Eisenhower Fellowship 2010 Womens Leadership Program

University of Iowa The impact of the financial crisis October 2010

Agenda

1. 2. 3. 4.

Brief introduction Brief overview of the EF Program Brief overview of the financial crisis Impact of the financial crisis on Africa

Background of the Eisenhower Fellowship

Eisenhower Fellowships (EF) Founded in 1953 as a tribute to Dwight D. Eisenhower upon his assuming the U.S. presidency Private non-profit ,non-partisan organization created by a group of prominent American Citizens Mission is to engage mid career professionals from around the world and enhance their leadership skills Board of Trustees is chaired by General Colin L Powell (Retired) and led by its president, John S. Wolf 2010 Womens Leadership Program Selected 19 women from different countries Seven week individualized itinerary of consultations with senior officials in government, private and other sectors

Dwight D. Eisenhower (1890 1969), the 34th President of the United States, was elected to the presidency during a time when the world was still struggling to regain economic and political stability after the devastations of World War II. Eisenhower, who had been the Supreme Commander of the Allied Forces during that war, and was later the Chief of Staff of the United States Army, brought to the presidency a nearly apolitical balance between public and private interests, and between local and global concerns. During his presidency, he sought international peace and justice and continued to press for the containment of communism through global effort. One of the most highly respected American presidents, his service and leadership spoke to people throughout the world.

Seven week program

Itinerary
Philadelphia, New York, Connecticut, Washington DC, Dallas, Houston, St Louis, Jefferson City, North Carolina, Iowa, Phoenix, San Francisco, Las Vegas, Boston, Atlanta

Financial crisis cause, impact and measures

Women in leadership

Regulators, banks, universities

Universities North Carolina, Harvard, Iowa Federal reserve banks and FDIC

Investment bank and credit rating agency State government and mayors office

Public sector Mayors office, State Treasurer Private sector PwC, Goldman Sachs

Education and research Universities Leadership summit and orientation

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The impact of the financial crisis Eisenhower Fellowships 2010 Womens Leadership Program

My work in Africa

Africa
My role Senior Manager in PricewaterhouseCoopers in Africa Central Specialized in providing professional services to the public sector (governments and donors) Services offered Audit of development projects Kenya, Uganda, Tanzania Project and fund management Somalia and Sudan (MDTF) Local fund agency services Eritrea, Uganda, Tanzania Special Investigations - Kenya Technical assistance - Rwanda
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Contributing factors

Factors that contributed to the financial crisis

Surplus balance of payment and increase in savings Low long term interest rates to stimulate investment

Homeownership - investment, source of property tax and stability

Placed some derivatives and firms beyond effective regulation Securitization provided capital for on lending and reduced risks
The impact of the financial crisis Eisenhower Fellowships 2010 Womens Leadership Program

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Growth in foreign capital Low interest rates Promotion of homeownership by the federal government Deregulatory measures taken by Congress and SEC Growth of securitzation and subprime mortgages
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Demand for new opportunities

Demand for new investment opportunities

Enormous Liquidity

Strong global economic growth

Low interest rates

Desire to find new investment opportunities. Best opportunities were seen in the housing market because:
1. 2. 3.

US government supported home ownership Mortgage assets considered safe from sharp downturns Flexible and varied mortgage products attracted more capital
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The impact of the financial crisis Eisenhower Fellowships 2010 Womens Leadership Program

The financial crisis

Overview of the crisis

Low interest rates

Demand for higher rates

Financial innovations

Sub prime loans

Housing bubble burst

Low interest rates as a result of the Federal Reserve Board efforts to keep interest rates low to stimulate investment MBS a solution for investors looking for higher interest rates and banks to release funds for on lending Sub prime loans developed without a proper regulatory environment Housing bubble burst made it difficult for borrowers to repay loans
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The impact of the financial crisis

Major players

Role played by different players

Inadequate regulation of sub prime loans and financial innovations Rating model based on historical factors and traditional borrower Interpretation of accounting standards and proper disclosure Inadequate structures to monitor financial innovations Inadequate credit risk analysis and disclosure of accurate information
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Regulators Rating agencies

Accountants and auditors Investment banks Banks

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Major players

Strengthening measures by different players

Strengthen regulation of sub prime loans and financial innovations Revisit model and factors for rating financial instruments Consolidate and simplify accounting standards and use of fair value Strengthen risk management and structures over financial innovations Proper credit risk analysis and disclosure of accurate information
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Regulators federal reserve banks, FDIC, OCC, etc Credit rating agencies Accountants and auditors FASB, PCAOB, AICPA, etc Investment banks Banks and borrowers

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Federal reserve banks prevalent themes in bank failures

Inadequate risk management controls Weak board oversight Overreliance on non core funding sources e.g. brokered deposits Commercial real estate and land development loan concentration Rapid loan growth Inadequate allowance and ineffective methodology Regulators detecting early warning signs but delaying forceful remedy

The impact of the financial crisis

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Federal reserve banks reforming prudential regulation and supervision

Eliminate coverage gaps and weaknesses Address systemic risk issues Strengthen leverage ratios and assess adequacy of capacity and liquidity buffers Reduce pro cyclical effects of accounting and reserves Promote greater market transparency Align incentives and compensation Enhance consumer protection oversight including non bank subsidiaries

