing countries. Sovereign debt issuance by high-income countries is set to increase dramatically, crowding out many developing country issuers (private and public). Many institutions that have provided financial intermediation for developing country clients have virtually disappeared. Developing countries are likely to face higher spreads, and lower capital flows than over the past 7-8 years, leading to weaker investment and slower growth in the future.
The challenge facing developing countries is how, with fewer resources, to pursue
policies that can protect or expand critical expenditures, including on social safety nets, human development and critical infrastructure. This will be especially difficult for LICs: the slowdown in growth will likely deepen the degree of deprivation of the existing poor, since large numbers of people are clustered just above the poverty line and particularly vulnerable to economic volatility and temporary slowdowns. Many of the most affected LICs are heavily dependent on official concessional flows, which will be under pressure in donor countries facing their own fiscal challenges.
There is a therefore a strong need to expand assistance to LICs to protect critical
expenditures and prevent an erosion of progress in reducing poverty. Attention must be directed to protecting the poor through targeted social spending, including expanded safety nets, and to maintaining and expanding the infrastructure assets that will be critical to restoring growth following the crisis. A concerted effort is also needed to support the private sector, especially SMEs, which are essential to a resumption of growth and job creation in developing countries. Creation of a global Vulnerability Fund, financed with a modest portion of advanced country stimulus packages, could go a long way to providing the resources necessary for these efforts."
You can get more of this report on this link.
Showing posts with label Global Financial Crisis. Show all posts
Showing posts with label Global Financial Crisis. Show all posts
Monday, March 14, 2011
Sunday, March 13, 2011
World Bank Group Significantly Boosts Support to East Asia and Pacific
The World Bank has announced last week that it has adjusted its regional strategy and massively increased its financial and technical support for the region, to address the impacts of the global financial crisis.
Whether Fiji qualifies for this assistance, we are not sure but Government officials could look into it. There will certainly be conditions to be met by the Fiji Government should they wish to access any assistance.
At this stage as well, no detailed study has been done as to the extent that the global crisis has affected the Fiji economy, aside from the effect of the domestic political crisis on the country itself. This would really be an interesting study to do.
Read the World Bank Press release below.
------------------
"The World Bank Group responded quickly to the impacts of the global financial crisis on the countries of the East Asia and Pacific region in fiscal year 2009 with over US$9 billion in financing for development. This represents a significant increase on the amount of financing of the previous year. The World Bank Group also ramped up its technical assistance to help governments in the region address the social and economic impacts of the crisis.
“Although growth in East Asia and Pacific still compares favorably with that of other regions, the poor and the vulnerable have been deeply affected by the global economic crisis,” said World Bank Group Vice President for the East Asia and Pacific Region, James W. Adams “In this region alone, more than 10 million people who would otherwise have moved out of poverty are expected to remain below the poverty line. We have adjusted our regional strategy and increased resources for the region to help countries weather the economic crisis and ensure priority programs remain on track. This includes investments in infrastructure, education, health, agriculture, and social safety nets.”
Many countries in the region were just beginning to recover from the food and fuel crisis of 2008 when the global financial crisis hit. The World Bank Group responded by increasing its support --in loans, grants, equity investments and guarantees-- to help countries and private-sector firms deal with the devastating effects of the global financial meltdown.
Commitments from the International Bank for Reconstruction and Development (IBRD)—which provides financing, risk management products, and other financial services to middle-income countries— increased in FY09 to $6.9 billion, up from $2.7 billion the previous year. The International Development Association (IDA), which provides interest-free credits and grants to the lowest-income countries, provided $1.2 billion in support in FY09.
As the largest provider of multilateral financing for the private sector in the developing world, the Bank Group’s private sector arm –the International Finance Corporation (IFC)— also increased its support to help boost private sector-led recovery. In FY2009, preliminary results indicate that IFC generated $1.1 billion of new business in 45 projects, seven of these are located in conflict-affected countries and regions, while one in every five projects has a climate change component.
Karin Finkelston, IFC’s Director for East Asia and Pacific, said “To help the region navigate the financial crisis, we focused our efforts on the poorest and most vulnerable countries. We are pleased that we were able to increase our financial commitments to IDA countries to nearly $400 million from around $200 million in 2008.”
The Multilateral Investment Guarantee Agency (MIGA) supported infrastructure development in south-west China, where fast urbanization and industrial growth have led to severe wastewater issues. The agency issued guarantees of $75.3 million to support two water projects, which will promote improved water quality as well as better environmental practices.
“As the leading international institution promoting foreign direct investment (FDI) in emerging and transition economies, MIGA can help investors mitigate risks in these uncertain times and play an important role in helping countries attract FDI,” says MIGA’s Executive Vice President Izumi Kobayashi. “MIGA can act as a stabilizing influence in the market.”
The Bank Group’s support in FY2009 in the East Asia and Pacific region by sector is as follows :
Whether Fiji qualifies for this assistance, we are not sure but Government officials could look into it. There will certainly be conditions to be met by the Fiji Government should they wish to access any assistance.
At this stage as well, no detailed study has been done as to the extent that the global crisis has affected the Fiji economy, aside from the effect of the domestic political crisis on the country itself. This would really be an interesting study to do.
Read the World Bank Press release below.
------------------
"The World Bank Group responded quickly to the impacts of the global financial crisis on the countries of the East Asia and Pacific region in fiscal year 2009 with over US$9 billion in financing for development. This represents a significant increase on the amount of financing of the previous year. The World Bank Group also ramped up its technical assistance to help governments in the region address the social and economic impacts of the crisis.
“Although growth in East Asia and Pacific still compares favorably with that of other regions, the poor and the vulnerable have been deeply affected by the global economic crisis,” said World Bank Group Vice President for the East Asia and Pacific Region, James W. Adams “In this region alone, more than 10 million people who would otherwise have moved out of poverty are expected to remain below the poverty line. We have adjusted our regional strategy and increased resources for the region to help countries weather the economic crisis and ensure priority programs remain on track. This includes investments in infrastructure, education, health, agriculture, and social safety nets.”
Many countries in the region were just beginning to recover from the food and fuel crisis of 2008 when the global financial crisis hit. The World Bank Group responded by increasing its support --in loans, grants, equity investments and guarantees-- to help countries and private-sector firms deal with the devastating effects of the global financial meltdown.
Commitments from the International Bank for Reconstruction and Development (IBRD)—which provides financing, risk management products, and other financial services to middle-income countries— increased in FY09 to $6.9 billion, up from $2.7 billion the previous year. The International Development Association (IDA), which provides interest-free credits and grants to the lowest-income countries, provided $1.2 billion in support in FY09.
As the largest provider of multilateral financing for the private sector in the developing world, the Bank Group’s private sector arm –the International Finance Corporation (IFC)— also increased its support to help boost private sector-led recovery. In FY2009, preliminary results indicate that IFC generated $1.1 billion of new business in 45 projects, seven of these are located in conflict-affected countries and regions, while one in every five projects has a climate change component.
Karin Finkelston, IFC’s Director for East Asia and Pacific, said “To help the region navigate the financial crisis, we focused our efforts on the poorest and most vulnerable countries. We are pleased that we were able to increase our financial commitments to IDA countries to nearly $400 million from around $200 million in 2008.”
The Multilateral Investment Guarantee Agency (MIGA) supported infrastructure development in south-west China, where fast urbanization and industrial growth have led to severe wastewater issues. The agency issued guarantees of $75.3 million to support two water projects, which will promote improved water quality as well as better environmental practices.
“As the leading international institution promoting foreign direct investment (FDI) in emerging and transition economies, MIGA can help investors mitigate risks in these uncertain times and play an important role in helping countries attract FDI,” says MIGA’s Executive Vice President Izumi Kobayashi. “MIGA can act as a stabilizing influence in the market.”
The Bank Group’s support in FY2009 in the East Asia and Pacific region by sector is as follows :
- Agriculture and Rural Development, USD520 million;
- Education, USD797 million;
- Energy and Mining, USD526 million;
- Economic Policy, USD2,792 million;
- Financial and Private Sector Development, USD160 million;
- Public Sector Governance, USD460 million;
- Social Development, USD322 million;
- Social Protection, USD215 million;
- Transport, USD855 million.
Sunday, February 13, 2011
Moving on from a global crisis: business as usual or an inflection point?
Read below comments by the Director-General of the World Bank's Independent Evaluation Group, Dr Vinod Thomas on what the global crisis would mean for countries.
Dr Thomas does note that countries that are open were more vulnerable to the effect of the crisis. He also added that for the financial sector, deregulation (which had been the trend before the crisis) coupled with sensible regulatory policies that are targeted at containing excessive risk taking at the "expense of other people's money" would be advisable for countries.
The article follows.
"Speaking at the Institute of Policy Studies in Singapore on June 19, 2009, Dr. Vinod Thomas, Director-General and Senior Vice-President of the World Bank’s Independent Evaluation Group (IEG), described the current global economic turmoil as a triple crisis comprising the global economic downturn; rising poverty; and climate change. Thomas said that this crisis provides a moment to reflect on the past and actions for the future.
“One can think of this crisis as one that can be solved and we can then move on. We can also think of this as an inflection point where some deep uncertainties about how the ways in which countries have developed and been growing over the last 10-15 years are just not going to happen anymore and that it’s not sustainable.”
