What should be done before crisis hits you?
The world’s business circles are getting increasingly panicky over the possibility of another wave of financial crisis. Monday night [August 8. – Ed.], despite President Obama’s investor-soothing speech, Wall Street registered the lowest drop in prices since the end of 2008. On August 9, US stock indices showed a record historical decline.
Washington tried to blame Standard & Poor’s, accusing them of unprofessionalism because they had lowered the US sovereign rating the previous week. Monday night they also lowered the long-term credit rating of America’s largest mortgage companies, Fannie Mae and Freddie Mac after the federal takeover at the start of the financial crisis in 2008. Thousands of US municipal bonds were downgraded as well. All such ratings considered, the outlook is negative.
Against the backdrop of the US problems, the Asian stock indices literally collapsed. Russia’s stock indices registered a record drop since 2008. Ukraine’s equity market beat the record year’s drop of -8.28 percent during The Day when it registered -10 percent on Tuesday [August 9. – Ed.]
According to MarketWatch’s chief economist Irwin Keller, “The very fear that the United States economy is heading into a double-dip recession may well serve to keep us out of it.” There is also the fear that the lowering of raw materials prices will cause a reduction in the cost of consumer products and growth in consumer spending, but this would help the economy. Probably the most encouraging statement made by the world’s financial analysts. The big question is: “Will this help improve the existing situation?”
Two months ago, the millionaire and financial guru, George Soros, predicted: “The collapse of the financial system, as we know it, is real and the crisis is far from over. Indeed, we have just entered Act II of the drama…” Bloomberg quotes Soros as saying, “When the financial markets started losing confidence in the credibility of sovereign debt, Greece and the euro have taken center stage, but the effects are liable to be felt worldwide.”
Naoyuki Shinohara, Deputy Managing Director of the International Monetary Fund, recently shared his view on the possibility of the second wave of world financial crisis, saying that the highest risk is the vulnerability of the developed countries’ budgetary policies. Also, in his opinion, Russia may well follow the Greek scenario.
Meanwhile, Standard & Poor’s does not expect the domino effect from the developing markets after the lowering of the US long-term debt assessment. John Chambers, chairman of S&P’s sovereign debt committee, said Monday [August 8. – Ed.]: “It is like going from indigo to navy blue.”
The Economic Times reads: “Former Federal Reserve Chairman Alan Greenspan [term of office: 1987-2006. – Author] on Sunday downplayed the risk of a double-dip recession in the United States, saying its domestic economy was in better shape compared to its European peers. A double-dip recession ‘depends on Europe, not the United States,’ Greenspan said in a TV interview. ‘The United States was actually doing relatively well — sluggish, but going forward —until Italy ran into trouble.’ Greenspan added that this served to destabilize the euro. This top-notch financial expert is sure that the lowering of US credit rating will have a negative effect on the markets, although ‘Treasuries are still safe. The US can pay any debt it has because it always can print more money.’” RIA Novosti (Russia) quotes him as saying [August 7, NBC’s “Meet the Press.” – Ed.]: “It hit a nerve that there is something basically bad going on… It hit the self-esteem of the United States…” He went on to say that, from the economic standpoint, he could realize that everything was OK, yet the S&P’s decisions had to do with the debt ceiling and the way Congress debated the issue until the last moment. Greenspan, a true American patriot, appears to be playing into Washington’s hands as the White House is struggling to cope with challenges unheard of since the Great Depression.
As it is, his views are not shared by analysts elsewhere in the world. The Chinese government feels sure the international community needs a different kind of reserve currency, one capable of replacing the dollar. Xinhua News Agency came up with this statement [August 7. – Ed.]: “The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone.” White House Press Secretary Jay Carney says the lawmakers took their time debating their decisions until they agreed on the federal debt ceiling.
However, the problem is not the sluggish administrative practice. Mykola Ivchenko, head of the information and analysis Forex Club in Ukraine, told The Day that the global PMI [Purchasing Managers Index. – Ed.] had dropped from 52.3 points in June to 50.6 in July, the minimum since July 2009 when the situation began to gradually improve after the US recession. He believes this was proof of the approaching economic decline. In 2008, this index was below 50, compared to that in spring — in other words, considerably earlier than the crisis. Today’s economic decline all over the world is against the backdrop of the lowering New Orders Index in July: from 51 to 49.9. Ivchenko says it is safe to assume that this index will continue to lower, what with the lower economic growth rate in the US, considering that America shares 28.6 percent of the world’s GDP.
All this is evidence that the world financial crisis will hit Ukraine. Then we will suffer the heavy burden of outstanding debts. To make things worse, Ukraine’s steel, chemical and agrarian exports will suffer a lower market demand. As a result, there will be lower budget incomes and balance-of-payments deficit, caused, among other things, by foreign inland investment limitations. In other words, the hryvnia [exchange rate. – Ed.] will be increasingly under pressure.
What can be done to spare Ukraine from this crisis or at least soften the impact? One answer: There is the domestic market that could make up for the decline in the world market demand for the Ukrainian products. And there is a way to increase Ukraine’s export competitiveness. Is the incumbent government coping with these problems, considering its constitutional duty to foresee such world market challenges? Doubtlessly, some measures are being taken, including the stepping up of the construction industry and upgrading the municipal sector. There are vague pay-rise promises in the budget-run sector (if one disregards the overall snail-like pace of payroll increase), but not a word about national product competitiveness. In a word, our government must resolve these problems and keep them on top of the round-the-clock agenda. As it is, our government appears to be unaware of the imminent crisis. Prime Minister Mykola Azarov decided to inspect a child daycare center being under construction in Kyiv [August 9. – Ed.] and told media people that such institutions would no longer be needed in two years. Specifically, he promised to arrange for a serial production of Pampers and condoms in Ukraine. The questions remains: “Was it a constructive decision, meant to help imports, or yet another publicity stunt using the good old childcare scenario?”
COMMENTARY
Oleksandr KENDIUKHOV, president, All-Ukrainian Association of Economic Scientists:
“My estimates show that the world economic crisis, which began in 2008, will peak in 2015-16, so Ukraine has time enough to get prepared for this, even though the situation is getting from bad to worse. However, the undeveloped – or underdeveloped – domestic market is not the main problem. The big problem is that we have export-oriented industries, but their products fail to meet world market standards. We have practically nothing to offer [in terms of quality. – Ed.]. Therefore, the main strategic goal remains the way it was set five years ago and the way it will remain fifteen years from now: high-tech export-oriented projects implying high added-value of an end-product. If and when these projects are implemented, we will earn more than enough to provide for the domestic market needs. Not a single such project has been carried out since Ukraine proclaimed its national independence. In this sense we could learn from the experience of Japan, [South. – Ed.] Korea, China, even Kazakhstan. By the way, Kazakhstan will launch 200 export-oriented businesses in the next five years, as recommended by our association. There is 50 billion dollars’ worth of central budget appropriations to help these projects. Unfortunately, there are no such projects in Ukraine.”
