It’s been nearly a decade since the global financial crisis swept through markets across the world. In the United States, President Donald Trump has advocated weakening the rules that were established in the wake of the crisis, while other world leaders warn against turning back. Global Network Perspectives asked experts across the world about the risk of financial instability in their countries and regions.
Brazil
Rafael Schiozer, Professor of Finance, FGV-EAESP
What are the odds of major financial market disruption in your country? What are the major risks right now?
Brazil underwent several crises over the last 20 years, which translated into volatility in currency, interest rates, and equity prices. In all of these events, the financial system has been able to endure the instability in these markets relatively well. Brazilian banks are well-capitalized compared to international standards, they have good risk management processes and little direct exposure to foreign assets, which make them less likely to transmit external shocks into the domestic economy. The Central Bank successfully used a wide array of policy instruments to manage these periods of instability and contain macro-systemic risks.
In the short run, the major risk is indeed political. The recent political events in Brazil, such as the impeachment of President Rousseff in mid-2016, the corruption scandals resulting in over 200 politicians formally investigated by federal prosecutors, and the recent alleged wrongdoings of incumbent president Michel Temer all increase the uncertainty of the political future of the country. It is almost impossible to predict what the aftermath of this political crisis will be.
Read Schiozer’s full commentary
Germany
Jörg Rocholl, President and EY Chair in Governance and Compliance, ESMT
Public confidence in the financial system has been severely damaged since the 2008 financial crisis swept in full force across the globe, bringing with it massive consequences for banks and taxpayers. Government intervention prevented more serious consequences and averted a core meltdown of the financial system. Since then, general acceptance of market economies has undergone an enormous stress test, and it will take a while to restore lost faith.
As a consequence of what happened in 2008, it was clear that policymakers and regulators had to react. To avoid future risks, they must continue to take the steps necessary to make the financial system more resilient and shield states and taxpayers from having to pick up the bill when the banking sector gets into trouble, in particular by further increasing capital and liquidity standards for banks. At the same time, bankers feel increasingly strangulated by regulation, sometimes comparing it to a tsunami.
While this picture might be too much of a stretch, we cannot ignore the impression that some regulation is a hasty reaction. Once a problem is identified, there seems to be a legal imperative to address this problem, without evidence as to whether this legal response actually helps to alleviate the problem or simply placates the public.
The benefits of regulatory changes, their costs – such as the rapidly growing bureaucratic burden on information and reporting requirements – and the possible interactions between different regulatory steps have to be taken into account. The focus has often been on individual measures and sectors, where consistency and a holistic approach are needed.
Read Rocholl’s full commentary
Israel
Ido Erev, Professor of Behavioral Science and Management, Technion – Israel Institute of Technology
Miriam Irez, Professor of Behavioral Science and Management, Technion – Israel Institute of Technology
What are the odds of major financial market disruption in your country? What are the major risks right now? Is your country better prepared to mitigate/manage such risks than it was before the 2008 crisis?
Israel was less affected by the 2008 sub-prime crisis than other western countries. GDP growth declined from 4% in 2008 to 0.7% in 2009, but in 2010 it rose again to more than 4%. Unemployment increased from 5.7% in 2007 to 8.0% in 2009, but declined to 6.3% by mid-2010. Prime Minister Netanyahu believes that the robustness of the Israeli market in 2008 is a result of the measure he led when he served as the minister of finance between 2001 and 2003. This measure includes a reduction of the investment in infrastructure and education. Yet, there are many other explanations of the limited effect of the 2008 crises in Israel. Some people believe that the Israeli banks were just to slow in joining the party.
Similar to the past, we trust our entrepreneurial spirit and the ability to improvise when necessary and find new avenues to survive. We believe that this spirit will help us if unfortunately the country will face an economic crisis.
Nigeria
Oghenovo A. Obrimah, Senior Lecturer, Dept. of Accounting, Economics, and Finance, Lagos Business School
What are the odds of major financial market disruption in your country?
The Nigerian economy has faced disruption on several fronts, including uncertainty about the true value of the Naira (Nigerian currency); a loss of confidence in the management in the economy which has been evident in (foreign-direct investment) FDI flows, and the increased probability that banks will engage in risk-shifting activities. In light of the current situation, the odds of major financial disruption in Nigeria are not trivial: it’s an economically significant possibility.