The end of globalization?
With those countries most connected to the global economy having been worst hit by the crisis, questions have arisen about whether high levels of globalization will spell doom moving forward. “This crisis adds a certain degree of empirical evidence to an observation that the more you are connected, the more a crisis such as this affects you.”
Thomas also notes that trade has been a mechanism for transmitting the recession to so many countries—Singapore included—demonstrating that there really has been no decoupling. “Asia cannot, as people had imagined, go a separate way from the rest of the world economy, even if the crisis was initiated by the OECD countries.”
Trade and openness remain the policy prescriptions, however; as past experience shows that it is these same globalised economies which have stronger recovery of GDP growth. “In a crisis such as this, those with greater trade shares are hit harder. That does not mean that being connected to the rest of the world is a bad idea, because as the recovery takes place and opportunities show up, those that are more connected to the global economy, with greater shares of trade and investment in their GDP, benefit much more.”
Warning against the trend of rising protectionism, Thomas said that “coming out of the crisis, if the recovery means greater restrictions on trade, then the future growth trajectory will definitely look different from the past. The past growth rates—the honeymoon really—lasted as long as it did because of the increasing openness of the global economy.”
Crisis response
In addition to trade, policy responses have also focused on financial reform, fiscal spending, poverty alleviation, and the environment.
Discussing reforms needed in the financial sector, Thomas noted that “if regulation had a bad name in the past, today it is clear that deregulation- much needed in many economies- needs to be coupled with sensible regulatory policies.”
Thomas also warned against abandoning new or highly innovative financial instruments because of the benefits that they provide: “You need to keep in mind that the intermediation, the leveraging, and the access to credit for large numbers of people can be augmented by many of these instruments… The lesson though is that those need to be matched by a regulatory framework that avoids extraordinary risk-taking at the expense of other people’s money.”
As countries worldwide put in place unprecedented fiscal expansion packages, Thomas noted that we should put a premium on quality over quantity. “You will see huge variations two years from now, with the same dollar producing widely different impacts in terms of the growth recovery, and that will differentiate those who come out of this recovery well, compared to those who don’t.”
The crisis of rising poverty- 150 million more people in poverty in 2008, and 50 million more set to fall below the poverty line in 2009- with its risk of social instability and loss of welfare, is closely linked to employment. The recovery in employment is expected to be slower than economic recovery as employers wait to see if the recovery is real; and as efficiency gains may result in a shift in employment patterns.
While the environment may have been an issue placed on the backburner in previous crises, Thomas said that that is no longer an option, and that climate change means that “the kind of growth that we have gotten used to isn’t feasible going forward. The numbers that are coming out on climate change are just absolutely frightening and if even a part of that is true, then investing in a different way would seem to be a high priority…In 20-30 years, with business as usual, we may be living in an ice-free world. If you think about it, that should be enough to spur action, but that does not spur action anywhere close to what you would like.”
This does not mean, however, that countries should be expected to reduce carbon emissions while they are still developing. “No country has developed rapidly without increasing their carbon footprint. So we have to be realistic. That is the only way development has taken place.”
There is, however, huge room for improvement in the carbon efficiency of development, said Thomas. “A sevenfold variation exists in how carbon intensive you need to be for any given income…so, yes, growth goes with a greater carbon footprint, but, no, it’s not automatic or preordained. There’s huge room for adjusting this as you go forward.”
Uncertainty is at an all time high, and Thomas said that there is a sense that the past is not going to be the best predictor of the future this time around; that the incremental changes that we are comfortable with may miss out on the big picture, especially in terms of risks and opportunities. In this context, Thomas emphasized the importance of flexibility in crisis responses.
“Action waits until there is a crisis”
This crisis does provide for an opportunity to make necessary changes. “We could be at an inflection point as opposed to returning to business as normal. This crisis could be turned into an opportunity to take action on three fronts: economic, social, and climate.”
Citing the examples of fiscal reform in Korea, Thailand, China and Brazil, Thomas said that all of these could be linked to a crisis; and that there are many fronts—human capital, greater competitiveness, social inclusion, infrastructure, public sector governance, new forms of green investment—on which this crisis can spur action."
To read more, click on this link.
Dr Thomas does note that countries that are open were more vulnerable to the effect of the crisis. He also added that for the financial sector, deregulation (which had been the trend before the crisis) coupled with sensible regulatory policies that are targeted at containing excessive risk taking at the "expense of other people's money" would be advisable for countries.
The article follows.
"Speaking at the Institute of Policy Studies in Singapore on June 19, 2009, Dr. Vinod Thomas, Director-General and Senior Vice-President of the World Bank’s Independent Evaluation Group (IEG), described the current global economic turmoil as a triple crisis comprising the global economic downturn; rising poverty; and climate change. Thomas said that this crisis provides a moment to reflect on the past and actions for the future.
“One can think of this crisis as one that can be solved and we can then move on. We can also think of this as an inflection point where some deep uncertainties about how the ways in which countries have developed and been growing over the last 10-15 years are just not going to happen anymore and that it’s not sustainable.”
The end of globalization?
With those countries most connected to the global economy having been worst hit by the crisis, questions have arisen about whether high levels of globalization will spell doom moving forward. “This crisis adds a certain degree of empirical evidence to an observation that the more you are connected, the more a crisis such as this affects you.”
Thomas also notes that trade has been a mechanism for transmitting the recession to so many countries—Singapore included—demonstrating that there really has been no decoupling. “Asia cannot, as people had imagined, go a separate way from the rest of the world economy, even if the crisis was initiated by the OECD countries.”
Trade and openness remain the policy prescriptions, however; as past experience shows that it is these same globalised economies which have stronger recovery of GDP growth. “In a crisis such as this, those with greater trade shares are hit harder. That does not mean that being connected to the rest of the world is a bad idea, because as the recovery takes place and opportunities show up, those that are more connected to the global economy, with greater shares of trade and investment in their GDP, benefit much more.”
Warning against the trend of rising protectionism, Thomas said that “coming out of the crisis, if the recovery means greater restrictions on trade, then the future growth trajectory will definitely look different from the past. The past growth rates—the honeymoon really—lasted as long as it did because of the increasing openness of the global economy.”
Crisis response
In addition to trade, policy responses have also focused on financial reform, fiscal spending, poverty alleviation, and the environment.
Discussing reforms needed in the financial sector, Thomas noted that “if regulation had a bad name in the past, today it is clear that deregulation- much needed in many economies- needs to be coupled with sensible regulatory policies.”
Thomas also warned against abandoning new or highly innovative financial instruments because of the benefits that they provide: “You need to keep in mind that the intermediation, the leveraging, and the access to credit for large numbers of people can be augmented by many of these instruments… The lesson though is that those need to be matched by a regulatory framework that avoids extraordinary risk-taking at the expense of other people’s money.”
As countries worldwide put in place unprecedented fiscal expansion packages, Thomas noted that we should put a premium on quality over quantity. “You will see huge variations two years from now, with the same dollar producing widely different impacts in terms of the growth recovery, and that will differentiate those who come out of this recovery well, compared to those who don’t.”
The crisis of rising poverty- 150 million more people in poverty in 2008, and 50 million more set to fall below the poverty line in 2009- with its risk of social instability and loss of welfare, is closely linked to employment. The recovery in employment is expected to be slower than economic recovery as employers wait to see if the recovery is real; and as efficiency gains may result in a shift in employment patterns.
While the environment may have been an issue placed on the backburner in previous crises, Thomas said that that is no longer an option, and that climate change means that “the kind of growth that we have gotten used to isn’t feasible going forward. The numbers that are coming out on climate change are just absolutely frightening and if even a part of that is true, then investing in a different way would seem to be a high priority…In 20-30 years, with business as usual, we may be living in an ice-free world. If you think about it, that should be enough to spur action, but that does not spur action anywhere close to what you would like.”
This does not mean, however, that countries should be expected to reduce carbon emissions while they are still developing. “No country has developed rapidly without increasing their carbon footprint. So we have to be realistic. That is the only way development has taken place.”
There is, however, huge room for improvement in the carbon efficiency of development, said Thomas. “A sevenfold variation exists in how carbon intensive you need to be for any given income…so, yes, growth goes with a greater carbon footprint, but, no, it’s not automatic or preordained. There’s huge room for adjusting this as you go forward.”
Uncertainty is at an all time high, and Thomas said that there is a sense that the past is not going to be the best predictor of the future this time around; that the incremental changes that we are comfortable with may miss out on the big picture, especially in terms of risks and opportunities. In this context, Thomas emphasized the importance of flexibility in crisis responses.
“Action waits until there is a crisis”
This crisis does provide for an opportunity to make necessary changes. “We could be at an inflection point as opposed to returning to business as normal. This crisis could be turned into an opportunity to take action on three fronts: economic, social, and climate.”
Citing the examples of fiscal reform in Korea, Thailand, China and Brazil, Thomas said that all of these could be linked to a crisis; and that there are many fronts—human capital, greater competitiveness, social inclusion, infrastructure, public sector governance, new forms of green investment—on which this crisis can spur action."
To read more, click on this link.
