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Jan 24, 2008, 09.51 PM IST | Source: CNBC-TV18

Davos focus: Global economic crisis

It is day one at the World Economic Forum’s Annual Meeting. Menaka Doshi meets the global leaders from familiar names such as KV Kamath and Indra Nooyi, James Dimon ,Head of JP Morgan Chase, David O’Reilly ,the Head of Chevron, and Tony Blair and Henry Kissinger, it is a powerful list of leaders that it is co-chairing the forum this year.

It is day one at the World Economic Forum ’s Annual Meeting. Menaka Doshi meets the global leaders from familiar names such as KV Kamath and Indra Nooyi , James Dimon  ,Head of JP Morgan Chase, David O’Reilly ,the Head of Chevron, and Tony Blair and Henry Kissinger , it is a powerful list of leaders that it is co-chairing the forum this year.

 

And though they would much rather focus on broader issues affecting the world such as the millennium development goals, or climate change, or matters regarding energy efficiency, the one question that has gripped the entire imagination of this forum is what is going on with the global economy.

 

Excerpts from the exclusive interviews with the global leaders:

           

Q: What is going on with the global economy, what is your forecast?

 

KV Kamath: I do not know. It is a fabulous thing that because what started off as a subprime crisis, I think it is slowly expanding and what I believe is that everybody is trying to gauge what the pulse of the patient is and probably several readings are being taken and several medicines have been prescribed. But I do not think anybody precisely knows what is happening, or if they know what is happening, they do not know how serious the illness is. That is for sure.

 

Q: In your assessment, are we definitely looking at a recession in the US and therefore a slowdown in global growth across the world not just in Europe but in emerging countries as well?

 

KV Kamath: Frankly, I do not know whether there is a recession brewing in the US. But what I know is that things have gotten well beyond subprime. I think it is wrong for us to now talk about subprime because what the subprime issue has done is it has repriced global credit. So that pricing is on. That repricing of global credit has had an impact on bond prices and that has meant an impact on profitability, on results of individual financial institutions.

 

So what started as a subprime lending credit quality crisis quickly went on to repricing of credit risks itself as a result of which there was a liquidity squeeze. So we have got three things happening in the financial context, one is widening credit spread, liquidity constraints because of I would say lack of appropriate determination of credit spreads and third is there a solvency crisis. I think these are the three things worrying everyone today.

 

Indra Nooyi, CEO, PepsiCo: I think the timing for this meeting couldn’t have been better because we are meeting at a point when the world is in a state of uncertainty because of financial crisis, but it is also the first test of real globalisation because the world is globalized but can the world really weather an economic downturn in one developed economy or the other. I think this is for the first time we are going to test it, and whether the growing economies of India and China can actually see us through this sort of an economic slowdown in some parts of the world. So, that is the first thing I think makes this Davos very interesting.

 

But I think there is a bigger test in this session of Davos. Inspite of the economic crises that is definitely going to be centred in all our discussions, can we in fact look beyond that and view Davos as an incredible collection of conscience of NGOs, government, and corporations to come together to address issues that can be addressed.

 

For example, we all signed up to the Millennium Development Goals, the progress on the MDGs is not as much as it needs to be. I am here in Davos because we are one of the signatories to the MDG and we would like to see NGOs, governments and corporates come together to move the agenda on the MDG especially in the area of water and agricultural practices.

 

So I am here in Davos to see what the conversation is going to be about progress in MDGs and my hope is that we are all in Davos with an incredible ‘can do’ spirit but with a ‘must do’ responsibility to move this agenda forward. If we manage to move from discussion to decision and from research to action I think we will all feel very good about this incredible collection of people in this incredible town.

 

Tony Blair, Former PM, UK: The context in which Davos takes places especially with so many leading people from the business and the financial world is bound to some extent to be dominated by the situation in the world economy at the moment. But I actually think one of the good things about Davos is that people are willing to look beyond the immediate as well and I think in respect to the Middle East and climate and also what Indra was saying about Millennium Development Goals, I think you will find the focus on all those things as well.

