It has wiped out the growth from most of the countries and pulled there economy back to pre-growth levels.
This had a tremendous impact on the $10 trillion mortgage market creating a state of unrest. As a result US government backed financial giants like Fannie Mae and Freddie Mac who held about $5 trillion in mortgage securities saw the value of their assets dwindle.Between 2003 and 2007, the world saw an astounding economic boom which was growing at an annual rate of 7 percent. In mid 2006, with the housing bubble bursting, both housing and prices began a long period of contraction. Borrowers were unable to refinance loans leading to defaults. But the real question is where did all this liquidity cam from?After the dot com boom bust the stock market had become less attractive for small investors. With the help of reduced interest rates, homeowners also began taking on debts with the housing market heating up. 13 percent of buyers who were not first time owners and 42 percent of first time owners put no money down when they bought their homes.
This uncertainty started wreaking havoc in the stock exchanges in the US. The Dow Jones Industrial Average (DJIA) lost 778 points, which was the largest single-day loss in the history of the DJIA. Nearly 7 percent of the market’s value amounting to US$1.2 trillion vanished. This all happened in a single day. Other equity markets across the globe also took a severe beating
European countries like Portugal, Italy, Spain and Ireland were hit as the crisis started to seep into the Euro zone.
Germany, England and France alone came up with the plan of over 163 billion or $222 billion of bank liquidity as well as about 700 billion or $1 trillion of interbank loan guarantees.
This can be seen clearly from the last few visits of our PM requesting FODPs for funds and we all know that how much of it were of it were actually made available.However these effects were not as heavy as in other major economic centers and this was primarily due to the already existing weak links of the Pakistani domestic financial sectors with the financial markets on the international front. As per the rules of economics, direct and indirect impact on economies tends to be moderate in situations where the macroeconomic fundamentals are already weak at the time any such major crisis strikes.
The global financial crisis of 2008 - 2009 started seeping into the country, it resulted in drying up FDI, international loan prospects and any chances of privatization. Consequently investment rate in the Pakistan started to nose-dive as economic growth came to a near halt. Poverty levels in the country started to accelerate, there was decrease in employment opportunities and the national debt started to touch unprecedented heights. As a direct result of this, foreign exchange reserves dropped to a very low US $6.7 billion during October 2008. It is seen that the non-regular work force has suffered a greater drawback in the global recession. The most vulnerable workers in this respect are the causal, subcontract, temporary and overseas migrant labor as they qualify for far less severance pays and related benefit packages than the regular workers.The high and rising rate of inflation in the country in recent years has not been matched by any gains in real wages. This negative situation was further exacerbated by an escalation in income inequality during the high growth period (2003 - 2007).
The primary objective of foreign trade is to increase production and raise the standard of living of people of the country. It is important to economy because it leads to effective and better utilization of natural resources and contributes a great deal of well-being of the people involved in foreign trade. Pakistan’s foreign trade can be categorized by its trade deficit, because its exports comprises primarily of goods and raw materials. On the other hand, imports consist of capital goods, industrial goods, oil, luxury items, etc.
Over the past years, growth in Pakistan has been driven by private consumption on the back of cheap consumer financings which helped consumers to buy cars and other consumer durable goods. As interest rates have risen due to strict monetary tightening, consumer spending on durable items has contracted and this will hit the automobile and other consumer durable goods sectors. Similarly, the construction boom fueled partly by the cheap availability of bank financing has receded with adverse consequences for employment in such activities. Pakistan’s exports are highly concentrated in cotton textiles and the global recession may lead to significant layoffs in this sector.
Officially recorded remittances received by developing countries exceeded $250 billion in 2006. Remittances are assumed to play an important role in poverty reduction. They tend to increase when the home country’s economy slows, making it a particularly effective anti-poverty tool.
The workers become fearful of losing their jobs and at times even contemplate going back to their home country. In the face of this concern, they save as much as they can and remit whatever has been saved. This is partly due to the fact that the majority of migrant labor class, work in middle-eastern countries and these countries have not significantly retrenched migrants with the exception of Dubai. On the other hand, the growth in remittances may also be the result of returning migrants bringing back their accumulated savings. . In this case, however, one may expect a decline in future remittances.Another reason for this growth appears to be a switch in the motivation for remittances from consumption to investment: falling asset prices, rising interest rate differentials and a depreciation of the local currency have attracted investments from migrants.