Thursday, November 26, 2009
IMF Concludes Article IV consultations in Fiji
Taken from the International Monetary Fund website on this link.
The statement raises concerns regarding :
"Statement of an IMF Staff Mission at the Conclusion of the Article IV Discussions with Fiji, Press Release No. 09/427November 23, 2009
The following statement was issued today in Suva after the conclusion of an International Monetary Fund (IMF) staff mission to Fiji:
“A team led by Mr. Ray Brooks, Division Chief in the Asia and Pacific Department of the IMF, visited Suva November 10 – 24 to hold Article IV discussions with the government and other stakeholders.1 The team met with Prime Minister Bainimarama, Reserve Bank of Fiji (RBF) Governor Reddy, Acting Finance Minister Sayed-Khaiyum, Finance Secretary Prasad, other senior government officials, and members of the private sector and civil society. Representatives from the Asian Development Bank and the World Bank also participated in the meetings. The team expresses its appreciation to the authorities for the constructive discussions.
“Economic growth in Fiji has been sluggish in recent years due to political developments, delays in structural reforms, and worsening terms of trade. Job growth has been slow and unemployment rose to 8½ percent in 2008.
“The economy is expected to contract by 2½ percent in 2009 as the impact of the global crisis has been exacerbated by floods that damaged crops and tourist infrastructure early in the year. GDP growth of 2 percent is likely in 2010, driven by the rebound in tourism, the devaluation, the global recovery, and rebuilding after the floods. Growth over the medium-term should rise to 2½ percent with fiscal consolidation and progress on structural reforms.
“Fiji, however, faces considerable downside risks given its external vulnerabilities. Increased liquidity in the banking system poses risks of inflation, macroeconomic instability, and a loss of competitiveness. The growth outlook remains highly uncertain due to political developments, the fragile nature of the global recovery, volatility of commodity prices, the risk of natural disasters, and the complex structural reform agenda.
“We commend the authorities for their efforts to limit the overall deficit in 2009 to the budgeted level of 3¼ percent of GDP. This is being achieved by containing expenditure in the face of an unexpected 10 percent fall in revenue. However, central government debt, at over 50 percent of GDP, is high by regional standards. In addition, government has contingent liabilities of around 15 percent of GDP.
“Fiscal consolidation is needed to reduce central government debt to the government’s target of 45 percent of GDP over the medium term. Limiting the 2010 budget deficit to around 2 percent of GDP—excluding costs associated with civil service reforms—would begin to reduce the debt-to-GDP ratio. In the medium term, expenditure can be contained through a well-designed civil service reform and revenue can be strengthened by rationalizing tax incentives. Transparency in fiscal reporting should be improved by widening the coverage of the budget and publishing quarterly reports on the fiscal outcome.
“Monetary policy should be tightened to contain inflation, protect the reserve position, and lock in the competitive gain from the devaluation. Inflation is projected to rise to 7 – 8 percent year-on-year by early 2010 and any further upward pressure on prices could lead to higher wage demands and macroeconomic instability. Given these risks, the recent increase in the statutory reserve deposit ratio is a welcome step. But further measures are needed to absorb excess liquidity and utilize more market-based instruments. We endorse the authorities’ review of the RBF Act to provide the RBF with more independence.
“The Fiji National Provident Fund (FNPF) should be reformed to make it actuarially sound. The generous rate of conversion of benefits to annuities should be reduced and management should be made independent of government and responsible to beneficiaries. The government should reduce its reliance on the FNPF for financing and the FNPF should not be used to finance public enterprises since these actions undermine the fund’s soundness. We support the government’s intention to conduct a comprehensive study to guide its reforms of FNPF.
“The authorities are planning sweeping structural reform that is required to spur growth, create jobs and reduce poverty. Priorities are civil service, public enterprise and land reform, and price liberalization. The social impact of redundancies arising from civil service and public enterprise reform, and the impact of price liberalization, should be mitigated through well-targeted subsidies to vulnerable groups. The government’s decision to corporatize water, procurement and printing services is a very positive step.
“The IMF Executive Board is expected to conclude the Article IV consultation discussions in January 2010.”
The statement raises concerns regarding :
- constraints on future growth in Fiji and how the "outlook remains highly uncertain due to political developments, the fragile nature of the global recovery, volatility of commodity prices, the risk of natural disasters, and the complex structural reform agenda";
- downside risks including how "increased liquidity in the banking system poses risks of inflation, macroeconomic instability, and a loss of competitiveness";
- relevance and adequacy of monetary policy instruments used;
- the level of government debt and its sourcing mostly from FNPF funds;
- sustainability of FNPF to pay pensions at current rates and its use to fund government debt.
"Statement of an IMF Staff Mission at the Conclusion of the Article IV Discussions with Fiji, Press Release No. 09/427November 23, 2009
The following statement was issued today in Suva after the conclusion of an International Monetary Fund (IMF) staff mission to Fiji:
“A team led by Mr. Ray Brooks, Division Chief in the Asia and Pacific Department of the IMF, visited Suva November 10 – 24 to hold Article IV discussions with the government and other stakeholders.1 The team met with Prime Minister Bainimarama, Reserve Bank of Fiji (RBF) Governor Reddy, Acting Finance Minister Sayed-Khaiyum, Finance Secretary Prasad, other senior government officials, and members of the private sector and civil society. Representatives from the Asian Development Bank and the World Bank also participated in the meetings. The team expresses its appreciation to the authorities for the constructive discussions.
“Economic growth in Fiji has been sluggish in recent years due to political developments, delays in structural reforms, and worsening terms of trade. Job growth has been slow and unemployment rose to 8½ percent in 2008.
“The economy is expected to contract by 2½ percent in 2009 as the impact of the global crisis has been exacerbated by floods that damaged crops and tourist infrastructure early in the year. GDP growth of 2 percent is likely in 2010, driven by the rebound in tourism, the devaluation, the global recovery, and rebuilding after the floods. Growth over the medium-term should rise to 2½ percent with fiscal consolidation and progress on structural reforms.
“Fiji, however, faces considerable downside risks given its external vulnerabilities. Increased liquidity in the banking system poses risks of inflation, macroeconomic instability, and a loss of competitiveness. The growth outlook remains highly uncertain due to political developments, the fragile nature of the global recovery, volatility of commodity prices, the risk of natural disasters, and the complex structural reform agenda.
“We commend the authorities for their efforts to limit the overall deficit in 2009 to the budgeted level of 3¼ percent of GDP. This is being achieved by containing expenditure in the face of an unexpected 10 percent fall in revenue. However, central government debt, at over 50 percent of GDP, is high by regional standards. In addition, government has contingent liabilities of around 15 percent of GDP.
“Fiscal consolidation is needed to reduce central government debt to the government’s target of 45 percent of GDP over the medium term. Limiting the 2010 budget deficit to around 2 percent of GDP—excluding costs associated with civil service reforms—would begin to reduce the debt-to-GDP ratio. In the medium term, expenditure can be contained through a well-designed civil service reform and revenue can be strengthened by rationalizing tax incentives. Transparency in fiscal reporting should be improved by widening the coverage of the budget and publishing quarterly reports on the fiscal outcome.
“Monetary policy should be tightened to contain inflation, protect the reserve position, and lock in the competitive gain from the devaluation. Inflation is projected to rise to 7 – 8 percent year-on-year by early 2010 and any further upward pressure on prices could lead to higher wage demands and macroeconomic instability. Given these risks, the recent increase in the statutory reserve deposit ratio is a welcome step. But further measures are needed to absorb excess liquidity and utilize more market-based instruments. We endorse the authorities’ review of the RBF Act to provide the RBF with more independence.
“The Fiji National Provident Fund (FNPF) should be reformed to make it actuarially sound. The generous rate of conversion of benefits to annuities should be reduced and management should be made independent of government and responsible to beneficiaries. The government should reduce its reliance on the FNPF for financing and the FNPF should not be used to finance public enterprises since these actions undermine the fund’s soundness. We support the government’s intention to conduct a comprehensive study to guide its reforms of FNPF.
“The authorities are planning sweeping structural reform that is required to spur growth, create jobs and reduce poverty. Priorities are civil service, public enterprise and land reform, and price liberalization. The social impact of redundancies arising from civil service and public enterprise reform, and the impact of price liberalization, should be mitigated through well-targeted subsidies to vulnerable groups. The government’s decision to corporatize water, procurement and printing services is a very positive step.
“The IMF Executive Board is expected to conclude the Article IV consultation discussions in January 2010.”
Wednesday, October 21, 2009
Our Strategic Planning Consultancy
As part of our suit of products, we offer consultancy in the area of strategic planning.
Using a strategic planning model that we have developed, after reviewing other models that are in use, we have developed the current strategic plans for Fiji National Provident Fund, Amalgamated Telecom Holdings, among others.
We have also assisted with developing annual corporate plans for some government agencies/departments. As part of this, we ensure that there is a link between the company's/organisation's strategic plan and its annual strategies and that those responsible for implementing strategies are clearly identified with time frames put in place.
During the current constrained business and economic environment, it might do well for companies to have another review of where they wish to position themselves over the next two to three years and then review/identify new strategies to take them there.
Organisational objectives that might have been relevant in the past two years might need to be reviewed as companies/organisations relook at themselves given the current global/domestic conditions.
