Uncertainity In Global Economy

Uncertainity In Global Economy

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Introduction A student received his offer letter for the admission into GMBA course, he was working in Australia, so did quick calculation and came up with an amount that he was required to transfer in USD (US dollars) for admission fees. After two months, when he went to the branch of National Australian Bank to transfer the money to Citibank Dubai, he was surprised to know that he need pay around 35% more than his initial estimate ,due to increase in USD to AUD(Australian Dollars) conversion rate. At the same time, he was told in his office that going forward there will be not any office parties due to cost cutting. After being landed, he came to know that there is large scale layoffs’ going on the industry, so he needs to be extremely cautious about his future job prospects. To make the things worst, he came to know that shares of company named Suzlon that he bought had a free fall and now trading at 10% of their peak value. After two months, when he got the topic for the Macro Economics, he realised that reason for all his losses and worries is same as his topic of assignment that is “Uncertainty in Global Economy”. Reason for Uncertainty {draw:g} Flattening of the world has made this depression a global phenomenon. The core of this crisis is the defaulting of the payment by the subprime borrowers. Subprime borrowers are those borrowers, who are not credit worthy and cannot be provided debt in the normal scenario due bad credit ratings. In 1990s, financial institutions have came up with the new financial instruments to provide credit to wide range of borrowers despite of their bad credit history. The main motivations behind these financial instruments are:- a) Greed to earn more and more profit. b) Push from Federal Reserve’s to make USA a spending economy rather than saving economy. All the banking transactions are governed by simple rule “Higher the risk, higher the return”, so bank used to charge higher interest rate from the subprime customers than prime customers Insufficient regulations and failure of existing regulations like Basel 2. Lack of transparency of auditing firms and credit rating agencies. Lack of integrated global risk management practises.

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Lack of ethics and dishonest players. Equity Debt Currency Assets The improper valuation of above mention instruments lead to large scale impact on the world economy and further lead to uncertainty in the world. The effect of uncertainty is described below:- There will large scale withdrawal of money from equity market, which will lead to liquidity crunch in the equity market. Foreign institutional investors will take out money from the emerging equity markets, which will lead to slow economic growth of emerging markets and transmitting of uncertainty effect in the emerging markets. Many of the institution like pension funds losing their investments in the equity markets, which will pass the economic crises to common people. Companies will delay their delay their Greenfield and brown field projects due to uncertainty about proper valuation in the equity market. Debt:-Debt is life line for any enterprise. Debt helps the company to fulfil its long term (CAPEX) or short term (OPEX) requirements. In the present scenario, when most housing backed debts in US are going bad and property index is very high, most of banks have stopped giving loans due to the uncertainty about the future repayment of the loans. Prime customers have defaulted the loan payments due to drastic fall in their property prices. The bad debt market has resulted in the downfall of some of the biggest banks of the world like Citibank, Bank Of America, UBS, RBS etc.The lack money in debt market is resulting in following impact on the economy:- The debt markets have reached to their lowest levels, in terms of transactions and total net worth. Corporate customers are facing the credit crunch and not able to expand due to lack of capital. Currency: - Presently the currency trading is suffering lot of unpredictability. Few of the currencies of the world have reached at their lowest level and fluctuating. The impact of currency fluctuations are as follows:- Large scale uncertainty regarding the profitability of outsourcing firms. Unbalancing of the imports and exports that may impact the local as well as foreign firms. Uncertainty regarding the net amount of investment required to be done in the foreign firms. Large scale remittance and pulling of funds by FII. Oil Prices:- Oil is the most traded commodity of this world. Due to the uncertainty, the global prices fluctuate a lot and this further enhances the uncertainty in the global economy. Decrease in GDP of most of the countries. Decrease in government’s spending on the environmental related issues. Decrease in spending on the research and development activities by the companies. Decreasing in the FDI and FII generated flow in most of the countries. There is large scale withdrawal of funds in most of the countries. Transformation of Global Economic System:- Last 20 years, global economies are marked following major factors that changed whole global economic scenario:- Reduction in the regulations that limits the cross country trades and providing the level playing field to all the factors of the production. Emergence of global trading blocs like NAFTA, European Union, AEAN, G-20 etc also accelerated the flattening of the current world economic scenario. There was a constant shift from the socialistic form of the government to the capitalistic form of the government. There was a large scale development in the information technology, which also helped to remove the information asymmetry caused due to the time and geographic differences. All the above factors lead to the flattening of the world and making the world a single integrated global financial market. But after the current economic meltdown different government are taking steps, which may take lead to segregation of the world again. The various steps that government has already taken or hinting to take will only have very short term positive impact but in the long term these problems will only worsen the problems. The various steps that various governments are taking that creating the environment of uncertainty are as follows:- Government Bailout Packages: - Present days government policies are motivated by “Privatisation of profits and socialisation of losses”. The bailing out of various banks and insurance companies is totally against the principals of free markets. The remarkable drift in the government policies has created a sense of uncertainty regarding the government’s role in the economic scenario. This again is hinting towards the movement from capitalistic form of the government to the socialistic form of government. Regulation against the Outsourcing: - The current bailout packages have a important component that limits the companies to outsource their work to the developing countries. This has created a sense of uncertainty for the global companies and likely to kill their competitiveness. Implementation of Environment related regulations:-Most of the developed countries are not willing to accept the regulations that are aimed at improving the environmental conditions on the world. This creating a sense of distrust among the developing countries. Conclusion:- The present economic crises has pointed that there is a need of the comprehensive and integrated framework to avoid any sort of uncertainty. It should be more of the process oriented and not people dependent. Earlier the uncertainty was more people oriented, for instance Allan Greenspan single handily deal with the economic crises like Black Monday) October, 1987 stock market crash, dot com burst of March 2000 and post 9-11 scenario. Uncertainty and trust can be treated as two sides of the same coin, if we have the trust for the system then that will automatically generate the feeling of the certainty in the system. We can aim to develop certainty and trust in the current economic scenario by following below mentioned three step approach:- {text:list-item} {text:list-item} {text:list-item} In the process of removing the uncertainty and building the trust in the economic system each of the above mentioned point needs to be carefully considered and suitable action should be taken to deal with them.
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