Due to this reason, we saw a 1.14 percent drop in remittances during those years.
It helps in the economic development of the particular country where the investment is being made as it permits the transfer of technology, development of human resource, creation of new job opportunities which in turn contributes to a greater extent in the growth of a nation.
Between 2005 and 2006, the Pakistani economy was booming with a high GDP growth rate allowing Pakistan to attract FDI from all over the world. In 2007, the financial crisis started unfolding around the globe. As a result, and naturally, investors started tightening their hands. Hence from 2007 onwards we can see a declining trend in FDI inflows into Pakistan.
Such improvement also allows the ordinary saver to share in that growth. As part of the rapid development of a global securities industry, a wide range of developing countries including low income and highly indebted countries can expect to be able to attract a portion of the flows invested in foreign markets by investors from the world's major financial centers.
During 2005, the Pakistani economy was charging forward in full swing and the government needed funds to support this massive growth. As a result, the government started issuing debt securities which were happily welcomed by foreign investors, which continued until 2007. Apart from a rise in debt security subscriptions, there was even greater activity in the stock market. The investments in the stock market during 2006 and 2007 doubled, amounting to around $1.0 billion which was very significant. To many outside investors, the Karachi Stock Exchange (KSE) still remains an attractive proposition.a floor was installed on August 27, 2008 in order to prevent the market from further declining and also to give investors some time to think over their investment strategies and decision making. The market was at the level of 4,929 points when the floor was eventually removed on December 15, 2008. Although the KSE was floored, the buying and selling was still taking place with the help of ‘Off Market Transactions’ which resulted in a greater fall when the market resumed.By off market transactions we mean those transactions which are conducted either between two financial institutions or between two individual investors in which one investor offload’s his shares by selling it to another investor at a discount (because he needs cash either for payment or for personal use) during the period when the market is not active or in a functioning condition.Pakistan set a floor for stock prices on the benchmark exchange, moving to halt a plunge that wiped out about $36.9 billion of market value.
Although, it was observed that there was not much impact of the global financial crisis on the Pakistani economy, it did affect certain facts of the economy.It did not sustain any major ‘broken bones’, only a few minor ‘cuts and bruises’ which are expected in the face of a Global Financial Crisis.
Transcript of "My MBA Thesis - Final Presentation - Nov - 6 - 10"
Presentation of MBA ThesisPresented bySheikh Faizan Ahmed (0935117)Syed Anser Ahmed (0935121)AdvisorMs. Hilla Shahpur ManeckjiNo Broken Bones: How the PakistaniEconomy Warded Off the Paralyzing Effectsof the Global Financial Crisis
Problem StatementDid the Global Financial Crisis impact thePakistani economy? If it did, how bad was thesituation and what were the effects?
Rationale of the ResearchDomain Not much research has been done on this topic It is current and relevant
Justification The current Global Financial Crisis has been described asthe worst since the Great Depression of 1930s. Pakistan is identified as an emerging market and it wasthought by us that the analysis of the Global FinancialCrisis on the Pakistani Economy would show us itsreaction on an emerging market economy. Such an undertaking is well worth the time and effortespecially for students of Finance and people concernedabout the welfare of a society.
Critical Reviews The ongoing Global Financial Crisis 2008-2009 started inFebruary 2007 when reports of losses by large subprimelenders began to emerge. This had a tremendous impact on the $10 trillionmortgage market creating a state of unrest. Between 2003 and 2007, the world saw an astoundingeconomic boom. Where did all this liquidity actually come from? According to Jones and Ocampo (2009) exceptionalfinancing, high commodity prices and large remittancesplayed an important role in fueling the boom.