If you are a company or organisation that needs assistance in this regard, and need more information on how we can help you, you can call our office on (679) 3342719 or email us on info@gilbert.com.fj.
Using a strategic planning model that we have developed, after reviewing other models that are in use, we have developed the current strategic plans for Fiji National Provident Fund, Amalgamated Telecom Holdings, among others.
We have also assisted with developing annual corporate plans for some government agencies/departments. As part of this, we ensure that there is a link between the company's/organisation's strategic plan and its annual strategies and that those responsible for implementing strategies are clearly identified with time frames put in place.
During the current constrained business and economic environment, it might do well for companies to have another review of where they wish to position themselves over the next two to three years and then review/identify new strategies to take them there.
Organisational objectives that might have been relevant in the past two years might need to be reviewed as companies/organisations relook at themselves given the current global/domestic conditions.
If you are a company or organisation that needs assistance in this regard, and need more information on how we can help you, you can call our office on (679) 3342719 or email us on info@gilbert.com.fj.
Tuesday, April 7, 2009
Invest in Fiji Blog Readership : March 2009 vs February 2009
We provide you with statistics on our blog readership. Here are the readership statistics for our Promoting Suva blog for the months of February and March 2009. Data for February is given first followed by data for March.
February 2009
February 2009
- total number of visits - 415;
- total number of page views - 612;
- top 15 countries of origin of readers and no of visits per country - Fiji, 185; Australia, 60; United States, 37; United Kingdom, 21; New Zealand, 17; India, 11; Canada, 9, Ivory Coast, 8; Thailand, 8; Nigeria, 6; Ghana, 4; Spain, 3; Papua New Guinea, 3; Switzerland, 3; Poland, 3;
- top 10 referring source - google / organic, 330; (direct) / (none), 35; yahoo / organic, 16; blogger.com / referral, 5; ftib.org.fj / referral, 4; promotingsuva.blogspot.com / referral, 4; rizwandean.blogspot.com / referral, 4; search / organic, 4; ask / organic, 2;
monetynews.pl / referral, 2; - top 20 keywords used in searches - invest in fiji, 10; bruno gillier, 5; business in fiji, 5; investinfiji, 4; email contact directors 2009 @yahoo.com.fj, 3; investment in fiji, 3; "joes farm" & fiji, 2; +679 email 0f business, 2; +679 email contact addresses of companies in fiji, 2; deposit interest rates, fiji, 2; email fiji islands trade and investment bureau, 2; fiji, 2; fijian holdings unit trust, 2; foana nemani, 2; info@gilbert.com.fj, 2; investing in fiji, 2; rate of interest fiji, 2; starting a business in fiji, 2; westpac fiji interest rates, 2; "@ .fj" + tel: +679 + ceo + 2009, 1;
- total number of visits - 636;
- total number of page views - 1,010;
- top 15 countries of origin of readers and no of visits per country - Fiji, 342; United States, 76; Australia, 69; New Zealand, 22; India, 17; Canada, 15; United Kingdom, 14; France, 10; Malaysia, 6; South Africa, 5; United Arab Emirates, 5; Philippines, 5; Ivory Coast, 4; Burkina Faso, 4; Germany, 3;
- top 10 referring source - google / organic, 514; (direct) / (none), 37; blogger.com / referral, 22; yahoo / organic, 20; rizwandean.blogspot.com / referral, 6; msn / organic, 5; promotingsuva.blogspot.com / referral, 5; search / organic, 4; ask / organic, 3; google.com / referral, 3;
- top 20 keywords used in searches - invest in fiji, 13; investinfiji, 6; bruno gillier, 5; gilbert veisamasama, 5; global financial crisis in fiji, 5; invest in fiji blog, 5; business in fiji, 4; fiji islands invest, 4; gillier group, 4; buisnesses for sale in fiji, 3; colonial national bank fiji, 3; global financial crisis-fiji, 3; investment in fiji, 3; anz term deposits, 2; association of banks in fiji, 2; business for sale in fiji, 2; effect of global financial crisis on fiji, 2; effects of global financial crisis in fiji, 2; effects of recession on holiday inn suva, 2; fiji credit crisis, 2;
- Readership of the blog again grew in March 2009 compared to the month earlier;
- Readers from Fiji, USA, Australia, New Zealand, India and Canada form our largest readership group. Readers from these countries can best be targeted for marketing from this blog;
- Our top referring site continues to be google.com. This indicates our good visibility on google searches.
- Keyword searches indicate that readers are searching for a issues relating to investing in Fiji. Interestingly there is an increase in searches on the impact of the global financial crisis on Fiji.
Companies can utilise our wide readership base and high search rankings to market and advertise their products.
For advertising to our wide readership base, check our advertising rates here. If you wish to discuss how we you can advertise your products and services on our blog, e-mail us on info@gilbert.com.fj.
George Soros warns shares will fall further
Read the following article by Louise Armitstead from http://www.telegraph.co.uk/ on Billionaire financier's expectations on share prices.
"George Soros, the billionaire financier, helped unsettle markets by voicing fears that share prices had further to fall. In an interview, he said: "It's a bear-market rally because we have not yet turned the economy around. This is not a financial crisis like all the other financial crises that we have experienced in our lifetime."
Markets across the world slid as a raft of bad news stalled the powerful rally that has fuelled optimism for over a month. In Britain, fresh concerns over bank stability and oil prices pushed the FTSE 100 index down 63 points, or 1.6pc, at 3930.5. The Dow dipped 2.3pc to 2789.6 on fresh concerns that the bank bail-out would not stabilise US lenders and after a report showed that chief executives' confidence in the economy had fallen in the past few months.
Germany's DAX lost 0.6pc and France's CAC 0.9pc. In Asia, Japan's Nikkei was down 0.3pc, Hong Kong's Hang Seng sunk 0.3pc and Australia's ASX slipped 1.3pc after interest rates were cut to a 49-year low. The trend threatens to undo the recent two-week rally, in which time the FTSE 100 has jumped 13pc, the S&P 24pc and the Nikkei 25pc.
Like Mr Soros, analysts at Morgan Stanley warned the bear market was not over. They said in a note: "We have to decide whether this is towards the end of another bear market rally that we should sell into now that hope has grown, or the start of a much larger advance, maybe even a new bull market. Our decision is to sell into strength now."
Optimism around the world was boosted last week after the leaders of the G20 countries agreed to a six-point plan designed to ensure the global recession does not turn into a depression. But now there are concerns the leaders did not go far enough.
Mr Soros, whose flagship Quantum Endowment Fund generated 8pc returns last year compared to an average decline of nearly 20pc among other hedge funds, told Bloomberg Television: "The recovery will look like an inverted square root sign. You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shaped recovery or anything like that. You settle down, step down.
"[President Barack Obama] has done very well in every area, except in dealing with the recapitalisation of the banks and the restructuring of the mortgage market.""
"George Soros, the billionaire financier, helped unsettle markets by voicing fears that share prices had further to fall. In an interview, he said: "It's a bear-market rally because we have not yet turned the economy around. This is not a financial crisis like all the other financial crises that we have experienced in our lifetime."
Markets across the world slid as a raft of bad news stalled the powerful rally that has fuelled optimism for over a month. In Britain, fresh concerns over bank stability and oil prices pushed the FTSE 100 index down 63 points, or 1.6pc, at 3930.5. The Dow dipped 2.3pc to 2789.6 on fresh concerns that the bank bail-out would not stabilise US lenders and after a report showed that chief executives' confidence in the economy had fallen in the past few months.
Germany's DAX lost 0.6pc and France's CAC 0.9pc. In Asia, Japan's Nikkei was down 0.3pc, Hong Kong's Hang Seng sunk 0.3pc and Australia's ASX slipped 1.3pc after interest rates were cut to a 49-year low. The trend threatens to undo the recent two-week rally, in which time the FTSE 100 has jumped 13pc, the S&P 24pc and the Nikkei 25pc.
Like Mr Soros, analysts at Morgan Stanley warned the bear market was not over. They said in a note: "We have to decide whether this is towards the end of another bear market rally that we should sell into now that hope has grown, or the start of a much larger advance, maybe even a new bull market. Our decision is to sell into strength now."
Optimism around the world was boosted last week after the leaders of the G20 countries agreed to a six-point plan designed to ensure the global recession does not turn into a depression. But now there are concerns the leaders did not go far enough.
Mr Soros, whose flagship Quantum Endowment Fund generated 8pc returns last year compared to an average decline of nearly 20pc among other hedge funds, told Bloomberg Television: "The recovery will look like an inverted square root sign. You hit bottom and you automatically rebound some, but then you don't come out of it in a V-shaped recovery or anything like that. You settle down, step down.
"[President Barack Obama] has done very well in every area, except in dealing with the recapitalisation of the banks and the restructuring of the mortgage market.""
Tuesday, March 24, 2009
Economics Association of Fiji Seminar - 24 Mar 09
Reasons for the global financial crisis
Dr. Jerry Jordan, president of the Pacific Academy of Advanced Studies in Los Angeles, told participants at a seminar organized by the Economics Association of Fiji on the global financial crisis which was held at the Holiday Inn on Tuesday night, that in his view the housing bubble in the US was due to two major reasons. The first was the monetary policies of the US Government in 2001. This was a time of uncertainty for the US economy especially with the attacks on the World Trade Center and the bursting of the dot-com bubble. To generate economic activity, the US Federal Reserve reduced interest rates and the ultimate effect was that more of lenders money were directed towards the housing industry. The second reason was the politicization of the housing industry, whereby some of the major lenders were pressured by policy makers to have a major part of their mortgage portfolios invested with low income earners.
