THE ECONOMIC IMPACT OF GLOBAL FINANCIAL CRISIS ON

THE ECONOMIC IMPACT OF GLOBAL FINANCIAL CRISIS ON FIJI T. K. JAYARAMAN

• • • 1. 2. 3. 4. 5. INTRODUCTION FACTORS INFLUENCING IMPACT POSSIBLE POLICY RESPONSES CONCLUSIONS

INTRODUCTION • ORIGIN OF THE CRISIS: US SUBPRIME MORTGAGE BOOM & BUST: “CASINO CAPITALISM” • EXPOSURE OF DEVELOPED COUNTRIES TO US DEBT • SPREAD OF CONTAGION • FAILURE OF FIN INSTITUTIONS: COLLAPSE • BAILOUT MEASURES: “SOCIALISM FOR THE RICH AND THE WALL STREET (WHERE PROFITS ARE PRIVATIZED AND LOSSES ARE SOCIALIZED”)- NOURIEL ROUBINI

Introduction (contd) • CREDIT CRUNCH: RELUCTANCE OF BANKS TO LEND • HIGH SPREAD BETWEEN INTERBANK LENDING RATE & TB RATE • CENTRAL BANKS’ EFFORTS TO UNFREEZE CREDIT FLOWS • PANIC: STOCK MARKET COLLAPSE: CONTINUOUS FALL • WHERE IS THE BOTTOM?

• Uncertain conditions and Uncertain Projections • TABLE 1 HERE

• Can the past predict the future? • Table 2 here

TWO CHANNELS OF TRANSMISSION • FINANCIAL CHANNEL • NO LAGS: ALMOST IMMEDIATE • DEPENDS ON EXPOSURE TO US DEBT & INTRICATE PRODUCTS: SECURITIZATION ETC. • TRADE CHANNEL: LAGS • DEPENDS ON ROLE OF EXPORTS IN THE PAST • EXPORT LED-GROWTH COUNTRIES : LIKELY TO BE HURT MORE THAN DOMESTIC DRIVEN ONES • DEPENDENCY ON IMPORTS: TRADE DEFICITS & BOP PROBLEMS: 20 COUNTRIES LISTED BY IMF

• Table 3

HEALTH OF BANKING & FIN. SYSTEM IN FIJI • RBF ANNUAL REPORT: SOUNDNESS OF BANKS • WELL CAPITALISED: CAPITAL ADEQUACY RATIO: 14. 3% AGAINST MANDATORY 8% • NON-PERFORMING LOANS AS A RATIO OF TOTAL LOANS IS 6% : LOW BY INTERNATIONAL STANDARDS. • SUPERVISION OF BANKS • PARENT BANKS: GOOD RATING • AUS BANKING FOURTH SOUNDEST BY WORLD ECONOMIC FORUM SURVEY

HEALTH OF FINANCIAL SYSTEM IN FIJI (contd) • • AVAILABILITY OF DOMESTIC LIQUIDITY NO TRUST FUND OF THE KIND AS IN TUVALU FNPF’S ASSETS MOSTLY DOMESTIC WILL FOREIGNERS HOLDING ASSETS IN FIJI PULL OUT? RISK OF FLIGHT OF CAPITAL? • PORTFOLIO INVESTMENTS NEGLIGIBLE • REAL ESTATE: IF FOREIGNERS’ NEED LIQUIDITY PULLING OUT BECOMES INEVITABLE • IMPACT ON FOREIGN RESERVES: SIMILAR TO 1997/98 INDONESIA

• INSERT Table 4 on Trade with Industrial countries

TRADE CHANNEL IN FIJI • TRADE IS HEAVILY ORIENTED TOWARDS IMPORTS • FIJI’S GROWTH IS NOT EXPORT-LED AS CHINA’S • RECESSION OVERSEAS WILL NOT AFFECT FIJI IN MAJOR WAY • FIJI DOES NOT EXPORT HIGH VALUED RAW MATERIALS AS IRON ORE, CRUDE OIL OR GAS • IF USA CONSUMPTION SPENDING GOES DOWN, EFFECT ON FIJI MINERAL WATER EXPORTS? • BETTER MACRO-MNGMT. IN AUS WOULD HELP FIJI

TRADE CHANNEL (CONTD) • POTENTIAL DECLINE IN OIL & COMMODITY PRICES WILL HELP FIJI • RISING FOOD PRICES : MORE LIKELY TO BOOST IMPORT COSTS • DECLINING EXPORTS MAY CAUSE TRADE DEFICITS • TRADE DEFICITS DEPEND ON GROWTH IN EXPORTS & GROWTH IN IMPORTS • PRESENT BOP SUPPORT COMES FROM TOURISM & REMITTANCES