What are the major risks right now?
Nigeria enjoyed a well-functioning monetary policy that militated against and enabled decreases in inflationary pressure between 2007 and 2012. The current situation makes it difficult for domestic and international investors to predict returns on foreign capital. That loss of confidence in the economy may also be connected to evidence suggesting that the Central Bank of Nigeria is no longer independent from the political arm of government. The major risk at the moment is that the monetary economy will follow the course charted by the current administration of the Central Bank. That risk, combined with the growing perception that the privatization efforts within the Nigerian economy are a ruse, present the largest risk for Nigerians and investors.
Is your country better prepared to mitigate/manage such risks than it was before the 2008 crisis?
In the wake of the 2008 crisis, the Nigerian economy was managed adroitly. Subsequent to 2014, however, monetary policy became politicized. If Nigeria is to do a good job of managing country risk in the present and going forward, the value of the Naira must be determined by a combination of market forces and government fiat. There must be a return to allowing free market forces to determine inflation levels. In addition, economic development must become the major focus of the government.
Philippines
Federico M. Macaranas, Professor, Executive Director of the AIM Policy Center
What are the odds of major financial market disruption in your country? What are the major risks right now? Is your country better prepared to mitigate/manage such risks than it was before the 2008 crisis?
Having a major financial market disruption in the Philippines is less likely to happen because of the stable macroeconomic fundamentals set by Central Bank of the Philippines, including monetary and fiscal policies. For example, the Philippines has managed to maintain its annual inflation rates between the ideal 3-5% margin for the last 8 years. This means that the Central Bank has been effective in managing the financial risks and establishing the foundations of the country’s macroeconomy.
Perhaps, the possible risks to the economy were more political in nature rather than economic. One is a changing of the guard at the Central Bank, which will have new governor by July 2017. However, the coming appointment of Deputy Governor Nestor Espenilla Jr. – a career central banker – as the Central Bank’s Governor may lower the risk of change.
Read Macaranas’s full commentary
Singapore
Robert Kimmel, Head of Department, Associate Professor of Finance, NUS Business School
Kimmel provided two opinions: one for Singapore and another for his home country of Ireland—both relatively small island nations.
Such countries are always subject to financial and economic disruption due to events beyond their borders, even if they do everything right at home.
Among the risks facing Singapore (and much of the world) are the possibility of an economic slowdown in China, and the rising tide of protectionist sentiment around the world. Singapore was to be part of the Trans Pacific Partnership Agreement. Although this agreement had been criticised as a political attempt by the United States to reduce the power and influence of China, it was to be largest free trade deal in history; however, the new US administration, as one of its first actions, withdrew from the agreement. The remaining countries have agreed to press forward anyway, but the agreement will have much less of an impact without a country with such a large economy.
Ireland is a relatively small country with an open economy. Even if the government and the people do everything right, there is always a risk of disruption due to events outside of its borders, since there are substantial trade and investment ties with other countries.
The biggest risk at this time is probably Brexit. Ireland has a long border with Northern Ireland, which is part of the UK, and trade ties between Ireland and not just Northern Ireland, but all of the UK, are strong, and nobody really knows what the terms of the Brexit will be. The EU is taking a hard line, stating that the UK cannot pick and choose which trade/labour mobility agreements they will participate in. The chances of a “hard Brexit,” in which the UK leaves the EU with no trade agreement in place, are substantial. The financial industry in Dublin could actually benefit, since Ireland and Malta are the only remaining English-speaking countries in the EU. Some London financial firms are already relocating staff and operations to Dublin, albeit on a small scale. However, the economic effects due to trade disruption are likely to be substantial and negative. There may be some possibility of disruption to emigration, which traditionally has functioned as a relief valve during poor economic times in Ireland, although free movement between Ireland and the UK predates the European Union and is likely to survive Brexit.
South Africa
Sean Gossel, Senior Lecturer in Finance, UCT Graduate School of Business
Misheck Mutize, Lecturer in Finance, at the UCT Graduate School of Business
What are the odds of major financial market disruption in your country?
