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GLOBAL CRISIS

2008
Presented by :
Yamna khan
10330

Outline

Introduction
Crisis unfolds
Spillovers from the Crisis
(1) Private Capital Flows and Financial Spillovers
(2) Commodity Prices
(3)Trade Impact
(4) Trade Imbalances
Pakistan and Global Crisis 2008
(1)BOP
(2) Banking sector of Pakistan
(3) IMF Loan
(4)Exchange rate
Conclusion

INTRODUCTION

How it started and how it


affected?

In 2008 the world economy faced its most


dangerouscrisis since theGreat Depression
of the 1930s.Global trade fell by nearly 30
percent relative to GDP during the Great
Recession of 2008-2009.
The contagion, which began in 2007 when
sky-high home prices in theUnited States
finally turned decisively downward, spread
quickly, first to the entire U.S. financial
sector and then to financialmarkets
overseas.

the casualties in the United States included


a) the entire investmentbanking industry,
b) the biggest insurance company,
c) the two enterprises chartered by the
government to facilitate mortgage
lending,
d) the largest mortgage lender,
e) the largest savings and loan, and
f) two of the largest commercial banks.
The carnage was not limited to the financial
sector, however, as companies that

banks,

trusting no one to pay them back, simply


stopped making the loans that most businesses need
to regulate their cash flows and without which they
cannot do business.
Share prices plunged throughout the world and by
the end of the year, a deeprecession had enveloped
most of the globe. In December theNational Bureau
of Economic Research, the private group recognized
as the official arbiter of such things, determined that
a recession had begun in the United States in
December 2007, which made this already the third
longest recession in the U.S. since World War II.

By

the end of the year, Germany,Japan, andChina were


locked in recession, as were many smaller countries. Many
in Europe paid the price for having dabbled in
Americanreal estate securities. Japan and China largely
avoided that pitfall, but their export-oriented
manufacturers suffered as recessions in their major
marketsthe U.S. and Europecut deep into demand for
their products. Less-developed countries likewise lost
markets abroad, and their foreign investment, on which
they had depended for growth capital, withered. With none
of the biggest economies prospering, there was no obvious
engine to pull the world out of its recession, and both
government and private economists predicted a rough
recovery.

The Crisis Unfolds

The

first major institution to go under


wasCountrywide Financial Corp., the largest
American mortgage lender.Bank of America
agreed in January 2008 to terms for
completing its purchase of the Californiabased Countrywide. With large shares of
Countrywides mortgages delinquent, Bank of
America was able to buy it for $4 billion on
top of the $2 billion stake that it had acquired
the previous Augusta fraction of
Countrywides recent market value.

Spillovers from the


Crisis
(1)

Private Capital Flows and Financial Spillovers

Before the
outbreak of the global crisis, Europe was the main source of
(gross) capital flows to the rest of the world, with $1,600
billion per annum during 2004-07, higher than total
outflows from the US and Japan taken together. With the
outbreak of the crisis and consequent bank deleveraging,
total outflows from Europe fell sharply, registering barely
$300 billion a year during 2008-11 . The EZ crisis has also
led to considerable short-term, month-to-month volatility in
capital inflows to DCs(developing countries), which have
become increasingly sensitive to news coming from the
region.

After the Lehman collapse, sovereign bond spreads


shot up and stood, at the end of 2008, at about three
times the level in the previous year, while the MSCI
index (Morgan Stanley Capital International) fell to
some 40% of the level reached in 2007. With the
recovery in capital flows, spreads fell, and equity
prices rose rapidly, but they both deteriorated after
mid-2011 with the deepening of the EZ( European
zone) crisis. The Lehman collapse also resulted in
large drops in the currencies of most DCs against the
dollar. It was described as a currency war by the
Brazilian minister of finance, while the governor of
the South African Reserve Bank remarked that DCs

(2) Commodity Prices


The

financial crisis in Aes(advanced economies) has


not depressed commodity prices to the extent seen in
previous post-war recessions.
The boom that had started in 2003 continued until
summer 2008 with the index for all primary
commodities rising more than threefold (Figure 4). This
was followed by a steep downturn in the second half
of 2008, but, like capital inflows, commodity prices
also recovered strongly from the beginning of 2009,
rising until spring 2011 when they leveled off and
started to fall, manifesting increased short-term
instability. In early 2013, the index was 15% below the
peak reached in summer 2008.

Commodity prices and


China
China,

whose import composition changed rapidly from manufactures


to commodities as a result of its shift from export-led to investment-led
growth. As its markets in major AEs started to shrink in 2008, China
introduced a large investment package, notably in infrastructure and
property, pushing the ratio of investment to GDP towards 50%.
Since such investment is much more intensive in commodities, notably
in metals, than exports of manufactures, which rely heavily on
imported parts and components, this shift led to a massive increase in
Chinese primary commodity imports, which doubled between 2009 and
2011 compared to a 50% increase in its manufactured imports (Figure
5).
During the same period, prices of metals rose 2.4 times, much faster
than other primary commodities. The severe swings seen during 2008
had an important speculative component. Within the first six months of
that year, the overall price index rose by some 35%, followed by a
sharp decline of 55% in the second half of the year.

(3)Trade Impact

The decline in dollar terms was almost twice as


large because of a sharp decline in the prices of
commodities.
Among major DCs, the trade impact has been
particularly severe on China because of its
dependence on exports to AEs.In the period 200207, Chinese exports grew by more than 25% per
annum, accounting for about one-third of GDP
growth, taking into account their import contents.
With the crisis in AEs, exports of Asian DCs slowed
sharply in 2008 and then dropped in
2009,becoming a major drag on activity and
reducing growth by 5-6 % points (Akyz 2012).

