My MBA Thesis - Final Presentation - Nov - 6 - 10

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1. Presentation of MBA ThesisPresented bySheikh Faizan Ahmed (0935117)Syed Anser Ahmed (0935121)AdvisorMs. Hilla Shahpur ManeckjiNo Broken Bones: How the PakistaniEconomy Warded Off the Paralyzing Effectsof the Global Financial Crisis 2. Problem StatementDid the Global Financial Crisis impact thePakistani economy? If it did, how bad was thesituation and what were the effects? 3. Rationale&Justification 4. Rationale of the ResearchDomain Not much research has been done on this topic It is current and relevant 5. Justification The current Global Financial Crisis has been described asthe worst since the Great Depression of 1930s. Pakistan is identified as an emerging market and it wasthought by us that the analysis of the Global FinancialCrisis on the Pakistani Economy would show us itsreaction on an emerging market economy. Such an undertaking is well worth the time and effortespecially for students of Finance and people concernedabout the welfare of a society. 6. CriticalReviews 7. Critical Reviews The ongoing Global Financial Crisis 2008-2009 started inFebruary 2007 when reports of losses by large subprimelenders began to emerge. This had a tremendous impact on the $10 trillionmortgage market creating a state of unrest. Between 2003 and 2007, the world saw an astoundingeconomic boom. Where did all this liquidity actually come from? According to Jones and Ocampo (2009) exceptionalfinancing, high commodity prices and large remittancesplayed an important role in fueling the boom. 8. Contd.. The risk levels were not accurately assessed and whendefaults started to happen a sharp contraction in creditand bank lending occurred. This uncertainty started wreaking havoc in the stockexchanges in the US.The PakistaniScenarioInternationalArenaCriticalReview 9. International Arena While this was going on in the US, the core of thefinancial world outside the US was rocked inflicting heavydamages on the financial institutions and the markets ata global scale (IMF Report 2008). Outside of the USA, the Bank of China and Frances BNPParibas were the first international institutions to declaresubstantial losses from subprime-related securities. European countries were also standing soon in the line ofthe affectees. 10. Contd.. To arrest the situation the European Central Bankinjected 94.8 billion into the system. The following day these overnight repurchaseagreements were renewed and a further 61.1 billionwas injected. France, Germany and the United Kingdom followedthem. 11. The Pakistani Scenario Countries offering financial aids also saw that the crisishad an impact in their ability to continue with financialaids to developing countries. Depression effects were not as heavy as in other majoreconomic centers. Weak links of the Pakistani domestic financial sectorswith the financial markets on the international front. 12. Contd.. Global financial crisis of 2008 - 2009 started seeping intothe country, it resulted in Drying up Foreign Direct Investment (FDI) Slowed international loan prospects Declined rate of privatization Rising rate of inflation Rise in the cost of doing business Demand for goods and services has suffered with theglobal recession Rise in poverty and unemployment 13. Issues 14. Issues One of the major issues was to identify whatcharacteristics were to be used as a foundation for theanalysis of the impacts on the whole economy. We identified four proxies or characteristics, namely: Imports and Exports Remittances Foreign Direct Investment Foreign Portfolio Investment 15. Contd.. Once the main characteristics were identified, we focusedon the impacts on these crucial characteristics and wereable to ascertain the over all impacts on the economy. 16. Objectives 17. Objectives To identify whether the Global Financial Crisis has hadan impact on the Pakistani economy or not? If impacted, then with what intensity? 18. Importanceof theStudy 19. Importance of the Study This study was not only important but also veryinteresting for us as it sheds light on the workings of theglobal financial world. The effects of the Global Financial Crisis around theworld made us think about the impacts on Pakistan. This study shows the disintegrated nature of thePakistani economy in relation to the rest of the world. It also identifies the soundness of our banking system. 20. Contd.. This research can be used as a foundation for policymaking that deals with the avoidance of future financialmishaps and how an economy can safe guard itself. Society as a whole is well off when its economy canwithstand the shocks and turns of the global financialstorms. A strong, vibrant economy paves the way for a stable,prosperous society. 21. Limitationsof theStudy 22. Limitations of the Study Since the Global Financial Crisis is still on going, we werelimited in the selection of our data for analysis. Due to its on going status, not much has been writtenviz-a-viz the impacts on the developing nationeconomies specially the Pakistani economy. 