The impact of the financial crisis

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Investment banks lessons learnt

Ability to innovate should not exceed capacity to manage Risk and control functions should be independent of the business unit Risk managers should have equal stature Review compensation in line with compensation and deferred Policy makers and regulators should be clear that self regulation has its limits Dynamic regulation system that can identity and constrain market excesses Global supervision, coordination and communication should reflect global interconnectedness of markets All pools of capital that are large enough to be a burden on the financial system should be regulated Risk should not be taken out of the system and we should not abandon financial innovations
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The impact of the financial crisis

Impact of the crisis

World

The impact of the financial crisis Eisenhower Fellowships 2010 Womens Leadership Program

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Current financial crisis is global and affecting developing countries

Current financial crisis is more global than any other period of financial turmoil in the past 60 years Extent and severity of the crisis began with the bursting of the housing bubble in the United States in August 2007 In line with previous crisis, the pre crisis period was characterized by:

Surging asset prices, that proved unsustainable Prolonged credit expansion leading to debt accumulation Emergence of financial instruments Inability of regulators to keep up New rapid expansion of securitization

The impact of the financial crisis Eisenhower Fellowships 2010 Womens Leadership Program

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Impact of the crisis

Africa

Impact of the financial crisis on Africa

The impact of the financial crisis

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Rwanda - Kigali

The impact of the financial crisis

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Eritrea - Asmara

The impact of the financial crisis

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Kenya Central Province

The impact of the financial crisis

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Sudan - Khartoum

The impact of the financial crisis

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Tanzania Arusha

The impact of the financial crisis

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Impact of the crisis on developing countries

First round effect on developing countries, including Africa

Round 1

Confidence levels Exchange rate

Uncertainty

Round 2

Round 1 The level of financial integration determined how countries were affected by the 1st round effects. Most affected include China, Brazil and Russia Contagion spread to the capital markets and confidence levels dropped. This was especially in emerging economies Most countries experienced exchange rate volatilities The 1st round of effects led to a rise in uncertainty.
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The impact of the financial crisis

Impact on Africa

Second round effect on Africa

IMF projections have indicated a substantial fall in the growth rates of developing countries from 6.25 per cent in 2008 to 3.25 per cent in 2009.
Round 2

Global recession

Fall in demand

Fall in exports

Reduced growth

The impact of the financial crisis

The second round has led to a global recession which has resulted to a fall in output, fall in demand and a fall in commodity prices especially the price of natural resources. The impact in Africa include: Falling exports. (The projected loss in export revenues for Africa is US$ 634bn) Lower fiscal revenues Shortage of liquidity Reduction in remittances Reduced private capital inflows Reduced FDI and short term credit 2010 Absence of trade credit October Slide 23

Effect on Africa

Effect of the financial crisis on Africa

Trade flows

Capital flows

Foreign direct investment

Overall impact on Africa Reduced growth Shrinking trade Delayed infrastructure development Threat to poverty reduction

Migrant remittances

Tourism

Aid flows

Negative effects were mainly felt through trade and capital flows, investment and migrant remittances. This has led to reduced growth, shrinking trade, delayed/cancelled infrastructure development and a threat to poverty reduction and the MDG agenda.
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Downside risks of the financial crisis

The downside risks expected from the financial crisis include:

The economic crisis will lead to a financial crisis and ultimately insolvency of financial institutions The bailout plans in developed countries will increase protectionism thereby introducing explicit controls on foreign lending and employment of foreigners

Untenable targets on debt and fiscal sustainability. Most countries are likely to violate on agreed targets
Conflict between short term and long term sustainability e.g. on interest rates and forex reserves

Global imbalance

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Kenya
On the financial sector:
1.

The effects on the financial sector are not expected to be significant given:

The weak linkages of our financial institutions with those in developed countries Foreign assets are less than 10% of the total commercial bank assets and the foreign liabilities less than 20% if total bank liabilities

2. 3. 4.

Credit to the government and the private sector has been expanding steadily Kenya has a stable banking sector Kenyas reliance on foreign aid is minimal

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Kenya measures taken by the Central Bank

Measures being taken by the Central Bank

Re-appraisal of the role and activities of the capital market

Strengthening the coordination of the regulatory institutions including RBA, CMA Enhanced the surveillance of banks Monetary stimuli (reduction of the banks cash ratio) Regulation of the banking sector Reviewing the deposit guarantee schemes. The current guarantee is KShs. 100,000 and looking at reviewing it upwards.

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Strategies for helping Africa

Ways the developed countries can help Africa

Pursuing strategies that boost demand for Africa exports Discourage protectionist practices in trade and finance Increased provision of financing and grants to African countries Provide funding for low income countries Honor pledged funding for Africa

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Boost exports Discourage protectionism Bilateral and multilateral mechanisms Fund programs to reduce vulnerability Honor pledges

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Much of the effort must come from African countries

Strategies for African countries

Rebalance between external and domestic sources of growth Accelerate institutional reforms Balance between the role of the state and role of the market Balance between crisis response and alleviation of structural constraints to long term growth Give priority to infrastructure, trade and regional integration
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Domestic growth Institutional reforms Conducive environment Focus on long term growth Prioritize

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Thank you

Thank you

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