(4) Trade Imbalances


The

crisis resulted in a significant shift in global trade


Imbalances.
On the eve of the crisis, DCs taken together had a
current account surplus of almost $700 billion and a
little more than half of this was due to China. It fell by
almost $300 billion by the end of 2012 despite a $130
billion increase in the surplus of the west Asia and
North Africa as a result of increases in oil revenues.
The surplus of developing Asia fell from $400 billion to
$130 billion, and China from $350 billion to $210 billion,
while Latin America and sub-Saharan Africa moved from
surpluses to deficits.

Pakistan and global crisis


2008
Pakistan

was already under the affect of internal economic


crisis, when global crisis 2008 started.

Pakistans

financial crisis predates the global financial crisis.


For the past several years, Pakistan had been running
unsustainable budgetary and trade deficits.

Reasons

for Pakistans Economic Crisis


Pakistan witnessed major disruptions in its normal economic activities
as the result of acute energy crisis, high rate of interest, high cost of
production, inflation, deteriorating law and order situation, poor industrial
infrastructure, decline in FDI and joint venture with foreign investors, a
bewildering stock market, a perceptible slowdown in the manufacturing
and services sectors The other international elements include global
recession, credit crisis, weak economic prospects of the EU, USA, and
limited access to international markets and specific countries.

The

government of Pakistan
routinely spends some $26 billion a
year based on expected revenues of
around $20 billion, incurring a
budget deficit of over 7% of GDP. On
the trade front, accumulated exports
hardly ever cross the $20-billion-a
year mark, but imports end up
exceeding $35 billion: a trade deficit
in excess of $15 billion a year and a

BOP
Pakistans

balance of payment (BOP) crisis in


2007-08, which occurred as a consequence
of $147-a-barrel oil and a spike in
commodity prices, meant a frightful
depletion of foreign exchange reserves,
down to an import cover of less than three
months.
Inflation, meanwhile, shot up to over 24%,
and Pakistan was caught in a vicious cycle of
stagflationeconomic stagnation coupled
with high inflation

Pakistans

BOP crisis came at a time when the entire


donor community, including the U.S. and Europe, were
engrossed in their own subprime disasters. Desperate
for a bailout package, Pakistan pleaded with the U.S.,
begged Saudi Arabia and urged China for a billiondollar donation, all to no avail.
Finally, on 24 November 2008, the International
Monetary Fund (IMF), reportedly lured by the United
States Department of Defense, announced a 23-month
Stand-By Arrangement (SBA) of $7.6 billion and
released the first tranche of $3.1 billion. As a
consequence, foreign exchange reserves jumped from
a low of $6 billion to over $9 billion.

Banking sector of
Pakistan
According

to the 2007-08 Financial Stability Review


from the State Bank of Pakistan (SBP), 'Pakistans
banking sector has remained remarkably strong and
resilient, despite facing pressures emanating from
weakening macroeconomic environment since late
2007.

According

to Fitch Ratings, the international credit


rating agency with head offices in New York and
London, 'the Pakistani banking system has, over the
last decade, gradually evolved from a weak stateowned system to a slightly healthier and active
private sector driven system'.

The

data from the banking sector for the final


quarter of 2008 confirms a slowdown after a multiyear growth pattern.
In October 2008, total deposits fell from Rs3.77
trillion in September to Rs3.67 trillion. Provisions
for losses over the same period went up from
Rs173 billion in September to Rs178.9 billion in
October.
At the same time, the SBP has jacked up interest
rates: the 3-month Treasury bill auction saw a jump
from 9.09% in January 2008 to 14% in January
2009, and bank lending rates were as high as 20%.

IMF Loan

On 24 November 2008, the Executive


Board of the IMF agreed to bail out
Pakistan through a Stand-By Arrangement
(SBA) valued at $7.6 billion. There were
two conditions: Karachi must cut its
budgetary deficit from around 7% of GDP
to 4.2% of GDP, and increase taxation
from 10% of GDP to 10.5% of GDP.

Exchange rate
Exchange

rateafter remaining stable for


more than 4 years, lost significant value
against the US dollar and depreciated by
21% during MarchDecember 2008.
Most of the depreciation of rupee against
dollar was recorded in post November 2007
owing to combination of factors like political
uncertainty, trade related outflows and
speculative activities. With successful signing
of Standby arrangements with the IMF, the
rupee got back some of its lost value.

Conclusion
Not only has the Great Recession led to a Great
Slowdown in
Developing countries(The Economist 2012), but also
the medium-term prospects for global economic
conditions look unfavorable compared to the precrisis years and, in some respects, even the period
since the onset of the crisis.

Of BRICS (Brazil, Russia, India, China, and South


Africa),
only China promised sustained catch-up growth and
graduation
even though it faced a bumpy road. Brazil, Russia, and
South Africa continued to depend heavily on

India has been relying on the supply of labor to the


rest of the world, not by converting them into highervalue manufactures, but by exporting unskilled
workers and information and telecommunications
(IT) and other labor services of a very small
proportion of its total labor force (Nabar-Bhaduri and
Vernengo 2012).
On the contrary, the role and impact of global
market forces in the development of DCs has been
greatly enhanced by continued liberalization of
trade, investment, and finance, unilaterally or
through bilateral investment treaties and free trade
agreements with AEs. DCs need to be as selective
about globalization as AEs, and reconsider their
integration into the global economic system.

This implies rebalancing external and


domestic forces of growth and
development. Dependence on foreign
markets and capital should be reduced.
There is also a need to redefine the role of
the state and markets, not only in finance
but also in all key areas affecting
industrialization and development, keeping
in mind that there is no industrialization
without active policy.

THANK YOU !

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