impact global financial crisis idb members

7/31/2019 Impact Global Financial Crisis IDB Members

1/16

Impact of Global Financial Crisis

on IDB Member Countries:Regional Prospects and Challenges

Presentation to the Conference onGlobal Financial Crisis and Capacities of the Islamic

Financial System, Islamic Republic of Iran(17 January 2009)

Islamic Development Bank


2/16

Rapidly weakening global prospects

Chart 1: World Bank Economic OutlookProjections, end-Nov. 2008

-1

01234

56

789

2006 2007 2008 2009 2010

( p e r c e n

t )

Global Output OECD CountriesDeveloping Countries Developing Countries (excl. China an

GrowthProspects

Origin of Crisis

Core Faultlines

Comments bySage

TransmissionChannels

MENA/GCCOutlook

SSA Outlook

Asia Outlook

Global Recoveryby 2010


3/16

Slowdown of economic growth, so far !

IDB-56 MCs LDMCs-28 non-LDMCs-28

2005 2006 2007 2008 2009 20104

5

6

7

8

9

( P e r c e n t )

Chart 4: Growth Prospects of IDB Member Countries

GrowthProspects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



4/16

Global Financial Crisis: How It All Started

De-regulation in the Name of Ideology Major Wall Street investment banks, hedge & derivative funds,

unregulated credit default swaps market In April 2004, net capital rule waived for US investment banks;

unleashed reserves held to cushion losses

Dark Heart of the US Financial System $10 trillion in securitized toxic assets $55 trillion in credit derivatives and credit default swaps(mechanism to insure banks against losses) CDS market size was more than twice the size of the combined GDP of

U.S.A. + Japan + the E.U.

From US Financial Crisis to Global Tsunami AIG, operating in more than 100 countries, became insolvent (holding

$441 billion of CDS)

End of investment banks in US investment Contagion effect on banks in Europe (UK, Switzerland, France,Germany, Iceland, Netherlands)

Seizing-up of interbank lending market Partial nationalization of banks and deposit guarantees Cost of lending to businesses and households became prohibitive

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



5/16

Failure of De-regulation Ideology

Excessive leverage model of financial intermediation

Growth in credit volume and paper profits generated by investing borrowedfunds

Four Core Faultlines in the US Financial System Poor market discipline

Slicing of risks and selling of debts to multiple investors; instead of risks beingdiversified, it obscured risks creating systemic vulnerabilities

System incentivizes creation of speculative bubbles Unsustainable rise in asset prices became possible because of co-mingling of

aggressive lending and truncating risk-taking

Lack of due diligence Astronomical expansion in the size of the derivatives market created a false

sense of security

Moral hazard Global financial institutions had grown to too big to fail size, leading to

imprudent lending practices

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



6/16

What Do The Sage Have To Say?

Alan Greenspan, Chairman of the US Federal Reserve I made a mistake in presuming that self-interest of organizations, specifically banks and

others, were such that they were best capable of protecting their shareholders and theirequity in the firms.

Paul Krugman, Nobel Laureate, Prof. of Economics at MIT Will the U.S. financial system collapse today, or maybe over the next few days? I dont think

so but Im nowhere near certain old world of banking,, has largely vanished, replacedby what is widely called the shadow banking system. And as the unknown unknowns haveturned into known unknowns, the system has been experiencing postmodern bank runs.

Joseph Stiglitz, Nobel Laureate, former Chief Economist, World Bank In a country where money is respected, Wall Streets leaders used to have our respect. They

had our trustTimes have changed. Gone is the respect and trust.

Will Hutton, Eminent British Financial Journalist For 30 years, greedy, callow, ignorant financiers, supported by no less callow politicians

from all the political parties, have proclaimed the wonders of financial innovation and howproud we all should be of the City of London. The pric etag for their behavious is aneconomic calanity. We should never have bought such sname oil. The consolation in thesedark times is that we never will again.

Olivier Blanchard, Chief Economist, IMF The coming months will be very bad. Halting this loss of confidence, providing stimulus and,

if necessary, replacing private demand are essential if we want to prevent the recessionfrom becoming a Great Depression.

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



7/16

What are the Major Transmission Channels?Baseline Scenario

Sharp deceleration in investment growth

MICs: 13.2% in 2007 and projected: 3.5% in 2009 MENA: 16.8% in 2007 and projected: 7.0% in 2009 SSA: 20.3% in 2007 and projected: 7.7% in 2009

Tighter capital inflows to middle-income countries Net private debt + equity flows: $1 trillion in 2007 to $530 billion in

2009 [7.7% to 3% of developing country GDP]

Sovereign and private-sector spreads have spiked sharply by 700 basispoints and 1,000 basis points

Weaker ODA and remittance flows to low-income countries Sharp slowdown in global import-demand

Global export volume to fall by -2.1% in 2009; (1982) OECD countries import-demand: -3.4% in 2009

Lower commodity prices in 2009 International price of crude oil is projected in the range of $68-75 per

barrel Food prices to decline by 23% and metal prices to decline by 26% Mixed BoP impact on developing countries

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



8/16

What are the Major Transmission Channels?High Risk Scenario

Deeper and longer recession in OECD Countries Recovery delayed beyond mid-2010

Impact on Developing (and IDB Member) Countries Seizing up of borrowing and lending for investment and trade

financing Banking failures of otherwise sound institutions Vulnerable countries: high twin-deficits and high inflation could lead

to severe exchange rate crises Impact on poverty

1 percent decline in growth leads to additional 20 million peoplein poverty

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



9/16

MENA / GCC Region: Sharp U-type Growth Recovery !

