The Current Global Economic Environment

1
The Current Global Economic Environment Its
Implications for Jamaica

• Dr. Wesley Hughes
• Director General
• Planning Institute of Jamaica
• Thursday, October 23, 2008

Prepared by the Economic Planning Research
Division and the Director Generals Secretariat
2
We Have A Problem

• In August 2008, the Bank of International
  Settlement (BIS) said the financial crisis facing
  the world was the most serious since WWII and
  that we were approaching the tipping point.

3
Roots of the Problem

• The 1997 Asian financial crisis
• The slashing of interest rates in the US
• The dot com bubble (2001) which racked up losses
  of US7 trillion on the equity market

4
Roots of the Problem

• The US Fed Reserve policy between 2001 and 2006
  to keep interest rates at record low levels to
  keep growth going
• The housing bubble which burst in 2007

5
Understanding the Problem

• Sub-prime mortgage market refers to the granting
  of loans to homebuyers who would not normally
  qualify for loans at market interest rates due to
  risk factors such as poor credit history or
  income level.

6
Understanding the Problem

• Problems of the US sub-prime mortgage market
  undermined the financial institutions.
• Bank balance sheets became fragile, curtailing
  their ability to lend

7
Warning Signals in 2007

• April New Century Financial (NCF) files for
  Chapter 11 bankruptcy protection, cuts its
  workforce by half and sells its debts to other
  banks.
• Sept. 13 Northern Rock asked the Bank of
  England for emergency financial support leading
  to the biggest run on a British bank for more
  than a century. Depositors withdrew 1 billion.

8
Escalation of the Crisis - 2008

• Jan. 21 Global stock markets suffered their
  biggest falls since 9/11.
• Mar. 17 Bear Stearns, Wall Streets 5th largest
  bank was acquired by JP Morgan Chase for 240
  million.
• Sept. 7 Fannie Mae and Freddie Mac were bailed
  out.

9
Escalation of the Crisis - 2008

• Sept. 15 Lehman Brothers filed for Chapter 11
  bankruptcy protection
• Merrill Lynch agreed to be taken over by Bank of
  America for US50bn
• Sept. 16 US Fed Res offered rescue package of
  85bn to AIG
• Sept. 25 Washington Mutual (WaMu) was closed
  down and sold to Citigroup.

10
Emergency Stabilization Act of 2008

• The Act was proposed by President Bush and
  Treasury Secretary Henry Paulson to stem the
  liquidity crisis of Sept 08.
• The overall purpose of the US700 billion plan
  was to reduce uncertainty and restore confidence
  in the US financial system and so free up the
  flow of credit.

11
Implications for Jamaica

• Our ability to raise funds internationally in the
  private financial markets will be met by much
  higher interest rates.
• The capital market is not an option for raising
  funds.
• We will have to rely increasingly on the
  multilateral financial institutions.
• The GOJ will have to source more of its financing
  needs on the local market, resulting in higher
  domestic interest rates and less resources
  available to the productive sector.

12
Implications for Jamaica

• There will likely be a large overcorrection in
  order to restore confidence and maintain
  credibility in the US and global financial
  sector.
• This may crowd-out FDI for Jamaica.
• Rating agencies will try to cover for their
  failure and punish emerging economies.

13
What To Expect Globally?

• De-leveraging
• A fall out in the real sector in the United
  States
• General economic activity will naturally slow
• Lowering of inflation as international commodity
  prices fall.

14
What To Expect Locally?

• In concluding, it is expected that this global
  financial crisis will have an adverse impact on
  Jamaica, particularly in the areas of
• Trade in Goods Services
• Production/GDP growth
• Employment
• Poverty
• Investments
• Exchange rate / Interest rates
• Government expenditure and
• Remittance flows