The Recession and Business The Recession and Business SchoolsSchools

ANZAM Institutional Members’ MeetingANZAM Institutional Members’ Meeting

March 27March 27thth, 2009, 2009

Professor Nigel HealeyProfessor Nigel Healey

University of CanterburyUniversity of Canterbury

OverviewOverview

The financial crisis

The impact on the real economy

Potential implications for Australasian business schools

New structured credit products

Movement to safe liquid assets

US housing downturn

De-leveraging

Initial Trigger

Pre-Conditions

Impacts

Sub-prime mortgage losses

Uncertainty about extent and location of risk

Booming credit markets

The financial crisisThe financial crisis

Effects of the financial crisis…Effects of the financial crisis…

On the financial sector:

Massive losses/write-downs

Risk aversion and liquidity preference

Global de-leveraging

Large asset price falls

Credit expensive and scarce – “tax the living to bury the dead”

Effects of the financial crisisEffects of the financial crisis

On the real economy:

Erosion of business and consumer confidence

Reduced investment spending (credit, confidence, risk appetite)

Reduced consumer spending (negative wealth effects, confidence, fear of unemployment)

Reduced global demand and commodity prices

Countries impacted in different waysCountries impacted in different ways

Factors impacting economies

USA UK Euro Japan Asia ex Japan

Aust / NZ

Bank losses

Credit restrictions

Export demand

Commodity prices

Crisis a product of credit boom and financial engineering

……and growth outlook deteriorating and growth outlook deteriorating everywhereeverywhere

Consensus forecasts

2009 GDP growth forecasts (percent)

At Dec 08 At Feb 09 Change

Australia 1.6 0.4 -1.2

Asia x Japan 3.9 0.9 -3.0

USA -0.7 -2.1 -1.4

Japan -0.2 -3.8 -3.6

Eurozone -0.5 -2.0 -1.5

UK -1.3 -2.6 -1.3

NZ 0.2 -0.9 -1.1

Potential implications for Australasian Potential implications for Australasian business schoolsbusiness schools

Endowment income – b-schools as a cash cow

Executive education

International enrolments

Public funding

Faculty recruitment and retention

Societal attitudes to business schools

Potential implications for Australasian Potential implications for Australasian business schools (1)business schools (1)

Loss of endowment income

Stock market prices - down 50%

Interest rates down from 8% to 3%

Alumni giving

B-schools as the cash cows – envy over salary loadings

ASX All Ordinaries

Potential implications for Australasian Potential implications for Australasian business schools (2)business schools (2)

Executive education

Short courses –open vs in-company

Executive (company-sponsored) MBAs

Consulting

High-margin, but pro-cyclical

Potential implications for Australasian Potential implications for Australasian business schools (3)business schools (3)

International enrolments depend upon: Availability of university places at home

If demand exceeds supply, some of the excess spills over

Cost of study abroad

Ability and willingness to pay for tuition and living costs

From savings

By borrowing

By students working in host country

Availability of university places at Availability of university places at home: the potential demandhome: the potential demand

Tertiary school-age population

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China India Nigeria

Source: UNESCO; Economist Intelligence Unit

Availability of university places at Availability of university places at home: the spillover effect home: the spillover effect

0

25,000

50,000

75,000

100,000

125,000

150,000

175,000

200,000

225,000

250,000

275,000

300,000

325,000

350,000

1999 2000 2001 2002 2003 2004 2005 2006

Total international students ChinaTotal international students IndiaTotal international students Nigeria

Source: Economist Intelligence Unit; National Statistical Offices

Estimated number of international students enrolling in undergraduate and postgraduate study in Australia, Canada, France, Germany, Japan, New Zealand, United States, United Kingdom

Availability of university places at Availability of university places at home: the expanding supplyhome: the expanding supply

0

20

40

60

80

100

120

1990 1995 2000 2005 2006

Primary

Junior Secondary

Senior Secondary

Tertiary

Chinese enrolment rates (%)Chinese enrolment rates (%)

