THE ECONOMIC IMPACT OF GLOBAL

FINANCIAL CRISIS ON FIJI

T.K.JAYARAMAN

• 1. INTRODUCTION

• 2. FACTORS INFLUENCING IMPACT

• 3. IMPACT

• 4. POSSIBLE POLICY RESPONSES

• 5. 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 1980sWHEN 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!

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