 

And to be frank, I think there will be a lot of discussion about the uncertainty and the insecurity that the present financial situation gives rise to. But I think if you are looking for the action points out of the conference, I think they will be around the Millennium Development Goals, the issues to do with climate change, both government and private sector responsibility, energy and energy security. And I think that anybody looking not just at the political situation but the economic situation has got to take the Middle East and Middle East peace process, but the broader Middle East extremely seriously.

 

I also think that there are issues that Henry Kissinger was mentioning earlier to do with the change in dynamics in world power, which is now with us, I mean I am sure that there will be a lot written and spoken about the world’s economic situation. But I think one of the benefits of Davos is that people are able to take a step back and look at some of these longer-term challenges too and I think you will find probably greater action.

 

David O’Reilly, Chairman & CEO, Chevron: I think that the United States economy will correct itself and perhaps even more quickly than people realise. It is a pretty big and resilient economy. I also subscribe to the view that it isn’t going to impact the rest of the globe as much as maybe as it has.

 

So I think there is a degree of pessimism about the economy that belies really what is happening. So I am an optimist when it comes to the length of the slowdown and I do think that if we look past the immediate year, that the outlook is still pretty good.

 

So I think that the correction that is underway is maybe overdue, it may seem like we are going through a crisis. But I hope we don’t get caught up too much in these immediate issues that we are facing on the financial front because I think it will detract from many of the underlying longer-term issues that we have all been discussing here though I think we’ll all enter a longer discussion and continued momentum despite the current concern.

 

James Dimon, JP Morgan Chase: I think not only does the United States wants to have a terrible economic time, you have a fully engaged administration, a fully engaged central bank, and you have central banks around the world who are fully engaged. But I would also caution that the world economy is extremely complex, and I am not sure the tools that even policymakers have at their fingertips. We have had financial crises every five years for the last 100 years. And they all come from a different nature, a different sword. They all have been resolved. So, I think people are doing everything they can to mitigate the negative effects of a potential downturn. But I am not sure that anyone can really stop how it is going to unfold.

 

David O’Reilly: I think crude prices will moderate this year because demand is slowing because of the slowing economy and I think that will be a healthy thing. But long-term, , I am very bullish on the outlook for crude and energy of all types, I do think we need more refining capacity. But there is a lot of investment going into refining capacity and I anticipate that will be adequate over the next few years.

 

Q: Most of it is in Asia.

 

David O’Reilly: It does not matter where it is; it is a global business. As long as it grows somewhere, it will benefit everybody.

 

For the last ten years, PricewaterhouseCooper has been setting the mood for the World Economic Forums Annul Meeting in Davos by announcing the results of its CEO survey just the day before the forum begins. This year the headline of the eleven CEO surveys is that the outlook for 2008 is not looking very good. Most CEOs across the world especially in developed countries are preparing for a recession.

 

Global CEO of Pricewaterhouse Cooper, Sam DiPiazza says that there is a lot argument about whether we are in a technical recession or not. Most CEOs see this slowdown and are concerned about the level of confidence and this imbalance in the market place.

 

Head of Pricewaterhouse Cooper India, Ramesh Rajan feels that Indian companies are emerging as global players, acquiring companies and increasing their global footprint and all this is adding to the buoyancy and the confidence of the Indian companies.

 

Q: The big question, the fact that across the developed world CEO seems to be very gloomy. What are they telling you?

 

DiPiazza: It is clear that there is been a change from a year ago when we saw optimism at unprecedented levels. But I think the real story this year is that difference between the developed world where the optimism in the US, UK and Japan has dropped by 10-15 points to the developing world where India, China and others are at levels never seen before.

 

Q: Brazil, India, China scored the highest in terms of CEO confidence. You have China at 73%, Russia the same, Brazil at 73% and India at 90% and contrast that with the United States which is at 36%, UK at 43%. What’s giving Indian CEOs so much confidence when the rest of the rest of the world is looking so gloomy?