23. ResearchMethodology&Data Sources 24. Research Methodology This study is qualitative in nature. Data has been collected through qualitative methods anddescriptive studies to attain some sort of result. Proxies Developed are as follows: Imports and Exports Remittances Foreign Direct Investment Foreign Portfolio InvestmentSecondary Sources State Bank of Pakistan AnnualReports (2006 to 2009)Primary Sources Were not used due to limitations 25. DataAnalysis 26. Data Analysis Import / Export Pakistans foreign trade can be categorized by itstrade deficit, because its exports comprises primarilyof goods and raw materials. On the other hand, imports consist of capital goods,industrial goods, oil, luxury items, etc. 27. Contd.. Pakistan is expected to cut 3 million jobs in differentsectors of the economy in the coming years. The major sectors that are vulnerable to job losses areautomobiles, construction and textiles. 28. Contd.. Remittances Remittances have become a major source of externaldevelopmental finance. The actual size of remittances, including both officiallyrecorded and unrecorded transfers through informalchannels is even larger. The money sent home not only promotes economicgrowth, increases investment and communitydevelopments but also helps in reducing povertythrough employment generation. 29. Contd.. Contrary to expectations, remittances have held up. This is partly due to the fact that the majority of migrantlabor class, work in middle-eastern countries. Switch in the motivation for remittances fromconsumption to investment. 30. Contd.. Due to rising economic skepticism and looming joblosses, many expats instead of heading back home cameto the Gulf region in search of jobs and opportunities. 31. Contd.. Foreign Direct Investment It plays an important role in the economy providingnecessary resources, technology, and managerialexpertise. It helps in the economic development of theparticular country where the investment is beingmade. 32. Contd.. FDI in 2005 was $1.5 billion and in 2006 this numberjumped to $5.0 billion. In 2007, the Year on Year (YoY)change was only 8 percent while in 2008, the YoYchange was a negative 2 percent which further declinedby 30 percent in 2009. 33. Contd.. Foreign Portfolio Investment It is increasingly appreciated that improved marketsfor investment in equities can help promote fastereconomic growth. Pakistan being one of the developing countries has anadvance market of securities with proper and fullyfunctional stock exchanges which are not onlycontributing to the nations growth but also adding tothe wellbeing of its investors. 34. Contd.. Between 2005 and 2006, we saw an increase of 55 percentin portfolio investments. After the crisis panic selling pulled down the index to 9,144points a floor was placed to avoid further decline. $36.9 billion was wiped out from market. 35. Deliverables 36. We started off with just a hunch that the GlobalFinancial Crisis has not impacted the Pakistani economyin a major way. Through our research we have confirmed our instinctand have shown that in fact, the Pakistani economy wasable to defend itself from the Global Financial Crisismainly due to its weak integration with global financialcenters.Deliverables 37. Conclusion&References 38. Analyzed the impact of the Global Financial Crisis onthe Pakistani economy viz-a-viz Imports and Exports,Remittances, Foreign Direct Investment and ForeignPortfolio Investment. Some cuts and bruises suffered by the economy. Pakistani economy was able to stand its ground in theface of the Global Financial Crisis mainly due to lack ofdeep integration with other major financial centers ofthe world.Conclusion 39. References Griffith-Jones, S. and Ocampo, J. A. (2009) The financial crisis and itsimpact on developing countries Working paper No. 53, InternationalPolicy Centre for Inclusive Growth, Brasilia, Brazil. Irwin, G. (2005) No money down gains more buyers Akron BeaconJournal. Jaffee, D. M. (2008) The US subprime mortgage crisis: issues raisedand lessons learned Working Paper No. 28, The Commission on Growthand Development, Washington DC, pp. 1-36. Tong, H. and Wei, S. H. (2008) Real effects of the subprime mortgagecrisis: is it a demand of finance shock? NBER Working Paper No. 14205,Cambridge, MA. Bagella, M., Ciciretti, R. and Paesani, P. (2008) Monetary policy andstock market risk perception in the US. In Fuchs, E.J, and Braun, F. eds.Emerging topics in banking and finance, Nova: Science, pp. 187200. 40. Contd.. James, W. E., Park, D., Jhawanich, S., Jong J., Terada-Hagiwara, A. andSumulong, L. (2008) The US financial crisis, global financial turmoil, anddeveloping Asia: is the era of high growth at an end? ADB EconomicsWorking Paper Series No. 139, Philippines. Bosworth, B. and Flaaen, A. (2009) Americas financial crisis: the end ofan era In ADBI (), Global Financial and Economic Crisis: Impacts,Lessons and Growth Rebalancing, April, Asian Development BankInstitute: Tokyo. Orlowski, L. T. (2008) Stages of the 2007/2008 global financial crisis: isthere a wandering asset-price bubble? Discussion Paper No. 2008-43,Sacred Heart University, Fairfield. Hudson, R. and Maioli, S. (2010) A response to Reflections on a globalfinancial crisis Critical perspectives on international business, 6 (1), pp.53-71. 41. Contd.. Abella, M. and Ducanes, G. (2009) The effect of the global economiccrisis on Asian migrant workers and governments responsesInternational Migration Review, 43 (3), pp.671-91. State Bank of Pakistan (2006) Annual Report 2005 2006, Karachi. State Bank of Pakistan (2007) Annual Report 2006 2007, Karachi. State Bank of Pakistan (2008) Annual Report 2007 2008, Karachi. State Bank of Pakistan (2009) Annual Report 2008 2009, Karachi. South Asia Terrorism Portal (2010) Pakistan Assessment 2010[Online]. Available:http://www.satp.org/satporgtp/countries/pakistan/ [Accessed 1stOctober, 2010].