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2009:The Impact of the Global Financial and Economic Crisis on SADC Economies


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2009:The Impact of the Global Financial and Economic Crisis on SADC Economies

  1. 1. 4/2/2009 The Impact of the Global andEconomic Crisis on Southern Africa Agricultural Trade Forum 16th Public Policy Dialogue Keith Jefferis Windhoek, March 24, 2009Structure of PresentationThe Global Financial and Economic Crisis Origins of the crisis Unfolding of the crisis Impact of the Crisis on Developing CountriesImplications for SADC Economies Exports Balance of payments & financing Fiscal position The Bright Side! Policy Implications 1
  2. 2. 4/2/2009 Global Financial & Economic Crisis Global Growth Slowdown IMF Growth Forecasts, 2009 World economy now in deep (July 2008 & Jan 2009) recession 9 Global growth forecasts for 8 7 2009 revised down from 6 3.9% to 0.5% (IMF) 5 Developed country growth 4 forecasts slashed to -2.0%% 3 2 Emerging / developing faster 1 growth at 3.3%, but still 0 affected-1 Trend of downward revision-2-3 of forecasts not yet over IMF forecasts the most optimistic, e.g. JP Morgan -2.6% for 2009 2
  3. 3. 4/2/2009Global Growth Slowdown 8 Depths of recession –Annualised real GDP growth, qoq 6 4Q2008 and 1Q2009 Now widely acknowledged to 4 be worst recession since 2 1930s 0 Stronger growth in emerging markets, but still big drop -2 Weak recovery projected -4 towards end of 2009 -6 Sluggish but positive growth in Source: JP Morgan -8 2010 Robust world growth (>3%) only likely in 2011 World Developed Emerging marketsGlobal Growth Slowdown - Advancedeconomies 4 Four quarters of negativeAnnualised real GDP growth, qoq 2 growth, with total decline 0 in GDP of: -2 -4 USA – 3.4% -6 Euro zone – 3.7% -8 Japan – 8.3% -10 Even when recovery starts, -12 -14 there will be a long -16 Source: JP Morgan “catching up” process 2008-9 recession likely to 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 be deeper than slowdowns USA Euro Japan of 2001, 1991 & 1981 3
  4. 4. 4/2/2009Origins of the Crisis The global financial economic crisis has its origin in three interconnected areas: Financial Sector Issues Global macroeconomic imbalances Commodity PricesFinancial sector Sub-prime mortgage lending New models of financial behaviour (originate-to- distribute -> off balance sheet) Complex new financial instruments (CDOs) Misaligned incentives (selling of loans not repayments; determination of bonuses) Credit explosion Lax monetary policy Asset price bubbles (housing, equities) Defective risk assessment (rating agencies) Weak regulation 4
  5. 5. 4/2/2009Global imbalances Mismatch between surplus Two sides of the same coin and deficit nations Capital outflows from surplus X–M=S-I nations financed deficits in low-savings nations, Surplus nations: contributed to low interest high savings (> investment) rates and credit expansion = current account surpluses e.g. China, oil exporters capital exports to RoW buying US T-bills and bonds Fx reserve accumulation Exchange rate inflexibility : Deficit nations: Asian currencies (managed) undervalued low savings (< investment) US dollar overvalued = current account deficits EUR-USD rate bears burden capital imports from RoW of adjustment debt accumulationCommodity price bubble Commodity prices at Accentuated global historically high levels by imbalances, e.g. raised 2007/early-2008: savings by commodity Oil exporters Metals Foodstuffs Structural change effects – e.g. Rapid growth and infrastructure investment in China Long growth upswing Credit-induced spending Supply inelasticity 5
  6. 6. 4/2/2009How the crisis unfolded - 1Financial Sector Sub-prime defaults, triggered defaults on wide range of financial instruments Risk exposure and risk mis-pricing apparent Credit ratings inaccurate Uncertainty in markets Inter-linkages between institutions amplified problems Credit crunch, collapse of financial institutions, rescues, de-capitalisationHow the crisis unfolded - 2 Global imbalances Rising savings in deficit nations: rebuilding HH and corporate balance sheets reduced consumption, lower demand Desire to accumulate reserves perceived as economic strength but we can’t all run surpluses! Imbalances will have to be unwound: exchange rate misalignments must be corrected (but flight to quality has led to strengthening dollar); needs rising consumption in high savings nations 6
  7. 7. 4/2/2009How the crisis unfolded - 3Commodity Prices Rising inflation Declining real income in oil-consuming countries, hence reduced real expenditure E.g. on automobiles Tighter monetary policy (higher interest rates exacerbated credit problems)Impact of the Crisis Systemic Cross- Growth &Three phases banking border trade Financial crisis crisis financial effects (systemic) flows International Advanced I III financial flows/risk countries aversion Emerging II III Economic crisis markets (collapse in real Less- II III growth rates, trade developed countries flows) 7
