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IMF Chief Warns Against Financial Complacency
May 16, 2008
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The current global financial crisis may be slowly weakening but its impact on the international economy is likely to drag on for months.
This, according to the Managing Director of the International Monetary Fund Mr Dominique Strauss-Khan.
After a prolonged period of erratic market activity, optimism has begun to emerge among industry players that the worst of the financial storm has passed.
Even though past financial crises were triggered by accounting problems faced in developing countries, Mr Strauss-Khan warned that the recent economic turmoil may be an indicator of a new kind of market volatility.
To learn how companies, businesses and world economies can be better prepared to cushion the effects of this potential set-back, Michael Tan spoke with Mr Song Seng Woon, regional economist from brokerage firm CIMB-GK.
SW: Well, at this point, I suppose we’re seeing some stability in returning to the financial market but the difficulty for many companies at this point is that there’s still a lot of question marks over whether the real economy may be affected in the months to come because of what’s happening on the prices front. Prices for many sort of raw materials including energy prices are now at a level which we haven’t seen for many, many years or at record levels themselves so the worry for many businesses is whether house-hold spending may be affected by the elevated prices for many products and services and therefore that makes planning a little bit more difficult. People are also watching their spending a little bit more carefully as well. There’s a little bit of, I should say, uncertainty, over how the global economy may perform especially in the second half of the year if inflationary pressures continue to build up causing house-hold consumption to perhaps pull back somewhat.
And Managing Director of the International Monetary Fund Mr Dominique Strauss-Khan said that one of the main issues that contributed to the international financial crisis was the linkages between financial activity and the global economy. Have businesses learned to resolve that kind of issue?
SW: At this point, there is stability on that side so I think as far as the worry of a credit crunch is concerned and the volatility that may be created as a result of a lack of confidence by financial institutions, I suppose at this point here, it’s what the central banks have done, including the IMF etc, is to reassure businesses that things are relatively normal and businesses can carry on. At the end of the day, it’s about the confidence factor as we have seen with the so-called rescue of a couple of the financial institutions by the central banks in the US, in the UK and in other countries, in that, where there’s seen to be aggressive measures being taken, it does bring some stability to the market and the cost of borrowing which spiked up sharply can sort of normalize to some extent as well. So if that happens, then I think businesses to some extent can operate relatively normally quite quickly.
And Mr Strauss-Khan also said that the effects of the recent financial crisis are likely to weigh on economic activity for several more quarters. How long can this be expected to last?
SW: Well, I suppose only time will tell because the problem that people are getting to grapple with is that if this has been just an issue of a credit crunch due to uncertainty over sub-prime lending and looking forward, if measures are taken to tackle the sub-prime loans etc, I think we would have certainly seen much better prospects for economic growth going into 2009. But the problem is that unfortunately at this point, while the worst of the sub-prime for financial institutions may be behind us, for financial institutions, they may have to grapple perhaps with consumer house-hold loans turning bad in the coming quarter as a result of just the high cost of doing business or the high cost of putting food on the table which may cause consumers not only in the US but in the rest of the world to cut back on consumption as a result. If that happens, businesses will be affected as well and that could potentially induce slower economic growth going into 2009.
Despite this, the Euro-Zone economy rebounded with unexpected growth of 0.7% in the first quarter of this year. What kind of figures can you give us about the state of the financial market in South-east Asia from here on out perhaps?
SW: Well, I have to say, certainly at this juncture from most of the numbers that are being reported, I think first half GDP numbers for most countries will probably still look pretty good. We’ve seen Singapore’s numbers for example topping expectations and the government will release revised first-quarter numbers I think next week. We’ll probably continue to show first-quarter growth in excess of 7% on the back of fairly resilient domestic demand riding on regional growth. Bottom-line here is that at this juncture, the resilience of domestic demand really has been holding up most of the economies that we have seen including the Euro-Zone area itself. So going forward, it comes back to the question of, will inflation expectations or inflationary pressures eat into consumption in the coming quarter or so?
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