Contd….. The risk levels were not accurately assessed and whendefaults started to happen a sharp contraction in creditand bank lending occurred. This uncertainty started wreaking havoc in the stockexchanges in the US.The PakistaniScenarioInternationalArenaCriticalReview
International Arena While this was going on in the US, the core of thefinancial world outside the US was rocked inflicting heavydamages on the financial institutions and the markets ata global scale (IMF Report 2008). Outside of the USA, the Bank of China and France‟s BNPParibas were the first international institutions to declaresubstantial losses from subprime-related securities. European countries were also standing soon in the line ofthe affectees.
Contd….. To arrest the situation the European Central Bankinjected €94.8 billion into the system. The following day these overnight repurchaseagreements were renewed and a further €61.1 billionwas injected. France, Germany and the United Kingdom followedthem.
The Pakistani Scenario Countries offering financial aids also saw that the crisishad an impact in their ability to continue with financialaids to developing countries. Depression effects were not as heavy as in other majoreconomic centers. Weak links of the Pakistani domestic financial sectorswith the financial markets on the international front.
Contd….. Global financial crisis of 2008 - 2009 started seeping intothe country, it resulted in– Drying up Foreign Direct Investment (FDI)– Slowed international loan prospects– Declined rate of privatization– Rising rate of inflation– Rise in the cost of doing business– Demand for goods and services has suffered with theglobal recession– Rise in poverty and unemployment
Issues One of the major issues was to identify whatcharacteristics were to be used as a foundation for theanalysis of the impacts on the whole economy. We identified four proxies or characteristics, namely:– Imports and Exports– Remittances– Foreign Direct Investment– Foreign Portfolio Investment
Contd….. Once the main characteristics were identified, we focusedon the impacts on these crucial characteristics and wereable to ascertain the over all impacts on the economy.
Importance of the Study This study was not only important but also veryinteresting for us as it sheds light on the workings of theglobal financial world. The effects of the Global Financial Crisis around theworld made us think about the impacts on Pakistan. This study shows the disintegrated nature of thePakistani economy in relation to the rest of the world. It also identifies the soundness of our banking system.
Contd….. This research can be used as a foundation for policymaking that deals with the avoidance of future financialmishaps and how an economy can safe guard itself. Society as a whole is well off when its economy canwithstand the shocks and turns of the global financialstorms. A strong, vibrant economy paves the way for a stable,prosperous society.
Limitations of the Study Since the Global Financial Crisis is still on going, we werelimited in the selection of our data for analysis. Due to its on going status, not much has been writtenviz-a-viz the impacts on the developing nationeconomies specially the Pakistani economy.
Research Methodology This study is qualitative in nature. Data has been collected through qualitative methods anddescriptive studies to attain some sort of result. Proxies Developed are as follows:– Imports and Exports– Remittances– Foreign Direct Investment– Foreign Portfolio InvestmentSecondary Sources• State Bank of Pakistan AnnualReports (2006 to 2009)Primary Sources• Were not used due to limitations
Data Analysis Import / Export– Pakistan‟s foreign trade can be categorized by itstrade deficit, because its exports comprises primarilyof goods and raw materials.– On the other hand, imports consist of capital goods,industrial goods, oil, luxury items, etc.
Contd….. Pakistan is expected to cut 3 million jobs in differentsectors of the economy in the coming years. The major sectors that are vulnerable to job losses areautomobiles, construction and textiles.
Contd….. Remittances– Remittances have become a major source of externaldevelopmental finance.– The actual size of remittances, including both officiallyrecorded and unrecorded transfers through informalchannels is even larger.– The money sent home not only promotes economicgrowth, increases investment and communitydevelopments but also helps in reducing povertythrough employment generation.
Contd….. Contrary to expectations, remittances have held up. This is partly due to the fact that the majority of migrantlabor class, work in middle-eastern countries. Switch in the motivation for remittances fromconsumption to investment.
Contd….. Due to rising economic skepticism and looming joblosses, many expats instead of heading back home cameto the Gulf region in search of jobs and opportunities.
Contd….. Foreign Direct Investment– It plays an important role in the economy providingnecessary resources, technology, and managerialexpertise.– It helps in the economic development of theparticular country where the investment is beingmade.
