THE ECONOMIC IMPACT OF GLOBAL FINANCIAL CRISIS ON FIJI

1
THE ECONOMIC IMPACT OF GLOBAL FINANCIAL CRISIS
ON FIJI

• T.K.JAYARAMAN

2

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

3
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

4
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?

5
(No Transcript)
6

• Uncertain conditions and Uncertain Projections
• TABLE 1 HERE

7

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

8
TWO CHANNELS OF TRANSMISSION

• FINANCIAL CHANNEL
• NO LAGS ALMOST IMMEDIATE
• DEPENDS ON EXPOSURE TO US DEBT INTRICATE
  PRODUCTS SECURITIZATION ETC.
• TRADE CHANNELLAGS
• 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 PROBLEMS20 COUNTRIES LISTED BY IMF

9

• Table 3

10
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 BANKSGOOD RATING
• AUS BANKING FOURTH SOUNDEST BY WORLD ECONOMIC
  FORUM SURVEY

11
HEALTH OF FINANCIAL SYSTEM IN FIJI (contd)

• AVAILABILITY OF DOMESTIC LIQUIDITY
• NO TRUST FUND OF THE KIND AS IN TUVALU
• FNPFS 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

12

• INSERT Table 4 on Trade with Industrial
  countries

13
TRADE CHANNEL IN FIJI

• TRADE IS HEAVILY ORIENTED TOWARDS IMPORTS
• FIJIS GROWTH IS NOT EXPORT-LED AS CHINAS
• 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

14
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

15

• Table 5 Tourism Remittances here

16
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

17

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

18

• Table 6 AID FDI

19
VULNERABILITY TO PRESSURES ON RESERVES

• FIJIS 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

20

• Table 7 on Reserves

21
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

22

• INSERT TABLE 8 on Budget Balance etc

23
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

24
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

25
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

26
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 1980s
• WHEN FIJI HELPED SAMOA TO TIDE OVER
• TEMPORARY INTERNATIONAL RESERVES CRISIS

27
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!

28
(No Transcript)