Cost of study abroad: exchange rates Cost of study abroad: exchange rates depreciations in Australia, NZ and UKdepreciations in Australia, NZ and UK

NZ$

A$

GBP

Ability to pay from savings: the Hang Ability to pay from savings: the Hang Seng IndexSeng Index

Hang Seng Index Nikkei Index

Ability to pay by borrowing: risk Ability to pay by borrowing: risk aversion and the credit squeezeaversion and the credit squeeze

0

50

100

150

200

250

300

350

400

Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

US 5-year CDS index

BNP Paribas subprime funds frozen; German lender SachsenLB requires credit line

Bear Stearns aquired by JP Morgan with Fed assistance

Lehman Brothers files for bankruptcy

US Congress passes TARP package

US Treasury bails-outFreddie Mac and Fannie Mae; Emergency loan from the Federal Reserve to insurer AIG

Sou

rce: R

BN

Z

Ability to pay by borrowing: Asian Ability to pay by borrowing: Asian banking system solventbanking system solvent

Sou

rce: R

BN

Z

0

200

400

600

800

1000

1200

2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 (to date)

0

200

400

600

800

1000

1200

Losses, Asia

Losses, Europe

Losses, Americas

Total new capital raised

US$ billion US$ billion

Willingness to pay: deteriorating Willingness to pay: deteriorating growth and employment outlook in Asiagrowth and employment outlook in Asia

Falling exports to US, Europe

Slowing economic growth (China), recession (Japan)

Rising unemployment

Growing fear of unemployment

Reports of international students failing to return due to economic hardship in the family

Ability and willingness to pay: fewer Ability and willingness to pay: fewer jobs while studying and on graduationjobs while studying and on graduation

Many international students have: Part-time jobs in term-time Full-time jobs in the holidays Right to full-time work in host country on graduation

In-country employment covers part of living/tuition costs

Employment prospects in host countries deteriorating quickly, international students disproportionately affected

Employment prospects in home country also worsening, return on investment reduced

Factors influencing international Factors influencing international student demand: summarystudent demand: summary

Availability of university places at home

Cost of study abroad

Ability to pay from savings

Ability to pay by borrowing

Willingness to pay – uncertainty

Ability to pay – jobs in host country

Willingness to pay – jobs on graduation

Potential implications for Australasian Potential implications for Australasian business schools (4)business schools (4)

Pubic funding Lessons from US state schools, with balanced budget

constitutions

Pressure on government expenditure as deficits fuel public debt, debt service costs

Political inclination to see pain of recession shared – caps on public subsidies for domestic tuition, moral suasion in terms of pay settlements

23

The price of fiscal stimulus packagesThe price of fiscal stimulus packages

0

2

4

6

8

10

12Fiscal expansions post crisis (percent of GDP)

Sou

rce

: R

BN

Z

Potential implications for Australasian Potential implications for Australasian business schools (5)business schools (5)

Faculty recruitment and retention Demographic timebomb – baby-boomers (1945-60),

massification and Asia Competition from private sector and salary inversion

Short-term: Shake-out in corporate sector Collapse in competition from US schools Offset by exchange rate depreciation

Medium-term: increase in attractiveness of academic careers (ICT post tech-boom, but SUVs post-oil speculative bubble)

Potential implications for Australasian Potential implications for Australasian business schools (6)business schools (6)

Public attitudes to business schools Enron, WorldCom

GFME, Corporate Social Responsibility

Quants vs bankers

Nerds vs Suits

Student demand for vocational business degrees rising, now 20-25% of UG – time for a correction?

ConclusionsConclusions

Universities – and so business schools – traditionally counter-cyclical

Now many sources of revenue non-public and cyclical: Endowment income, executive education,

international education…

….even possibly public funding

Short-term gains in hiring

Potential damage in terms of public attitudes