News: Challenge for global economic recovery
Financial systems stagnating world over: WEF report
Publication: Daily Times
Date; November 1, 2012
Web Address:- http://www.dailytimes.com.pk/default.asp?page=2012\11\01\story_1-11-2012_pg5_1
Financial systems stagnating world over: WEF report
* WEF’s Financial Development Report 2012 says Pakistan faces tough challenges on developing its financial markets
* Ranks at 58th out of 62 economies in Financial Development Index of 2012
* FDR depicts commercial and retail access to finance shrinking in Pakistan
ISLAMABAD: Financial systems across the world are stagnating, leading to challenges for a global economic recovery. This was revealed in the fifth edition of the World Economic Forum’s (WEF) Financial Development Report 2012 released on Wednesday.
“The Financial Development Report shows that financial systems in advanced and emerging economies are stalling,” said WEF Senior Director Giancarlo Bruno. “Macroeconomic uncertainty as well as concerns related to regulation, contribute to inhibiting the financial industry from funding much-needed growth.”
Mishal Pakistan Chief Executive Officer Amir Jahangir said, “The Financial Development Report 2012 ranks 62 of the world’s leading financial systems and capital markets, analysing the drivers of financial system development in advanced and emerging economies to serve as a tool for countries to benchmark themselves and establish priorities for reform.”
The rankings are based on more than 120 variables spanning institutional and business environments, financial stability, and size and depth of capital markets, among other factors, he added.
Pakistan continues to show stability on the Financial Development Index of the WEF on the indicators; cost of closing a business, where the rank of five was maintained, also showing stability in frequency of banking crisis and output loss during banking crisis, Pakistan again secured the top rank (1st) among 62 economies; similarly on the public ownership of banks, which is a percentage of assets held by the 10 largest banks that are located in banks that are more than 25 percent government owned, Pakistan again secured the top rank (1st).
The report also shows an improvement in the total number of active borrowers from micro-finance institutions per 1,000 adults, where Pakistan has improved its position of 12 in 2011 to 9th in 2012.
Pakistan has shown slight improvements on the strength of auditing and reporting standards, where it is ranked 48th in 2012 as compared to 52nd in 2011.
On the pillar of legal and regulatory issues Pakistan has shown significant gains, by improving the burden of government regulations, securing 21st rank as compared to 32nd last year. The regulation of securities exchanges has also improved five points with a rank of 37th out of 62 economies globally.
The current account balance to gross domestic product (GDP), a variable, which is the three-year average of current account balance to GDP, indicates the difficulty Pakistan had in mobilising the foreign exchange necessary for debt service (from 2009 to 2011) has also improved from 53rd last year to 40th in the current year.
The economy has also shown improvements in the aggregate profitability indicator, which is based on a three-year average of three measures of profitability: net interest margin, bank return on assets, and bank return on equity, this was measured on an average from 2008 to 2010, Pakistan improved eight points on this, securing 41st rank on the Financial Development Index 2012.
Other areas where Pakistan showed improvement of 14 ranks was the real growth of direct insurance premiums, where Pakistan stands at 30th rank.
However, Pakistan showed discouraging performance on various key indicators, where it lost its development advantage on multiple factors, whereas; intellectual property protection (53) and effectiveness of law-making bodies (47) as compared to 48 and 43 from last year.
The distortive effect of taxes and subsidies on competition, which is to what extent does government subsidies and tax breaks distort competition, Pakistan lost its rank from 46 in 2011 to 53 in 2012.
In terms of Internet users, Pakistan has seen a decline in its Internet penetration, where it lost its position of 54th to 61st as compared to 2011 and 2012, respectively.
On the external vulnerability indicator, which is the sum of several measures of external exposure as a percentage of foreign exchange reserves, Pakistan has lost an alarming 14 points and it stands at 20th in 2012. However Pakistan still maintains a development advantage in this area.
Whereas the world has shown improvements in the banking system, such as Tier 1 capital ratios and non-performing loans to total loans, Pakistan has declined in these two indicators, securing 26 and 57 out of 62 economies in 2012.
The decline in deposit money bank assets to GDP (52); the private credit to GDP, which is a variable showing private credit by deposit-money banks and other financial institutions as a percentage of GDP also declined from 48 in 2011 to 56 in 2012.
The Financial Development Report (FDR) shows an alarming increase in banks overhead costs, which is the bank overhead costs as a percentage of total assets has increased from the rank of 22nd in 2011 to 45th in 2012, impacting a probable profitability of the banks in the coming years.
On the equity market development pillar Pakistan has shown discouraging performance, where stock market capitalisation to GDP has slipped from 43 to 50, stock market value traded to GDP from 33 to 43 and Pakistan’s rank on number of listed companies per 10,000 people has dropped from 36th to 43rd.
The worst news for Pakistan on the FDR is the commercial and retail access finance, where ease of access to credit has been deteriorated to 43 from 30 last year; similarly ease of access to loan has also become difficult, where the report has ranked it 40th this year as compared to 28th in 2011.
The market penetration of bank accounts, which is the number of commercial bank accounts per 100,000 adults has also declined 19 points in 2012, where Pakistan stands at 59th now, simultaneously debit card penetration has also lost development advantage from a rank of 37 in 2011 to 59 in 2012, showing staleness on part of the growth in the banking system in Pakistan.
On the global front, the report shows that liquidity appears to be stabilising in a number of top economies, as highlighted by the fact that turnover velocity rebounded in 2011, moving closer to 2006 levels. However, such gains are offset by considerably weaker domestic market capitalisation levels across the world’s stock exchanges.
Topping the index, Hong Kong SAR came in 1st for a second consecutive year as a result of benefits from a large and efficient banking system, well-developed infrastructure and robust equity markets. Despite these strengths, Hong Kong has a relatively underdeveloped bond market and its financial sector has yet to be fully liberalised.
The United States and the United Kingdom also remain in the same positions as last year, 2nd and 3rd, respectively. Both countries have highly developed financial markets, particularly their foreign exchange and derivatives markets, but they struggle with relatively inefficient banking systems. Banking system stability and currency stability are also areas of weakness. The US, however, has more developed equity and bond markets, while the United Kingdom has stronger corporate governance and legal and regulatory mechanisms. Japan and Switzerland each moved up one spot to 7th and 8th space overall. Both countries have improved the size and efficiency of their banking and financial services and have shown improvements in their legal and regulatory framework.
Mishal Pakistan is the country partner institute of the Centre for Global Competitiveness and Performance, WEF. The WEF is an independent international organisation committed to improving the state of the world by engaging business, political, academic and other leaders in partnerships to shape global, regional and industry agendas.