 

Rajan: It’s a reflection of what is been happening over the last few years. Our economy has been growing close to 9% YoY over the last three-four years. I think most of the sectors are doing extremely well; the opportunities are there and I think the Indian companies are emerging as global players, acquiring companies and increasing their global footprint and all this is adding to the buoyancy and the confidence of the Indian companies.

 

Q: One thing that’s giving Indian CEO’s lot of confidence with the way the stock market has performed in the last two years? In the last two weeks, survey was done prior to the last two weeks but in the last two months we have seen some amount of global meltdown and India is hurting as well. Do you think CEO confidence can get shaken from your interaction with these 30-40 CEOs that you have polled by poorly performing stock markets or are they so confident about corporate earnings?

 

Rajan: I think stock market does have an impact but we have seen in the recent past also these have being temporary and the markets have bounced backed. So overall the confidence is that there maybe temporary glitches in the stock market falling. But I don’t think overall this is going to have a major impact.

 

Q: Can we separate the two for global outlook as well; the fact that markets across the world are not doing well currently but is there is a lack of confidence also for corporate performance?

 

Di Piazza: I think it’s clear that the CEOs are reacting by bringing the investment focus that they have; their M&A focus closer to the home. So there is no question that CEOs see this as a very significant short-term hurdle. When we asked them to look at three years; they are much more optimistic. So I think this is about the volatility in the markets, the CEOs see their earnings at risk, their growth address can be very short-term but I think there is a lot of confidence into the long-term.

 

Q: Do they only fear a recession or have they called a recession already?

 

Di Piazza: There is a lot argument about whether we are in a technical recession or not. I would say most CEOs see this slowdown; they are concerned about the level of confidence not only in their own ranks but with the consumers, they see this imbalance in the market place, they are not exactly sure how this will affect the supply chains and so they see this continuing to decline. We will have to wait and see whether we hit technical recession but I think we are leaning that way as we listen today.

 

Q: Lots have been said about the whole decoupling theory. But I am not so sure that India will escape unscathed entirely if the world is looking so gloomy. Are there areas where you have seen CEOs expressed strength and areas where they are worried about challenges ahead?

 

Rajan: Strength definitely, the confidence level which they have over the next 12-36 months on the growth; I think there is tremendous confidence. As you mentioned 90% of the CEOs believe that we are on a good path. The challenge is 100% of the CEO surveyed felt that the people agenda was on the top of issue so availability of good skills and retaining the talent that is increasingly becoming a challenge. Infrastructure has always a challenge, then the labour laws; there is need to be a lot more flexibility in the labour laws. So these are some of the issues, regulations that government is certainly moving towards deregulating but that continues to be an issue.

 

Q: All eyes in Davos are going to be on how the US economy will finally fair in 2008. We have just heard broad plan being announced by President Bush and his administration on tax incentives for the economy. Do you agree with what’s been announced because markets were not exuberant about it?

 

DiPiazza: I think they are good step but the question is ‘will this really end the problem that the US faces and you have significant issues with real estate pricing, entire mortgage market and the credit environment that the US is tightened so dramatically’. The tax proposals that the President has put forth I think are positive but the market reacted cautiously because is it enough and is this really a substitute for continued reductions in the interest rates.

The US is facing much lower growth this year than they have seen in the past several years and with confidence declining, their growth could slip into negative factor. Will consumer tax rebate solve the problem, I am not sure.

 

Q: So too little, too late?

 

DiPiazza: Maybe too little maybe not necessary too late; I think there is still policy that can come into play but the US economy is slowing, we see that in our clients and they have been conservative in their investment, they are pulling back if you will and that’s never a great sign for an economy as robust as the US.

 

Q: Your prescription for what could jumpstart this economy?

 

DiPiazza: I think the continued focus on interest rates has to be there. Fed has to continue to move the interest rate environment. The big issue in the US is the tightening of the credit markets and that’s simply going to have to depend upon confidence; the financial institution confidence and the Fed continuing to keep a liquid market.

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