The situation was made even worse by the following factors:
Dr. Jerry Jordan, president of the Pacific Academy of Advanced Studies in Los Angeles, told participants at a seminar organized by the Economics Association of Fiji on the global financial crisis which was held at the Holiday Inn on Tuesday night, that in his view the housing bubble in the US was due to two major reasons. The first was the monetary policies of the US Government in 2001. This was a time of uncertainty for the US economy especially with the attacks on the World Trade Center and the bursting of the dot-com bubble. To generate economic activity, the US Federal Reserve reduced interest rates and the ultimate effect was that more of lenders money were directed towards the housing industry. The second reason was the politicization of the housing industry, whereby some of the major lenders were pressured by policy makers to have a major part of their mortgage portfolios invested with low income earners.
The situation was made even worse by the following factors:
- Americans penchant for consumption spending – in fact many mortgage holders took out second mortgages (mortgage equity withdrawal) not to consolidate debt but to buy cars and go for holidays.
- Failure of the corporate governance of many financial institutions. Dr. Jordan highlighted the importance of having a competent board who understood its role well and understood the core business of the entity. Dr. Jordan suggested that directors who were lacking in these areas should either hire consultants to help them understand their responsibilities or step down. In addition, he said that internal audit should be owned by the entity, totally independent of management and robust. Of course, now days entities are outsourcing this crucial function because it is a lot cheaper.
- Failure of supervision by oversight agencies/ authorities.
- Failure of rating agencies – securities that came into prominence (e.g. collateralized debt obligation) from this housing boom were given very good ratings even when financial conditions demanded that these ratings be reviewed. Investors who bought these securities based on their good ratings were caught off guard when within a short time frame their investments were worth nothing.
Impact of global financial crisis on Fiji
Dr. Jordan said that the impact will not be as dramatic as what is happening in the US, with business closures and high unemployment but it is coming nonetheless via our trading partners New Zealand and Australia.
On how Fiji can grow its economy given the current global financial situation, Dr. Jordan suggested increasing foreign investment. Again, how this can be achieved, especially with developed countries and many international corporations still licking their wounds from this global financial crisis, may prove a very challenging proposition. The Fiji Trade and Investment Board is tasked with this enormous responsibility and as such should be supported. Dr. Jordan hinted at four countries to look out for as things normalize, namely China, India,Mexico and Brazil. Perhaps FTIB may have some of its work done already.
Tuesday, November 4, 2008
Global Prospects and Policies - Speech by John Lipsky, First Deputy Managing Director, International Monetary Fund
Provided below is a copy of the speech by the First Deputy Managing Director, International Monetary Fund on "Global Prospects and Policies"
"I would like to thank Tim Ryan and his SIFMA colleagues for inviting me here today. It is a pleasure and an honor to have the opportunity to address this distinguished audience, and to share the podium with Under Secretary Ryan.
In discussing global prospects and policies this morning, I will focus on two key themes:
First, to state the obvious, these are very turbulent and uncertain times for the global economy. The world economy is entering a major slowdown, driven by the worst financial crisis in 75 years. As we all know, the current challenges are unprecedented in many important ways. As a result, visibility is unusually imperfect with respect to global economic prospects. Many plausible voices today are predicting dramatic - and, in some cases, dire - outcomes. Regardless, developments continue to evolve rapidly, especially with respect to conditions facing emerging economies. For our part, my IMF colleagues and I are paying close attention to the latest results, and doing our best to anticipate future challenges.
Second, these very difficult financial and economic circumstances call for timely, decisive and cooperative action. Given the global and systemic nature of the current crisis, policy responses need to be scaled commensurately. Our double mantra is straightforward: Global problems call for global solutions; systemic challenges require a systemic response. Increasingly, policymakers around the world share these basic tenets. Already, many unprecedented measures have been announced, and they need to be implemented quickly. Nonetheless, there is scope for further action-particularly with respect to guarding emerging economies from adverse external developments.
I will begin with a very brief overview of the global outlook.
The global economy is in a major slowdown, and there is a risk that it could turn into an outright downturn. Global growth is slowing sharply. Already in this year's first half, growth had slowed to 3½ percent (annualized), down from the 5 percent annual pace sustained over the four previous years.
a. Advanced economies are contracting at end-2008. Advanced economy growth slowed to a standstill during this year's first half. Momentum subsequently has been falling, with leading indicators already dropping to levels last seen during 2001-2002. Indeed, the U.S. economy has slowed sharply and recession risks are looming, while activity in the euro area and Japan had weakened earlier.
b. Increasingly, emerging and developing economies are feeling the impact of the global financial crisis, and their growth is decelerating rapidly. The confluence of a decline in external demand, receding commodities prices, and a sharp moderation in capital flows is likely to dampen activity notably in the coming quarters.
In sum, there is ample justification for pessimism: Global prospects remain highly uncertain and risks of a global recession loom large.
Nonetheless, my IMF colleagues and I are optimistic that a decisive, comprehensive and coherent policy response will be able to truncate the downside risks to the global economy. The key is to focus on dealing with the underlying sources of the weakness, while ameliorating the damage that these underlying factors are creating.
As is widely recognized, the underlying loci of global economic weakness stems from asset price deflation - especially in housing and other real estate markets. Not surprisingly, asset price deflation has been hard on financial markets, creating concentric circles of crisis that have propagated globally at a pace that by and large has taken market participants and policymakers by surprise. How well macroeconomic and financial policies jointly respond to containing the disruption will be telling in determining the global economy's near-term outlook.
There are two key risks to the outlook; One is that asset values - especially housing - will substantially undershoot reasonable long-term levels. The second is that financial market dysfunction will produce reinforcing rounds of real economic distress, especially in emerging economies.
In many countries' housing markets, the apparent boom-time overshooting in valuations already has damaged financial markets and the real economy, but an equally-scaled undershooting would compound the damage.
· Housing-related conditions are weak -- and weakening -- in the United States and several other advanced economies. In the United States, housing activity and prices continue to decline, though the inventory overhang is beginning to moderate. At the same time, however, foreclosures continue to rise, amid a weakening labor market. Rather than finding a floor, as we expect will occur in the coming year, there is a risk of deeper and more prolonged housing correction in the United States. In Europe, the housing correction began later and may have some ways to go. Of course, asset values in many emerging market economies increased in recent years at a faster pace even than in advanced economies, creating obvious risks.
· Avoiding damaging undershooting is justification for a strong policy response. Short-circuiting an adverse feedback loop between housing downturns, widespread financial deleveraging, and weakening confidence would help avoid a deeper downturn. This may require policy actions that impact the underlying markets directly.
The systemic reach of the global crisis underscores the need for global action on a comprehensive and coherent basis.
In financial markets, notwithstanding bold policy actions announced thus far, conditions remain exceptionally volatile and uncertain. Modest declines in interbank spreads, along with sharp falls in bank CDS spreads, suggest some tentative improvement in market sentiment. Solvency concerns have eased in light of the commitment to use public funds to recapitalize financial institutions, but money market funds continue to face large redemptions.
· And while liquidity strains have eased somewhat, they remain acute. Spreads remain at elevated levels, while exceptional volatility and uncertainty is keeping liquidity preference and risk aversion at elevated levels.
Moreover, the financial crisis has spread rapidly to emerging economies; in effect, we have moved swiftly from talk about "decoupling" to a situation where these economies are at substantial risk.
· As discussed in our latest Global Financial Stability Report, published earlier this month, emerging markets-as an asset class-are coming under increasing strains [shown in orange and red in the chart].
· In particular, intensified financial deleveraging is having a global reach, including to emerging economies. More intense capital account pressures, in turn, could seriously harm growth in these economies.
Emerging equity markets already have absorbed greater losses than mature markets, reflecting investors' flight to safety in the face of high uncertainty and risk aversion. Anticipating a significant growth slowdown, emerging equity markets have declined around 50 percent year-to-date.
· Moreover, financial flows are moderating. Pressure on banks in advanced economies-including even those receiving public capital injections and therefore subject to taxpayer oversight-could curtail lending in foreign markets; banks and firms in emerging economies that rely on global wholesale funding markets appear to be facing significant distress and rollover risks; hedge funds and other institutional investors under pressure to unwind positions as a result of tighter financing constraints and redemptions are undermining market liquidity and asset prices more broadly.
Under current strained global financial conditions, the risk of sudden interruptions (or reversals) in capital flows has risen appreciably.
· Countries with large external financing needs and highly levered financial systems face more intense strains in both credit and equity markets. This underscores their more limited room for maneuver in dealing with spillovers from financial and economic stress in advanced economies. Especially vulnerable in this regard are countries where households have contracted large foreign currency denominated loans.
· For the IMF, the current epidemic of spreading financial market strains reflects a challenge that we have faced many times before in many different guises. What is novel are the scale, scope and complexity of the current difficulties.