Given the current debate on the misunderstood terms: Radical Economic Transformation and white monopoly capital in South Africa right now, the chances are very high that markets will be disrupted, especially towards the national elections next year. Taking precedence from the recent activities by different political parties that have marched, on different occasions, to the Johannesburg Stock Exchange in protest against inequality and white monopoly capital, the financial markets will certainly be shaking next year.
What are the major risks right now?
The country currently faces significant political, legal and financial risk.
Political risk: from the volatile political environment and the infighting within the ruling African National Congress, which is severely threatening policy certainty.
Legal risk: emanating from the political interferences in the judiciary and the proposed Land Expropriation Bill aimed at taking land without compensation.
Financial risk: from the shrinking economy.
Is your country better prepared to mitigate/manage such risks than it was before the 2008 crisis?
The country is in a worse position than it was before and just after the 2008 crisis and the situation is not improving either. These disruptions are likely going to significantly push capital out of South Africa since the financial markets are largely composed of short-term capital. For political interests, the authorities are neither prepared to save nor prioritising financial markets. The recent sovereign credit rating downgrade is evidence of the deteriorating macroeconomic, socio-political environment in our already fragile state.
Switzerland
ARTURO BRIS, DIRECTOR OF IMD WORLD COMPETITIVENESS CENTER, IMD BUSINESS SCHOOL
In a series of two videos, Bris discusses the impact of financial regulation both on Switzerland and Europe as a whole.
Turkey
SELVA DEMIRALP, ASSOCIATE PROFESSOR OF ECONOMICS, KOÇ UNIVERSITY
What are the odds of major financial market disruption in your country? What are the major risks right now? Is your country better prepared to mitigate/manage such risks than it was before the 2008 crisis?
I do not see the risk for a “major financial market disruption” in Turkey in the near future. The major external risk is the Federal Reserve’s tightening cycle. Successive rate hikes by the Fed will trigger capital outflows. But this is not expected to cause a market disruption. Rather, it would weaken the Turkish Lira and contribute to the slowdown of Turkish growth.
As for the major internal risks, a more authoritarian political regime and the weaker central bank seems to be an important risk. In my opinion, the Central Bank of Turkey (CBT) is not implementing optimal monetary policy. And the divergence from the optimal policy seems to be due to government pressures for accommodative policy. Recently, they started talking about developing bank CDO’s and allowing the CBT to buy such securities. If that path is taken, that would be the biggest risk because that would not only damage central bank independence substantially but also it would be very inflationary in the near term.
Turkey adopted pretty strong regulations after the 2001 crisis. Hence, Turkish banks were not exposed to the “toxic” assets that other western banks were exposed to during the 2007-2008 crisis. So the crisis did not really spread to the Turkish Banking system. Indeed, I believe the strictness of the regulations is the main advantage of the Turkish banking system. It is important to keep it that way.
United States
Andrew Metrick, Michael H. Jordan Professor of Finance and Management, Yale School of Management
How big is the risk of another financial crisis?
From a general macro-economic perspective, the United States is safer than it was 10 or 15 years ago, in part because we just had a crisis. A big element of what leads us to have a crisis is people’s willingness to accumulate very high levels of risk because of a confidence that it can’t happen. There’s a certain immunity so soon after the last crisis.
We aren’t seeing the problem of taking on excessive risk in the United States. Globally, we do have some very large concerns. Europe has not yet emerged from the financial crisis. There’s still tremendous uncertainty about the stability of their financial system, which has not repaired itself and did not go through the wrenching changes that we went through in the United States over the 2009 to 2010 period.
China is something of a mystery in that it’s a very large, very fast-growing economy with a financial system that in many ways is not as well developed as the rest of the economy. In part that’s an ideological choice; that is, they’ve deliberately undergone a different form of development. One point of solace is that China is quite wealthy from a savings perspective; the government is quite capable of supporting the financial system if it comes to that. But there’s uncertainty about whether or not that would happen and just how complicated the problems are.
Again, for the U.S., I don’t think anybody can deny that we have a lot of uncertainty right now around key financial issues. Both specific policies and communication stances make it hard to predict where things will go over the next few years. Still, my macro concerns are not U.S.-based though significant events elsewhere in the world could spill into the United States.
Read Metrick’s full commentary