Contd….. FDI in 2005 was $1.5 billion and in 2006 this numberjumped to $5.0 billion. In 2007, the Year on Year (YoY)change was only 8 percent while in 2008, the YoYchange was a negative 2 percent which further declinedby 30 percent in 2009.
Contd….. Foreign Portfolio Investment– It is increasingly appreciated that improved marketsfor investment in equities can help promote fastereconomic growth.– Pakistan being one of the developing countries has anadvance market of securities with proper and fullyfunctional stock exchanges which are not onlycontributing to the nation‟s growth but also adding tothe wellbeing of its investors.
Contd….. Between 2005 and 2006, we saw an increase of 55 percentin portfolio investments. After the crisis panic selling pulled down the index to 9,144points a „floor‟ was placed to avoid further decline. $36.9 billion was wiped out from market.
We started off with just a hunch that the GlobalFinancial Crisis has not impacted the Pakistani economyin a major way. Through our research we have confirmed our instinctand have shown that in fact, the Pakistani economy wasable to defend itself from the Global Financial Crisismainly due to its weak integration with global financialcenters.Deliverables
Analyzed the impact of the Global Financial Crisis onthe Pakistani economy viz-a-viz Imports and Exports,Remittances, Foreign Direct Investment and ForeignPortfolio Investment. Some cuts and bruises suffered by the economy. Pakistani economy was able to stand its ground in theface of the Global Financial Crisis mainly due to lack ofdeep integration with other major financial centers ofthe world.Conclusion
References Griffith-Jones, S. and Ocampo, J. A. (2009) „The financial crisis and itsimpact on developing countries‟ Working paper No. 53, InternationalPolicy Centre for Inclusive Growth, Brasilia, Brazil. Irwin, G. (2005) „No money down gains more buyers‟ Akron BeaconJournal. Jaffee, D. M. (2008) „The US subprime mortgage crisis: issues raisedand lessons learned‟ Working Paper No. 28, The Commission on Growthand Development, Washington DC, pp. 1-36. Tong, H. and Wei, S. H. (2008) „Real effects of the subprime mortgagecrisis: is it a demand of finance shock?‟ NBER Working Paper No. 14205,Cambridge, MA. Bagella, M., Ciciretti, R. and Paesani, P. (2008) „Monetary policy andstock market risk perception in the US‟. In Fuchs, E.J, and Braun, F. eds.Emerging topics in banking and finance, Nova: Science, pp. 187–200.
Contd….. James, W. E., Park, D., Jhawanich, S., Jong J., Terada-Hagiwara, A. andSumulong, L. (2008) „The US financial crisis, global financial turmoil, anddeveloping Asia: is the era of high growth at an end?‟ ADB EconomicsWorking Paper Series No. 139, Philippines. Bosworth, B. and Flaaen, A. (2009) „America‟s financial crisis: the end ofan era‟ In ADBI (), Global Financial and Economic Crisis: Impacts,Lessons and Growth Rebalancing, April, Asian Development BankInstitute: Tokyo. Orlowski, L. T. (2008) „Stages of the 2007/2008 global financial crisis: isthere a wandering asset-price bubble?‟ Discussion Paper No. 2008-43,Sacred Heart University, Fairfield. Hudson, R. and Maioli, S. (2010) „A response to “Reflections on a globalfinancial crisis”‟ Critical perspectives on international business, 6 (1), pp.53-71.
Contd….. Abella, M. and Ducanes, G. (2009) „The effect of the global economiccrisis on Asian migrant workers and governments‟ responses‟International Migration Review, 43 (3), pp.671-91. State Bank of Pakistan (2006) Annual Report 2005 – 2006, Karachi. State Bank of Pakistan (2007) Annual Report 2006 – 2007, Karachi. State Bank of Pakistan (2008) Annual Report 2007 – 2008, Karachi. State Bank of Pakistan (2009) Annual Report 2008 – 2009, Karachi. South Asia Terrorism Portal (2010) „Pakistan Assessment 2010‟[Online]. Available:http://www.satp.org/satporgtp/countries/pakistan/ [Accessed 1stOctober, 2010].
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