Our earlier experience warns that sudden stops in capital flows potentially can transform a liquidity shock into a solvency crisis. The needed remedial action - including helping to minimize the risk of a sudden stop, and/or standing ready to compensate for one - is a key IMF responsibility.
We all know more or less how we got to this point - even if the recognition was clear mainly in hindsight. Simply put, the globalizing financial system built up too much risk and too much leverage.
· At the IMF, we have drawn two broad lessons from this experience: First, it seems evident that what we have labeled the "perimeter of regulatory oversight and risk management" was drawn too narrowly. Thus, risks remained out of sight that should have been front and center. The second broad lesson is that regulation should incorporate macro-prudential considerations. In other words, regulation and supervision have focused on instruments and institutions, while remaining more or less oblivious to cyclical and other macroeconomic considerations
Incorporating both these considerations -- the perimeter of regulation, and macro-prudential aspects - will not be either quick or easy. Nonetheless, they will be steps in the right direction.
The immediate imperative for policies is to restore confidence in the financial system. IMF experience indicates that successful efforts typically incorporate three basic aspects: Preserving short-term liquidity, removing damaged assets from bank balance sheets, and recapitalizing banks.
· In advanced economies, bold financial measures announced earlier this month will need to be implemented effectively and quickly.
o Bank recapitalization should proceed swiftly; central bank liquidity support should continue to be provided generously; and comprehensive approaches should be pursued to deal with distressed assets in the financial sector.
· More broadly, policies need to decisively contain both financial disruptions and the possible growth implications, which will include reliance on traditional macroeconomic tools. With the global slowdown undermining commodity prices, the scope for monetary policy to support economic activity has increased, particularly in advanced economies that until recently have been dealing with containing inflation risks.
o Fiscal measures are being used more comprehensively to address solvency issues in systemically important financial institutions, to purchase distressed assets, and to recapitalize the system. At the same time, further support to aggregate demand may be needed, given the loss of private sector confidence.
Policy requirements may also require greater multilateral efforts-inclusive of emerging economies.
· The policy measures adopted by advanced economies may impart unintended effects-notably, since financial institutions in emerging economies in general are not covered under the umbrella of the liquidity operations in advanced economies. Also, domestic banks in emerging economies do not necessarily have the same level of protection through deposit guarantees and such measures as public capital injections. Thus, they may feel pressured to put in place their own programs, even where the resources needed to create credible policies of this nature may not be available.
· In emerging economies, policy actions to deal with sudden interruptions (or reversals) of capital flows will be needed. Of course, in many cases the improvement in monetary, fiscal and structural policies in recent years represents a important protection, as has the build-up in international reserves. Nonetheless, these may not offer complete protection.
o Liquidity support needs to include the corporate sector in countries where funding markets are shrinking. Countries with large reserve buffers could provide foreign currency liquidity as needed, if acute dollar shortages of is affecting firms' ability to operate.
o Emerging economies may also need to consider traditional macroeconomic policies to deal with a shortfall in financing and growth.
The Fund, for its part, is moving quickly and playing an active role to help emerging economies battered by the financial crisis and by the sharp slowdown in advanced economies
· The Fund stands ready to disburse more than $200 billion of loanable funds and can draw on additional resources through standing borrowing arrangements with groups of IMF member countries. As you know, we are currently in program negotiations with several members.
· Since halting economic and financial crises requires timely measures, the Fund is actively considering the launch of a new short-term liquidity lending facility to address problems of fundamentally sound countries temporarily exposed to funding pressures.
Looking past the immediate challenges, a concerted effort will be needed to build a more resilient and efficient financial system. In addition to the two broad areas I mentioned already, there is a need to strengthen global early warning systems, in order to mitigate future risks.
In conclusion, these are very uncertain times and the risks to the global economy are large. But taking a comprehensive and collaborative approach globally-across the full range of policy instruments that we have at our disposal, I am confident that the worst can (and will) be avoided and that a more resilient and sounder financial system will eventually emerge. But the hard work lies just before us, and all will need to do our part."
"I would like to thank Tim Ryan and his SIFMA colleagues for inviting me here today. It is a pleasure and an honor to have the opportunity to address this distinguished audience, and to share the podium with Under Secretary Ryan.
In discussing global prospects and policies this morning, I will focus on two key themes:
First, to state the obvious, these are very turbulent and uncertain times for the global economy. The world economy is entering a major slowdown, driven by the worst financial crisis in 75 years. As we all know, the current challenges are unprecedented in many important ways. As a result, visibility is unusually imperfect with respect to global economic prospects. Many plausible voices today are predicting dramatic - and, in some cases, dire - outcomes. Regardless, developments continue to evolve rapidly, especially with respect to conditions facing emerging economies. For our part, my IMF colleagues and I are paying close attention to the latest results, and doing our best to anticipate future challenges.
Second, these very difficult financial and economic circumstances call for timely, decisive and cooperative action. Given the global and systemic nature of the current crisis, policy responses need to be scaled commensurately. Our double mantra is straightforward: Global problems call for global solutions; systemic challenges require a systemic response. Increasingly, policymakers around the world share these basic tenets. Already, many unprecedented measures have been announced, and they need to be implemented quickly. Nonetheless, there is scope for further action-particularly with respect to guarding emerging economies from adverse external developments.
I will begin with a very brief overview of the global outlook.
The global economy is in a major slowdown, and there is a risk that it could turn into an outright downturn. Global growth is slowing sharply. Already in this year's first half, growth had slowed to 3½ percent (annualized), down from the 5 percent annual pace sustained over the four previous years.
a. Advanced economies are contracting at end-2008. Advanced economy growth slowed to a standstill during this year's first half. Momentum subsequently has been falling, with leading indicators already dropping to levels last seen during 2001-2002. Indeed, the U.S. economy has slowed sharply and recession risks are looming, while activity in the euro area and Japan had weakened earlier.
b. Increasingly, emerging and developing economies are feeling the impact of the global financial crisis, and their growth is decelerating rapidly. The confluence of a decline in external demand, receding commodities prices, and a sharp moderation in capital flows is likely to dampen activity notably in the coming quarters.
In sum, there is ample justification for pessimism: Global prospects remain highly uncertain and risks of a global recession loom large.
Nonetheless, my IMF colleagues and I are optimistic that a decisive, comprehensive and coherent policy response will be able to truncate the downside risks to the global economy. The key is to focus on dealing with the underlying sources of the weakness, while ameliorating the damage that these underlying factors are creating.
As is widely recognized, the underlying loci of global economic weakness stems from asset price deflation - especially in housing and other real estate markets. Not surprisingly, asset price deflation has been hard on financial markets, creating concentric circles of crisis that have propagated globally at a pace that by and large has taken market participants and policymakers by surprise. How well macroeconomic and financial policies jointly respond to containing the disruption will be telling in determining the global economy's near-term outlook.
There are two key risks to the outlook; One is that asset values - especially housing - will substantially undershoot reasonable long-term levels. The second is that financial market dysfunction will produce reinforcing rounds of real economic distress, especially in emerging economies.
In many countries' housing markets, the apparent boom-time overshooting in valuations already has damaged financial markets and the real economy, but an equally-scaled undershooting would compound the damage.
· Housing-related conditions are weak -- and weakening -- in the United States and several other advanced economies. In the United States, housing activity and prices continue to decline, though the inventory overhang is beginning to moderate. At the same time, however, foreclosures continue to rise, amid a weakening labor market. Rather than finding a floor, as we expect will occur in the coming year, there is a risk of deeper and more prolonged housing correction in the United States. In Europe, the housing correction began later and may have some ways to go. Of course, asset values in many emerging market economies increased in recent years at a faster pace even than in advanced economies, creating obvious risks.
· Avoiding damaging undershooting is justification for a strong policy response. Short-circuiting an adverse feedback loop between housing downturns, widespread financial deleveraging, and weakening confidence would help avoid a deeper downturn. This may require policy actions that impact the underlying markets directly.
The systemic reach of the global crisis underscores the need for global action on a comprehensive and coherent basis.
In financial markets, notwithstanding bold policy actions announced thus far, conditions remain exceptionally volatile and uncertain. Modest declines in interbank spreads, along with sharp falls in bank CDS spreads, suggest some tentative improvement in market sentiment. Solvency concerns have eased in light of the commitment to use public funds to recapitalize financial institutions, but money market funds continue to face large redemptions.
· And while liquidity strains have eased somewhat, they remain acute. Spreads remain at elevated levels, while exceptional volatility and uncertainty is keeping liquidity preference and risk aversion at elevated levels.
Moreover, the financial crisis has spread rapidly to emerging economies; in effect, we have moved swiftly from talk about "decoupling" to a situation where these economies are at substantial risk.
· As discussed in our latest Global Financial Stability Report, published earlier this month, emerging markets-as an asset class-are coming under increasing strains [shown in orange and red in the chart].
· In particular, intensified financial deleveraging is having a global reach, including to emerging economies. More intense capital account pressures, in turn, could seriously harm growth in these economies.
Emerging equity markets already have absorbed greater losses than mature markets, reflecting investors' flight to safety in the face of high uncertainty and risk aversion. Anticipating a significant growth slowdown, emerging equity markets have declined around 50 percent year-to-date.