  8. 8. 4/2/2009Financial Contagion - Markets Aversion to emerging market IIF estimates net private capital (EM) risk + liquidity calls flows to EMs to fall sharply Capital flow reversals as foreign $930bn in 2007 investors withdraw $467 bn in 2008 Falling equity markets $165 bn in 2009 Pressure on exchange rates EMs that used commercial finance (weaker) to fund CADs esp. vulnerable Rollover risks for existing In Africa, small but growing borrowers (corporate and Ghana & Kenya sovereign) postponed planned international Higher cost of funds (EM bond offerings spreads) SA, Nigeria Trade finance scarce external financing for companies, Inflows of FDI much reduced banks scarce & expensive (higher interest rates)Financial Contagion – Other Flows Of particular Greater reliance on importance to LDCs MFIs ODA flows under IMF pressure World Bank Donor country budgets IFC under pressure Commitments to increase AfDB ODA now doubtful Remittances falling sharply Falling employment and real incomes in advanced economies 8
  9. 9. 4/2/2009Trade & Growth Effects Reduced prices and World trade expected volumes for major to decline in 2009 commodity exports First time since 1982 Major ToT deterioration Largest fall for 80 years for commodity exporters 2008Q4 saw major falls (reduced real incomes) in exports in many General reduction in countries trade flows worldwide Compounded by drying up of trade finance Risk of protectionism & slow progress on DDA negotiationsMinerals prices way down....Copper ($/tonne) Nickel ($/tonne)$10,000 $60,000 $9,000 $8,000 $50,000 $7,000 $40,000 $6,000 $5,000 $30,000 $4,000 $3,000 $20,000 $2,000 $10,000 $1,000 $0 $0 Source: LME Source: LME 9
  10. 10. 4/2/2009Trade & Growth Effects - Africa SS Africa growth forecast to remain positive in 2009 (IMF 3.5%) Real GDP Growth (IMF) but much reduced from 2007 levels 10 Changing employment patterns 8 from dynamic export sectors to lower productivity sectors 6 reversal of urban-rural migration Higher poverty due to: 4 % reduced employment 2 lower wages 0 lower remittances Concern about fragile states (Zim, -2 DRC, Burundi, Guinea-Bissau, Liberia) -4 Reduced availability of finance will inhibit investment in infrastructure & 2007 2008 2009 2010 human capital SS Africa Developing AdvancedGlobal Growth Slowdown – Key risks &uncertainties Depth and duration of Impact on international recession trade - how long and how Reversion to deep? protectionism? V-shape or L-shape? Prospects for DDA? Shape of Financial Macroeconomic Impact Sector Monetary expansion -> Institutions? inflation Regulation? Fiscal stability & future Public/private taxes ownership? Exchange rate realignment Unemployment 10
  11. 11. 4/2/2009 Implications for SADC EconomiesImpact on SADC Economies Domestic financial sector Fiscal balance Limited impact, at least Revenue slowdown initially Higher spending Trade Larger deficits Impact of global GDP recession and ending of Growth slowdown very commodity price boom likely Export slowdown Protectionism? External balance (BoP) Positives Inflation Wider CAD Power supplies Financing constraints Oil imports 11
  12. 12. 4/2/2009SADC Economies – GDP per capita,200610000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0Export Slowdown Main impact on mineral Slow recovery forecast producers in commodities markets, Huge declines in: but no return to 2007/8 Oil prices (-70%) peaks Base metal prices E.g. Stanchart f’casts (copper, -70%; nickel, - 2009 avg. vs. end-2008 80%) Nickel +0% Diamond sales volumes, Copper +18% to a lesser extent prices Oil +56% Lower than 2008 avg prices 12
  13. 13. 4/2/2009Export Slowdown Mineral ExportersCountry Commodity % of exportsAngola Oil, diamonds 99%Botswana Diamonds, copper, nickel 90%Congo DR Diamonds, oil 64%Mozambique Aluminium, gas 74%Namibia Diamonds, copper, uranium 59%South Africa Gold, platinum, coal <50%Zambia Copper, cobalt 77% Other Exports Tourism Motor vehicles (SA) Slowdown in long-haul sharp fall in new tourism due to vehicle sales due to recession credit crunch Mauritius, Seychelles Other exports also most dependent impacted, but less so Also Botswana, SA, Food, clothing Zambia, Namibia, Mozambique, Tanzania Being more diversified helps, but a matter of degree 13
  14. 14. 4/2/2009 Current Account Deficit (2009) 20 10 0% of GDP -10 -20 -30 -40 Source: IMF Regional Economic Outlook for Sub-Saharan Africa, Oct 2008 Financing of Current Account Short-term portfolio flows (MICs) Donor funds & concessionary Tightening of credit markets and borrowing (LICs) “flight to quality” has hit Fiscal pressures in donor countries emerging markets Limited IMF and World Bank Higher cost of funds (risk funds premium) Remittances (Lesotho, FDI (all ex. Zimbabwe) Madagascar, Malawi, Credit crunch Zimbabwe) Project viability (esp. minerals) Rising unemployment in Reduced inflows, esp. in natural developed countries resource sectors Reduced remittance flows expected in 2009 FX reserves Cannot provide prolonged financing of deficits 14
