Increased risk of credit crisis 'going global'

Australia’s export credit agency (EFIC) September World Risk Developments released today points to the ongoing US credit crisis increasing the risk of a US recession and of the crisis ‘going global’. 

World Risk Developments September 2008 Highlights

• Lingering credit crisis poses downside risks
• Stricter fiscal terms potentially for miners in Guinea
• Zambian President’s death unlikely to spark chaos
• Pakistan economy sails close to crisis
• Thai power struggle threatens economy

US Credit Crisis

The remarkable turn in the US credit crisis has increased the risk of US recession and of the crisis ‘going global’, though it is premature to say that the world economy is bound for a hard landing.

“The spillover effects from Wall Street to Main Street look to be contained,” says EFIC Senior Economist, Roger Donnelly.

“Second-quarter annualised US GDP growth was recently revised up to 3.3% from 1.9% – a  far cry from recession and emerging economies, particularly the all-important ‘Chindia’ and ‘BRICs’, are still expanding briskly.”

However, Donnelly says there is still a risk of negative financial and economic trends reinforcing each other in a vicious circle.

“A jump in mortgage foreclosures could further depress housing prices, which scares consumers from shopping, while decapitalising banks and tightening credit conditions even further.  If such a cycle were sufficiently vicious, a full-scale US and world recession could result.”

Zambia election likely to be peaceful

An election scheduled for October, triggered by the death of President Levy Mwanawasa last month, is likely to be won by the government candidate because of opposition disunity, according to most commentators.

“There is a good chance of policy continuity following the election, because the opposition is fragmented and there is a first-past-the-post electoral system,” says Donnelly. 

But, if Sata, the most popular opposition candidate, wins, the investment climate could deteriorate. 

“Sata is a populist who, at the 2006 election, criticised Chinese investors and threatened to expel them, along with Lebanese and Indian traders.  In July he was critical of Chinese investors on America's National Public Radio, though he has recently also made more moderate statements: saying that he welcomes Chinese investors in the mining industry.”

Some mining investors are hopeful that they will be able to persuade the new president to moderate a windfall profits tax introduced in April, which they claim, with IMF support, is punitive at high copper prices.   

“While the windfall profits tax is unlikely to prompt any existing investors to disinvest, it could discourage prospective new investors.”

Guinea reviews fiscal terms for mining

The government is pressing on with a mining contract review that may result in fiscal terms more in its favour.

Guinea’s Finance Minister said on 8 September that his government would speed up a mining contract review, adding that most mining agreements were not necessarily in the national interest.  The Guinean Mining Minister said that the government would be seeking World Bank technical help with the review.

Pakistan – Economy sails close to crisis

The new government in Pakistan is facing key political and social challenges.

“Yet it has to face a host of thorny problems – notably, a big terms of trade deterioration, accelerating inflation, twin budget and current account deficits, a foreign reserve drain and deteriorating domestic security.”

“To stabilise the situation, the new government needs to rein in public spending and secure support from international creditors.  But its task will be hindered by the deteriorating security situation and the fragility of the national coalition government,” says Donnelly.

Thai power struggle threat to economy

“Thailand's political crisis, now well into its third year, is escalating again, and starting to threaten tourism, FDI and credit ratings,” says Donnelly.

No rerun of the 1997 financial crisis is in prospect, because unlike then, Thailand now has much stronger economic shock absorbers – including fiscal and current account surpluses, a more flexible currency, and large foreign currency reserves. 

“One concern is that the country settles into a pattern where populist parties win elections, but are then challenged in the courts and streets.  The resultant uncertainty and disruption could act as a significant drag on growth,” says Donnelly.