· Moreover, financial flows are moderating. Pressure on banks in advanced economies-including even those receiving public capital injections and therefore subject to taxpayer oversight-could curtail lending in foreign markets; banks and firms in emerging economies that rely on global wholesale funding markets appear to be facing significant distress and rollover risks; hedge funds and other institutional investors under pressure to unwind positions as a result of tighter financing constraints and redemptions are undermining market liquidity and asset prices more broadly.
Under current strained global financial conditions, the risk of sudden interruptions (or reversals) in capital flows has risen appreciably.
· Countries with large external financing needs and highly levered financial systems face more intense strains in both credit and equity markets. This underscores their more limited room for maneuver in dealing with spillovers from financial and economic stress in advanced economies. Especially vulnerable in this regard are countries where households have contracted large foreign currency denominated loans.
· For the IMF, the current epidemic of spreading financial market strains reflects a challenge that we have faced many times before in many different guises. What is novel are the scale, scope and complexity of the current difficulties.
Our earlier experience warns that sudden stops in capital flows potentially can transform a liquidity shock into a solvency crisis. The needed remedial action - including helping to minimize the risk of a sudden stop, and/or standing ready to compensate for one - is a key IMF responsibility.
We all know more or less how we got to this point - even if the recognition was clear mainly in hindsight. Simply put, the globalizing financial system built up too much risk and too much leverage.
· At the IMF, we have drawn two broad lessons from this experience: First, it seems evident that what we have labeled the "perimeter of regulatory oversight and risk management" was drawn too narrowly. Thus, risks remained out of sight that should have been front and center. The second broad lesson is that regulation should incorporate macro-prudential considerations. In other words, regulation and supervision have focused on instruments and institutions, while remaining more or less oblivious to cyclical and other macroeconomic considerations
Incorporating both these considerations -- the perimeter of regulation, and macro-prudential aspects - will not be either quick or easy. Nonetheless, they will be steps in the right direction.
The immediate imperative for policies is to restore confidence in the financial system. IMF experience indicates that successful efforts typically incorporate three basic aspects: Preserving short-term liquidity, removing damaged assets from bank balance sheets, and recapitalizing banks.
· In advanced economies, bold financial measures announced earlier this month will need to be implemented effectively and quickly.
o Bank recapitalization should proceed swiftly; central bank liquidity support should continue to be provided generously; and comprehensive approaches should be pursued to deal with distressed assets in the financial sector.
· More broadly, policies need to decisively contain both financial disruptions and the possible growth implications, which will include reliance on traditional macroeconomic tools. With the global slowdown undermining commodity prices, the scope for monetary policy to support economic activity has increased, particularly in advanced economies that until recently have been dealing with containing inflation risks.
o Fiscal measures are being used more comprehensively to address solvency issues in systemically important financial institutions, to purchase distressed assets, and to recapitalize the system. At the same time, further support to aggregate demand may be needed, given the loss of private sector confidence.
Policy requirements may also require greater multilateral efforts-inclusive of emerging economies.
· The policy measures adopted by advanced economies may impart unintended effects-notably, since financial institutions in emerging economies in general are not covered under the umbrella of the liquidity operations in advanced economies. Also, domestic banks in emerging economies do not necessarily have the same level of protection through deposit guarantees and such measures as public capital injections. Thus, they may feel pressured to put in place their own programs, even where the resources needed to create credible policies of this nature may not be available.
· In emerging economies, policy actions to deal with sudden interruptions (or reversals) of capital flows will be needed. Of course, in many cases the improvement in monetary, fiscal and structural policies in recent years represents a important protection, as has the build-up in international reserves. Nonetheless, these may not offer complete protection.
o Liquidity support needs to include the corporate sector in countries where funding markets are shrinking. Countries with large reserve buffers could provide foreign currency liquidity as needed, if acute dollar shortages of is affecting firms' ability to operate.
o Emerging economies may also need to consider traditional macroeconomic policies to deal with a shortfall in financing and growth.
The Fund, for its part, is moving quickly and playing an active role to help emerging economies battered by the financial crisis and by the sharp slowdown in advanced economies
· The Fund stands ready to disburse more than $200 billion of loanable funds and can draw on additional resources through standing borrowing arrangements with groups of IMF member countries. As you know, we are currently in program negotiations with several members.
· Since halting economic and financial crises requires timely measures, the Fund is actively considering the launch of a new short-term liquidity lending facility to address problems of fundamentally sound countries temporarily exposed to funding pressures.
Looking past the immediate challenges, a concerted effort will be needed to build a more resilient and efficient financial system. In addition to the two broad areas I mentioned already, there is a need to strengthen global early warning systems, in order to mitigate future risks.
In conclusion, these are very uncertain times and the risks to the global economy are large. But taking a comprehensive and collaborative approach globally-across the full range of policy instruments that we have at our disposal, I am confident that the worst can (and will) be avoided and that a more resilient and sounder financial system will eventually emerge. But the hard work lies just before us, and all will need to do our part."
The IMF has funds available for financial crisis
The International Monetary Fund (IMF) has announced that it has about US$200 billion available for immediate lending and can draw on an additional $50 billion in additional resources if needed to assist countries that have suffered the effects of the global financial crisis.
The IMF is ready to process requests for assistance under fast-track emergency financing procedures.
Any loans will have conditions attached to it, but those conditions are focused on resolving core macroeconomic problems only.
Provided below is an excerpt from the IMF website :
"What is a crisis?
Crises take different forms. They can be characterized by a large decline in consumer demand and investment by firms, higher unemployment, and a lower standard of living. They are often accompanied by heightened uncertainty in financial markets and declines in the prices of stocks, bonds and, quite frequently, the value of the domestic currency. Crises can originate in or affect the financial sector, and can lead to difficulties in banks and the payments system, causing damage to economic activity as well. A very severe crisis (economic and/or financial) could lead to recession, debt defaults, and what is known as a sudden stop: a deep recession and a reversal in the flow of international capital.
Crises in emerging markets can be caused by several factors. External causes comprise a collapse of export prices, a drastic increase in import prices, the drying up of foreign investment and capital flows, a large depreciation or devaluation of the currency of a close trading partner, a retrenchment of local activities of international banks, or a sharp increase in interest rates in world markets.
Domestic causes include excessive monetary creation, unsustainable fiscal deficits, an overvalued domestic currency, political instability, and natural disasters. External shocks can have a multiplying effect on vulnerable countries, which tend to have relatively high levels of private or public debt, weak financial systems, and a history of instability and inappropriate policies.
The factors mentioned above often coincide, magnifying the depth and breath of a crisis. Different sectors in the economy tend to fare differently depending on the sources of the crisis and underlying vulnerabilities. All crises are, however, marked by a sudden and largely unexpected worsening of perceptions about a country's prospects, very often including the ability of the government, banks, or corporations to honor their obligations. The ensuing loss of confidence precipitates deleveraging of financial contracts and a collapse of asset prices.
Role of the IMF
Arresting economic and financial crises normally requires a timely package of decisive measures adapted to the country's circumstances. The implementation of this package is aimed at restoring confidence by improving expectations about the country's prospects. It also requires isolating the most significant problems and dealing with them without crowding the program with non-essential measures. In a crisis case, it is critical to focus only on those measures that are essential to restore stability-the conditions for recovery should be circumscribed to the source of the problem but powerful enough to ensure a country's return to economic and financial stability.
The IMF provides policy advice and financial support upon request by its members. An IMF staff team travels to the country to assess the sectors affected (for instance, the government, financial institutions, the corporate sector) and discuss with the country authorities the appropriate policy response. The discussions include estimating the future size of the country's financing needs (that cannot be met by the private sector or other sources of official assistance). Once understandings has been reached on a package, a recommendation is made to the IMF's Executive Board to endorse the program and disburse the loan. This process can be expedited under the IMF's "emergency financing procedures"."
Thursday, October 23, 2008
Comments by Alan Greenspan on the Global Financial Crisis
Provided below is an article reporting on Alan Greenspan's comments on the global financial crisis that is hitting most of the large economies today. Greenspan was Chairman of the Federal Reserve Bank in the USA for more than a decade and retired recently.
"Financial crisis is 'once in a century credit tsunami', Greenspan says as he talks of his shock at state of economy", by David Gardner, and taken from www.dailymail.co.uk
'Once in a century credit tsunami': Alan Greenspan describing the financial crisis to Congress in Washington today
Former U.S. Federal Reserve chairman Alan Greenspan has admitted that he was blindsided by the 'once-in-a-century credit tsunami' that has wreaked havoc on the world's economies.
The man once hailed as one of the most accomplished central bankers in America's history confessed he was in 'a state of shocked disbelief'.
Mr Greenspan, who headed the Federal Reserve for more than 18 years, said the financial crisis 'turned out to be much broader than anything I could have imagined'.
And he warned the economic meltdown will drive millions of people out of work.
'Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment,' Mr Greenspan told congressional lawmakers.
'Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity.'
The humbled former Fed chief, who has written best-selling books on the economy, has been blasted by critics who claim he left interest rates too low for too long, spurring an unsustainable housing boom, and failed to crackdown on sub prime mortgages being doled out to home-buyers who didn't satisfy conventional borrowing requirements.
It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.
