the global economy in crisis: implications for south africa national treasury october 2008
TRANSCRIPT
Overview
• The global economy in crisis
• Impact of the international environment on South Africa
• Economic scenarios
• What is to be done?
Crisis unleashed in August 2007 with sub-prime losses
August • Share prices fall as sub-prime exposure becomes clearer
• BNP Paribas suspends three funds with €2 bn exposure
• Global Central Banks in coordinated liquidity injection: Fed = US$43
billion, ECB = US$214bn, BoJ = US$8.4bn
September • Run on UK bank, Northern rock - £2bn withdrawn in 3 days.
• BoE offers additional reserves
• Mark-to-market losses of $200bn predicted on US mortgage-related
securities
October
/ November
• Merrill Lynch loss of US$5.5bn, later revised to US$8.4
• Write downs announced at UBS, Deutsche Bank, Merrill Lynch, Nomura
and Citigroup.
December • Fed, ECB, BoE, Bank of Canada and Swiss National bank announce
coordinated action to address short term funding markets and establish
temporary currency swap arrangements.
• Sovereign Wealth Funds provide funding for UBS, Morgan Stanley and
Merrill Lynch.
…and steadily deepens through 2008
January • Investment banks announce further losses• Largest one day losses on stock markets since 9/11• US Fed cuts rates by 125bps in two steps over nine days
March • More coordinated interventions by CBs• Bear Stearns acquired by JP Morgan Chase for $2 a share
September • Fannie and Freddie taken into ‘conservatorship’ by US govt.• Lehman Brothers files for bankruptcy• Remaining investment banks apply to become bank holding companies• US Fed loans $85bn to AIG
October • DJIA loses 22.1% in one week and highest day’s volatility in history • World central banks make coordinated interest rate cuts• G7 agrees on five point plan of action, including capital injections,
provision of liquidity and guarantees of bank deposits • G20 Finance Ministers and Central Bank governors called to extra-
ordinary meeting, addressed by President Bush• G7 interventions precipitate stronger flight of capital away from emerging
markets
Financial crisis turning to real economy crisis
• IMF estimates that US losses will amount to $1.4 trillion
• Financial market crisis affecting several other sectors in the real economy as credit becomes harder to obtain
• Danger signs:
• In the quarter to September 2007, Volvo sold about 42 000 trucks. In the same period this year, they sold just 175
• House sales in the UK have fallen by close to 70 per cent from a year ago
• Costs of dry bulk charter rates plunged 71.9 per cent in October
• The General Motor’s share price has fallen 88% this year, to US$3, its lowest since 1946
• GM, Chrysler and Ford have requested a US$ 25 billion bailout
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… and deteriorating economic growth prospects
• Unemployment in the US and the EU has risen to 6.5% and 7.5%
• Industrial production in the U.S. fell by 2.8% (m-o-m) in Sept
• Industrial production in China slowed to its lowest level in a decade
• Growth in the US slowed to -0.3% in the 3rd quarter
• Germany and the UK formally in recession
• World output to fall from 4.8% in 2007 to 2.5% in 2008 to 2.4% in 2009
• Advanced economies GDP growth at 0.3 in 2008 and 2009
• African growth expected at 5.2% for 2008 and 4.7% for 2009
• All growth in 2009 set to come from emerging markets
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Policy responses have been unprecedented
• Initial responses dealt with preventing financial markets from seizing up
Governments have already committed to $4 trillion to support the financial system
Individual country actions may be optimal for that country, but harmful from a global perspective
Guarantees of bank deposits can cause withdrawals on banks in other countries
Impact of G7 decisions impacts on emergent countries (eg currency depreciation)
– Chinese package aimed at investment in infrastructure
– Globally coordinated interest rate cuts
Extensive currency swap arrangements between large central banks and the US Fed
• Different fiscal stimulus packages in different countries
– US and UK packages aimed at reducing tax rates and supporting social security
– Some countries looking at supporting key sectors
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Resulting in rapidly falling commodity prices
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160Platinum Price (lhs)Oil Price (rhs)
Platinum and oil prices
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…and major capital outflows in the near term hitting share prices
Global equity markets
-31.0 -31.4 -33.3 -33.8-37.7 -37.9 -40.0 -40.7
-50.4 -51.5 -52.7 -52.8
-65.0-70
-60
-50
-40
-30
-20
-10
0
% c
hang
e si
nce
1Jan
200
8
1010
… resulting in large exchange rate movements worldwide
• Reduced risk appetite creating flight to the dollar and the yen
Exchange rates vs. the dollar and rand/euro and rand/sterling
14.0
-4.5
-10.2
-14.0 -15.0 -16.3-18.5 -19.2 -19.9
-22.4 -23.2-25.3 -25.7
-27.2-29.8
-33.8
-40
-30
-20
-10
0
10
20
% c
han
ge
sin
ce 1
Jan
11
China’s contribution to world growth still high
• On average, China has contributed about a fifth of world output growth
• Growth in Chinese imports has started to moderate, putting downward
pressure on commodity prices
• Chinese GDP growth has also moderated to 9.0% in 3rd quarter 2008
from 11.9% in 2007 and 11.6% in 2006
• The IMF forecasts Chinese growth of 8.3% in 2009.