• Table 5 Tourism Remittances here

CURRENT ACCOUNT BALANCE • RECESSION IMPACT ON BOP SUPPORT • TOURIST ARRIVALS WILL BE AFFECTED • RECESSION IN NZ AND SLOW DOWN IN AUS WOULD REDUCE HOLIDAY TRAVEL • REMITTANCES WILL DECLINE • EMPLOYMENT IN NZ IN FARM LABOUR WILL BE MORE FROM THE GROWING DOMESTIC UNEMPLOYED POOL

• IMPACT ON OFFICIAL DEVELOPMENT ASSISTANCE • DONORS LIKELY TO REVISE SPENDING ALLOCATIONS & CUTBACKS IN AID • ADVERSE IMPACT ON FDI INFLOWS

• Table 6 AID & FDI

VULNERABILITY TO PRESSURES ON RESERVES • FIJI’S FIXED ER RATE REGIME • DEPENDS ON COMFORTABLE LEVEL OF INTERNATIONAL RESERVES • FIXED ER REGIME HAS HELPED FIJI • DEPRECIATION WOULD HURT ECONOMY MORE • PRESSURES ON ER TO BE AVOIDED

• Table 7 on Reserves

PRESSURES ON INTL. RESERVES • FALL IN EXPORTS AND RISING EXPORTS AND DECLINE IN REMITTANCES, TOURISM, FDI INFLOWS WOULD LEAD TO PRESSURES ON RESERVES • REPAYMENT OBLIGATIONS OF OVERSEAS BOND IN 2011 : EQUVLNT OF ONE MONTH IMPORTS • EXPANSIONARY POLICIES HURT RESERVE LEVEL • CONSERVATION OF RESERVES IS CRITICAL

• INSERT TABLE 8 on Budget Balance etc

POLICY RESPONSE • FALLING WORLD OIL PRICE HELPS TO REDUCE INFLATIONARY PRESSURES. • HIGH FOOD PRICES STILL CONTINUING • CAN FIJI RESORT TO KEYNESIAN REMEDIES AS AUSTRALIA DID? • ANSWER IS NO: FIJI HAS NOT BUILT ANY BUDGET SURPLUS OVER THE PAST YEARS • MAJOR FISCAL STIMULUS BE AVOIDED • BUDGET DEFICITS BE MODEST CONSIDERING LIKELY FALL IN TAX REVENUE COLLECTION IN RECESSION & IMPACT ON CURRENT A/C BALANCE

POLICY RESPONSE (CONTD) • LOWER CAPITAL INFLOWS NECESSITATE CONTINUING PRESENT CAREFUL MACROECONOMIC MANAGEMENT • MONETARY POLICY CHANGES: LIKELY PRESSURES ON RESERVES & EXCHANGE RATE STABILITY BE KEPT IN VIEW • ANY FURTHER RELAXATION OF EXCHANGE CONTROL MEASURES WARRANTED ONLY IF RESERVE POSITION VASTLY IMPROVES • AMERICAN DOLLAR IS STILL A RESERVE CURRENCY

POLICY RESPONSE (CONTD) • AGAINST WEAK POUND & EURO, US DOLLAR GAINS STRENGTH • OIL IMPORTS WILL BE CONTINUED TO BE QUOTED IN US DOLLAR • RESERVES BECOME CRITICAL • DOMESTIC LIQUIDITY BE UTILISED RATHER THAN RESORTING TO ANY FRESH EXTERNAL BORROWING • EXCHANGE RATE RISKS : VOLATILITY IN STOCK MARKETS AS SPECULATORS WOULD SHIFT TO OIL & FOOD GRAINS • ALL EXTERNAL DEBT HAS TO BE PAID IN HARD CURRENCY • EXTERNAL DEBT CAN BE JUSTIFIED ONLY IF SPENT ON PROJECTS GENERATING FOREIGN EXCHANGE

NEED FOR REGIONAL INITIATIVES • EARLY FINALISATION OF BULK PROCUREMENT OF FUEL PROGRAM • NEED FOR CENTRAL BANK COORDINATION • PICS : SWAP ARRANGEMENTS • SIMILAR TO THE ONE IN THE EARLY 1980 s WHEN FIJI HELPED SAMOA TO TIDE OVER TEMPORARY INTERNATIONAL RESERVES CRISIS

FINAL WORD • DAYS OF LIVING ON CREDIT ARE OVER • USA IS RETURNING TO PURITAN ETHICS: THRIFT • WE BEGAN WITH A CARTOON FROM USA & NOW END WITH A RUSSIAN CARTOON: LAND OF ORIGINAL MARXISM! • MESSAGE: TIGHTEN THE BELT • THANK YOU!