Fighting to restore his battered reputation, Mr Greenspan blamed the sub prime collapse on over-eager investors who did not take into account the threats that would be posed once home prices stopped surging upward.
'It was the failure to properly price such risky assets that precipitated the crisis,' he added.
Mr Greenspan was hauled in front of the House of Representatives Oversight Committee along with former U.S. Treasury Secretary John Snow and Securities and Exchange Commission chairman Christopher Cox as Congress sought to discover how much regulatory failings contributed to the crisis.
'The list of mistakes is long and the cost to taxpayers is staggering,' said committee chairman Henry Waxman.
'Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became that government regulation is wrong. The market is infallible.
'For too long, the prevailing attitude in Washington has been that the market always knows best.
'The Federal Reserve had the authority to stop the irresponsible lending practices, but its long-time chairman, Alan Greenspan, rejected pleas that he intervene,' he added.
Mr Waxman, a Democrat, asked point-blank whether Mr Greenspan agreed he was wrong in failing to intervene in the markets when he was in charge of the U.S. central bank.
Mr Greenspan has long argued that regulatory intrusion slows the economy.
'My question is simple: Were you wrong?' asked Mr Waxman.
Mr Greenspan said he was 'partially wrong' in the case of credit default swaps, complex trading tools meant to act as insurance for bond buyers against default.
'I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders and the equity,' he admitted.
It was the closest he got to accepting some blame for the financial calamity that has reverberated around the world.
Mr Greenspan said stabilisation of home prices is vital to revive the paralysed economy, but he said that was not likely to occur for 'many months in the future.'
When the housing market finally recovers, then 'the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards re-engagement with risk,' he added.
Until that happens, he said the government is correct to move forward aggressively with efforts to support the financial sector.
He called the £400billion package approved by Congress a fortnight ago 'adequate to serve the need' and claimed its impact was already being felt in the markets.
Wall Street in New York closed almost six per cent down last night but rallied on opening and was up more than 200 points in early trading.
There were huge losses in Asia overnight but British shares in London appeared more resilient after the pound dived and £4billion was wiped off stocks yesterday.
The FTSE-100 opened up 0.5 per cent but swung between positive and negative territory all day. Rising U.S. shares pushed it back to be one per cent up at the close.
"Financial crisis is 'once in a century credit tsunami', Greenspan says as he talks of his shock at state of economy", by David Gardner, and taken from www.dailymail.co.uk
'Once in a century credit tsunami': Alan Greenspan describing the financial crisis to Congress in Washington today
Former U.S. Federal Reserve chairman Alan Greenspan has admitted that he was blindsided by the 'once-in-a-century credit tsunami' that has wreaked havoc on the world's economies.
The man once hailed as one of the most accomplished central bankers in America's history confessed he was in 'a state of shocked disbelief'.
Mr Greenspan, who headed the Federal Reserve for more than 18 years, said the financial crisis 'turned out to be much broader than anything I could have imagined'.
And he warned the economic meltdown will drive millions of people out of work.
'Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment,' Mr Greenspan told congressional lawmakers.
'Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity.'
The humbled former Fed chief, who has written best-selling books on the economy, has been blasted by critics who claim he left interest rates too low for too long, spurring an unsustainable housing boom, and failed to crackdown on sub prime mortgages being doled out to home-buyers who didn't satisfy conventional borrowing requirements.
It was the collapse of these mortgages and rising defaults a year ago that triggered the current crisis.
Fighting to restore his battered reputation, Mr Greenspan blamed the sub prime collapse on over-eager investors who did not take into account the threats that would be posed once home prices stopped surging upward.
'It was the failure to properly price such risky assets that precipitated the crisis,' he added.
Mr Greenspan was hauled in front of the House of Representatives Oversight Committee along with former U.S. Treasury Secretary John Snow and Securities and Exchange Commission chairman Christopher Cox as Congress sought to discover how much regulatory failings contributed to the crisis.
'The list of mistakes is long and the cost to taxpayers is staggering,' said committee chairman Henry Waxman.
'Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became that government regulation is wrong. The market is infallible.
'For too long, the prevailing attitude in Washington has been that the market always knows best.
'The Federal Reserve had the authority to stop the irresponsible lending practices, but its long-time chairman, Alan Greenspan, rejected pleas that he intervene,' he added.
Mr Waxman, a Democrat, asked point-blank whether Mr Greenspan agreed he was wrong in failing to intervene in the markets when he was in charge of the U.S. central bank.
Mr Greenspan has long argued that regulatory intrusion slows the economy.
'My question is simple: Were you wrong?' asked Mr Waxman.
Mr Greenspan said he was 'partially wrong' in the case of credit default swaps, complex trading tools meant to act as insurance for bond buyers against default.
'I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders and the equity,' he admitted.
It was the closest he got to accepting some blame for the financial calamity that has reverberated around the world.
Mr Greenspan said stabilisation of home prices is vital to revive the paralysed economy, but he said that was not likely to occur for 'many months in the future.'
When the housing market finally recovers, then 'the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards re-engagement with risk,' he added.
Until that happens, he said the government is correct to move forward aggressively with efforts to support the financial sector.
He called the £400billion package approved by Congress a fortnight ago 'adequate to serve the need' and claimed its impact was already being felt in the markets.
Wall Street in New York closed almost six per cent down last night but rallied on opening and was up more than 200 points in early trading.
There were huge losses in Asia overnight but British shares in London appeared more resilient after the pound dived and £4billion was wiped off stocks yesterday.
The FTSE-100 opened up 0.5 per cent but swung between positive and negative territory all day. Rising U.S. shares pushed it back to be one per cent up at the close.
However, the losses on the Dow Jones last night sparked huge sell-offs across the globe:
- Wall Street closed down almost six per cent amid persistent worries about the state of the U.S. economy but climbed back in early trading this afternoon
- Japan's Nikkei fell by as much as 7.59 per cent at one stage due to fears about its shrinking foreign exports before rallying to close 2.5 per cent down
- In Hong Kong, the Hang Seng closed down more than 500 points or 3.5 per cent after shares slumped to their lowest level since April 2005
- South Korea's benchmark index closed down a massive 7.4 per cent. There were also falls in India, Australia, New Zealand and Russia
- In Europe, Germany's Dax was in the red from early trading. By late afternoon, the French Cac-40 has also fallen into negative territory, down 1.7 per cent.
Finland's finance minister Jyrki Katainen became the latest leader to declare recession was around the corner, estimating it may last up to three years in Europe.
'Recession is very close in some particular countries, maybe in all the European countries,' he told Bloomberg.
'I don't know how long a recession or down-cycle we will face, but maybe it will take some two or three years. Even if we can calm the international turmoil, slower economic development will follow.'
Leaders from 43 countries across Asia and Europe will meet in China tomorrow for a two-day summit to discuss a co-ordinated response to the economic and financial problems.
EU Commission President Jose Barroso, already in Beijing for the meeting, said today: 'We are living in unprecedented times and we need unprecedented levels of global coordination. It's very simple; we swim together, or we sink together.'
Mr Brown admitted for the first time yesterday that the UK was sliding into recession, a statement that wrecks his claims to have ended 'boom and bust'.
His words during fractious House of Commons exchanges came hours after Bank of England governor Mervyn King also used the 'R' word for the first time.
A technical recession is defined as two straight quarters of economic contraction. The last time this has happened in Britain was under John Major in the early 1990s.
Mr Brown has for years claimed to have put an end to Britain's record of explosive bursts of growth followed by painful economic slumps.
He argued that reforms such as Bank of England independence and the implementation of public borrowing rules had put the country on a path to long-term stability.
But, the worst banking crisis since World War One has propelled the country into a period of extraordinary economic danger.
Government figures due out tomorrow are expected to show that between July and September the economy shrank for the first time since 1992.
And Mr Brown is being forced to tear up his fiscal rules as he attempts to spend his way out of the downturn.
The Prime Minister struggled to defend his economic record in Commons clashes with David Cameron.
The Tory leader three times challenged Mr Brown to withdraw his previous claims to have abolished 'boom and bust', but the Prime Minister refused.
Mr Brown said: 'The Governor of the Bank of England said last night that not since the First World War has the international banking system been so close to collapse, and I agree with him.'
He went on: 'Having taken action on the banking system, we must now take action on the global financial recession which is likely to cause recession in America, France, Italy, Germany, Japan and - because no country can insulate itself from it - Britain too.'
Those last words were greeted by Tory cries of 'at last'.
Mr Cameron said: 'Anyone listening to this exchange will know that he claimed the credit in the boom, so why won't he take responsibility in the bust?
'Let me ask him one more time, it's a simple yes or no, have you abolished boom and bust? Yes or no?'
Mr Brown responded by pointing out that interest rates have not hit 15 per cent, as they did under Mr Major.
Observers claimed yesterday's exchanges were the first time Mr Cameron has bested Mr Brown in debate on his favourite turf - the economy.
Many economists say the Bank of England is now likely to cut base rate by at least a half point at next month's meeting.
This would be the first back-to-back half-point reductions since the Bank gained independence from the Treasury in 1997.
Mr Brown and other world leaders will meet on November 15 in Washington to address the global financial crisis.
It is the first in a series of summits to address what economists predict could be a long and deep downturn."
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