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… cools demand for commodities and results in rapidly falling prices
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Inde
x Ja
n 20
02=1
00
Gold
Crude
Platinum
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… even as income accruing to South African exporters remains relatively high for now
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105
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115
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125 Terms of trade
• Terms of trade refers to the ratio of our export prices to our import prices
• If it is going up, we earn relatively more from trade
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… and inflation is likely to fall resulting in lower interest rates over time
CPIX inflation & its components
Second round effects & electricity raise core inflation
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Pe
rce
nt
(y-o
-y)
CPIX excluding food and petrolCPIX excluding petrolCPIXUpper target limitCPIX excluding food
Contributions to annual CPIX inflationJul-08 Aug-08 Sep-08
Food 5.1 5.3 5.0Transport 3.2 3.1 2.7Other 4.7 5.2 5.3Total 13.0 13.6 13.0
1.1 %pts due to electricity
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…as household debt levels continue to moderate
Household debt and service costs
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% o
f dis
posa
ble
inco
me
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% o
f dis
posa
ble
inco
me
Household debt Household interest payments (RHS)
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… slower growth would lower the current account deficit. Policy aimed at maintaining investment in future and sustaining financing.
Gross savings & investment
Gross saving & investment
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15
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30
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pe
r c
en
t o
f G
DP
GFCF Gross saving
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The critical question for SA is… where should we be when the global cycle turns?
• Financial crisis giving way to real economy slowdown… for some countries =
lending & borrowing seizing-up
• Effects on South Africa:
– ▼ commodity prices & ▼ foreign demand for exports = ▼ GDP
– ▼ food and oil prices = ▼ inflation
– But as ▼ rand = ▲ inflation.
• Short-term adjustments on the demand side: Fiscal deficit supports consumption
& investment, even as both slow relative to recent years.
• In the long-term, need to be more productive, more export-oriented, with higher
saving and investment, and with more rapid growth at a sustainable current
account… How do we get there?
GDP growth slowing with world growth… a gap emerging between what we need and what we are likely to achieve
-3
-2
-1
0
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% y
ear-
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-yea
r
SA growth (NT estimates)World growth 6% growth target
SA vs. world growth
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What is to be done? Monetary and fiscal options to sustain growth and macroeconomic stability
What we have done in recent years:
• Monetary policy focus on keeping inflation low over the long-term and
sustain capital inflows.
• Fiscal policy to raise saving in the economy & future economic growth.
• Fiscal space created to address prolonged slowdown in growth.
Where we are heading:
• With growth slowing now, more difficult to maintain positive saving rate >
focus on public investment.
• A prudent fiscal deficit to offset weakness in exports and keep long-term
interest rates low.
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…and sustainably boost exports and investment
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5
10
15
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25
30
35
per
cent
of G
DP
Exports
Investments
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Sustaining domestic economic growth in the near-term and growing the economy for future generations
• Use fiscal policy to offset short-term economic slowdown while maintaining
positive saving rate.
• Focus on government contribution to reducing costs of economic activity
and expanding markets with infrastructure.
• Monetary policy to achieve low and stable inflation and attract foreign
savings.
• Exchange rate flexibility allows SA to re-price lower to keep in line with other
emerging market economies and maintain competitiveness.
• Global economic weakness places renewed emphasis on promoting
productivity growth, domestic competitiveness, and efficiency gains…
implement growth recommendations.
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… and requires addressing the international economic environment with a renewed commitment to multilateralism and mutual accountability
• Monetary policy support and fiscal measures, while maintaining fiscal
sustainability.
• Access to finance for emerging and developing economies including
through liquidity facilities and program support.
• Support of the development agenda by the World Bank and other
multilateral development banks (MDBs) and new facilities in the areas of
infrastructure and trade finance.
• Ensuring that the IMF, World Bank and other MDBs have sufficient
resources to continue playing their role in overcoming the crisis.
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Key Principles for Reform undertaken by G20
• Strengthening Transparency and Accountability
• Enhancing Sound Regulation
• Promoting Integrity in Financial Markets
• Reinforcing International Cooperation
• Reforming International Financial Institutions.
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G20 Action Plan to support Common Principles for National Plans
• Enlarging participation to emergent economies in Fin Stability Forum/Standard-Setting
institutions
– Reviewing and aligning global accounting standards
• Greater Co-operation between regulators
• Reviewing mandates, governance and resource requirements of the IFIs
• Agreement on the Doha Development Round moving forward
• National plans must
– Addressing pro-cyclical regulatory policy
– Strengthening transparency of credit derivatives markets and reducing their systemic risks
– Reviewing compensation practices
– Defining the scope of systemically important institutions and determining their appropriate
regulation or oversight
– Reviewing the mandates, governance, and resource requirements of the IFIs