  15. 15. 4/2/2009 Foreign Reserves, 2008 Botswana approx. 25 months 10 9 8 Months of import cover 7 6 5 4 3 2 1 0 Source: IMF Regional Economic Outlook for Sub-Saharan Africa, Oct 2008 Fiscal Balance (2007) Angola Initial fiscal Botswana DRC position Lesotho reasonable:Madagascar Malawi Several Mauritius countries withMozambique surpluses Namibia Seychelles Deficits mostlySouth Africa manageable Swaziland Tanzania Benefits of Zambia ongoing fiscal -10 -5 0 5 10 15 reforms 15
  16. 16. 4/2/2009Fiscal Balance & Financing Lower revenues likely due to Deficit financing may be a reduced trade and growth problem Higher spending, e.g. social Access to international capital safety nets markets (eurobond issues) limited Vulnerabilities: Domestic financing capacity – Commodity-revenue varies from country to country dependence Banks – depends on many Donor dependence other factors Existing budget deficits Bond markets - generally High debts underdeveloped – but now SACU revenues may be a good time to develop Danger of crowding out of private sectorDonor dependenceDonor funds of great importance to low-incomeSADC countries: Malawi, Lesotho, Mozambique, Madagascar, Zambia, Tanzania Funding of budget, BoP, crucial for development projectsPrevious commitments to increase donor fundingnow questionableNeed for donor funding risingNeed for effective lobbying to – at a minimum –preserve donor funding levels 16
  17. 17. 4/2/2009Role of MFIs MFIs have a crucial role Under-funded; need for given adverse markets recapitalisation Source of concessional G20 Agreement to finance for LICs increase IMF funding Less risk-averse than Still issues over “voice” banks and US veto WB & AfDB for Conditionality issues – esp. infrastructure finance, but in the context of slow exogenous shocks IMF more flexible and can provide budget and BoP support Exogenous shocks facilitySummary of negative impacts Slower / negative GDP Uncertainty over depth growth and duration of crisis Reduced investment Risks mostly on the Increased current downside account deficits; financing constraints Exchange rate weakness Fiscal deficits; financing constraints Rising unemployment & poverty 17
  18. 18. 4/2/2009 The Bright SideFinancial Sectors Mostly untouched by first Vulnerability - protracted round of crisis: downturn elevates risk: commercial banks sound falling incomes, borrowers much improved regulation less able to service debts and supervision sectoral concentration of limited cross-border bank portfolios banking linkages market volatility if banks limited exposure to have lent for investment in complex financial products stock markets deposit-funded lending withdrawal of funds from parent banks money markets functioning normally equity markets following global trends 18
  19. 19. 4/2/2009Inflation Forecasts 35 Inflation will 30 fall due to: 25 Source: IMF REO for SSA (October 2008) Lower oil prices 20 Lower food% 15 prices 10 Sharply 5 declining global 0 inflation Will lead to lower interest 2008 2009 ratesElectricity 70,000 Reserve margin rapidly 60,000 eroded 50,000 Eskom now expects no 40,000 growth in demand in 30,000 2008-2009MW 20,000 New capacity of 10,000 40000MW needed over 0 next decade (almost -10,000 doubling) -20,000 Slowdown provides -30,000 breathing space 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 But commercial financial Reserve Net capacity Peak Demand markets currently closed 19
  20. 20. 4/2/2009 Import Bills Lower commodity prices: Net food importers also All except Angola & DRC aided by lower world net oil importers food prices Fuel approx 20% of total imports on average Will help CAD Mainly oil, but also other commodity-related imports (e.g. steel) Summary of Country Impacts ANG BWA DRC LES MAD MAL MAU MOZ NAM SEY SA SWZ TAN ZAM ZIMExports Minerals XX XX XX X XX X XX Tourism X X XX X X XX X X XFinance CAD XX XX X X XX XX X X XX X FDI X X X X X X X X X X X X X X Remittan- X X X X ces Donors X X X X Reserves X X X X X X XPositives Inflation Power OilImports 20
  21. 21. 4/2/2009Summary of ImpactsAll countries will be hit, but impact will vary fromcountry to country, depending on: trade structure, fx reserves, fiscal positionImpact less if: sound policies in place good reserves & low debt more diversifiedVulnerability from previous high inflation andCADsMost vulnerable are mineral exporters with highdependence on foreign capitalPolicy Responses - 1 Internationally, lobby for: No protectionism! Resume DDA Additional resources for IMF/WB, that can be disbursed quickly and flexibly Preservation of donor funding commitments Fair treatment for migrant workers 21
  22. 22. 4/2/2009Policy Responses - 2 Domestically: Exchange rate flexibility – to support adjustment Use monetary policy to support growth when inflation is low Fiscal policy – can be expansionary s.t. sustainability constraints Ensure quality of government budgeting & spending Renewed focus on financial sector supervision & regulation – banks & non-banks Need for high quality, timely economic and financial data Contingency planning & monitoring of evolving conditions Sustain reforms Thank You 22