Chart 3: Growth Outlook for the MENA Region

3

4

5

6

2006 2007 2008 2009 2010

( p e r c e n t )

World Bank-MENA IDB-MENA-19

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



10/16

MENA Region: Key Challenges

Steep fall in International Oil Prices From $147 per barrel in May 2008 to less than $50 in December 2008 Fiscal balance of oil-exporting countries under threat

Troubled Banking Sector Exposure of some SWFs and banks to US toxic debts Over fivefold jump in riskiness of some GCC banks Deposit guarantees and massive liquidity injections by GCC central banks

Troubled Corporates Fourfold rise in borrowing costs during 2008 Cancellation of major infrastructure and commercial projects Property bubble - significant drop in real estate prices

Wealth Destruction October 2008: 25% drop in stock prices or $250 billion losses Massive drop in GCC stock market indices by over 50% leading to potential

delinquencies by investors which adds to banks vulnerabilities

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



11/16

SSA Region: Smooth Recovery in 2010?

Chart 4: Growth Outlook for Sub-Saharan African Countries

4

5

6

7

8

2006 2007 2008 2009 2010

( p e r c e n t )

World Bank-SSA excl. South Africa IDB-SSA-22

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



12/16

SSA Region: Key Challenges

Steep fall in regional stock market Composite index of WAEMU countries fell by 21%

Banking sector untroubled Foreign-owned banks have continued their normal operations

Steep fall in prices of major non-oil exports In October, prices of 12 commodities declined by 9 to 27 percent

ODA flows to slowdown Official grants are projected to slowdown to 1.1% of SSA-GDP in 2009 from

1.5% in 2008

Risk of external debt distress to intensify (Oct. 2008) Six MCs (Sudan, Comoros, Cote d Ivoire, Guinea, Guinea Bissau, and Togo) in

debt distress

Four MCs (Chad, Burkina Faso, Djibouti, and Gambia) are at high risk Debilitating impact on poverty and progress to MDGs

Number of extreme poor gone up: 130 150 million Cost of lifting extreme poor to poverty line: $38 billion or % of developing

country GDP

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



13/16

Asia Region: Protracted Recovery?

Chart 5: Growth Outlook for the Asian Countries

0

2

4

68

10

12

14

2006 2007 2008 2009 2010

( p e r c e n

t )

World Bank-East Asia World Bank-South Asia

World Bank-Europe & Central Asia IDB-Asia-8

IDB-CIS-7

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



14/16

Asian Region: Key Challenges

Risk aversion in middle-income countries

Global investment funds withdrew from broad range of risky assets andconverted into liquid holdings

Sovereign spreads rose: Malaysia 300 bp & Indonesia 570 bp

Reversal of private debt flows Outflows in Turkey: $3.1 billion in 2008

Triggered large exchange rate depreciation Turkey / Pakistan: 40% / 25% depreciation vs $

Weak export prospects East Asian countries (excl. China) export growth projected to fall from 8.3% in

2008 to 2.6%in 2009 Turkeys precarious position: 2nd quarter growth deteriorated sharply to 1.9%

compared to 6.7% in previous quarter; troubled auto sector, foreign debt: $280

billion, of which one-sixth is short-term; and expected to adopt IMF program inJanuary 2009 CIS Countries: Kazakhstan has, globally, second riskiest banking system (based

on CDS prices); Vulnerable to slowdown in remittance flows South Asian Countries: Falling prices of oil- and non-oil commodities will stabilize

BoP and alleviate exchange rate pressures; expected to recover quickiest in 2009

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



15/16

Targeting Global Recovery by 2010 !

Boosting Aggregate Demand Effectiveness of monetary policy is limited

Banks hoarding new liquidity

Fiscal stimulus: 2% of combined global GDP Regeneration of investments and stimulating consumer confidence

Reforming International Financial System G-20 Declaration comprises of

Root causes of the current crisis, Actions taken and to be taken, Commonprinciples for reform of financial markets, Tasking of Ministers and experts,Commitment to an open global economy, and Action Plan to implement(i) priority actions by 31 March 2009, (ii) make progress on medium-termactions, and (iii) prepare for next G-20 Summit on 30 April 2009

Relevance to IDB and Member Countries Adequacy of MDBs resources Strengthening transparency and accountability Enhancing sound regulatory regimes

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook



16/16

Thank You

Growth Prospects

Origin of Crisis

Core Faultlines

Comments bySage


MENA/GCCOutlook

SSA Outlook

Asia Outlook


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