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The Recession and Business The Recession and Business SchoolsSchools
ANZAM Institutional Members’ MeetingANZAM Institutional Members’ Meeting
March 27March 27thth, 2009, 2009
Professor Nigel HealeyProfessor Nigel Healey
University of CanterburyUniversity of Canterbury
OverviewOverview
The financial crisis
The impact on the real economy
Potential implications for Australasian business schools
New structured credit products
Movement to safe liquid assets
US housing downturn
De-leveraging
Initial Trigger
Pre-Conditions
Impacts
Sub-prime mortgage losses
Uncertainty about extent and location of risk
Booming credit markets
The financial crisisThe financial crisis
Effects of the financial crisis…Effects of the financial crisis…
On the financial sector:
Massive losses/write-downs
Risk aversion and liquidity preference
Global de-leveraging
Large asset price falls
Credit expensive and scarce – “tax the living to bury the dead”
Effects of the financial crisisEffects of the financial crisis
On the real economy:
Erosion of business and consumer confidence
Reduced investment spending (credit, confidence, risk appetite)
Reduced consumer spending (negative wealth effects, confidence, fear of unemployment)
Reduced global demand and commodity prices
Countries impacted in different waysCountries impacted in different ways
Factors impacting economies
USA UK Euro Japan Asia ex Japan
Aust / NZ
Bank losses
Credit restrictions
Export demand
Commodity prices
Crisis a product of credit boom and financial engineering
……and growth outlook deteriorating and growth outlook deteriorating everywhereeverywhere
Consensus forecasts
2009 GDP growth forecasts (percent)
At Dec 08 At Feb 09 Change
Australia 1.6 0.4 -1.2
Asia x Japan 3.9 0.9 -3.0
USA -0.7 -2.1 -1.4
Japan -0.2 -3.8 -3.6
Eurozone -0.5 -2.0 -1.5
UK -1.3 -2.6 -1.3
NZ 0.2 -0.9 -1.1
Potential implications for Australasian Potential implications for Australasian business schoolsbusiness schools
Endowment income – b-schools as a cash cow
Executive education
International enrolments
Public funding
Faculty recruitment and retention
Societal attitudes to business schools
Potential implications for Australasian Potential implications for Australasian business schools (1)business schools (1)
Loss of endowment income
Stock market prices - down 50%
Interest rates down from 8% to 3%
Alumni giving
B-schools as the cash cows – envy over salary loadings
ASX All Ordinaries
Potential implications for Australasian Potential implications for Australasian business schools (2)business schools (2)
Executive education
Short courses –open vs in-company
Executive (company-sponsored) MBAs
Consulting
High-margin, but pro-cyclical
Potential implications for Australasian Potential implications for Australasian business schools (3)business schools (3)
International enrolments depend upon: Availability of university places at home
If demand exceeds supply, some of the excess spills over
Cost of study abroad
Ability and willingness to pay for tuition and living costs
From savings
By borrowing
By students working in host country
Availability of university places at Availability of university places at home: the potential demandhome: the potential demand
Tertiary school-age population
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
China India Nigeria
Source: UNESCO; Economist Intelligence Unit
Availability of university places at Availability of university places at home: the spillover effect home: the spillover effect
0
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
225,000
250,000
275,000
300,000
325,000
350,000
1999 2000 2001 2002 2003 2004 2005 2006
Total international students ChinaTotal international students IndiaTotal international students Nigeria
Source: Economist Intelligence Unit; National Statistical Offices
Estimated number of international students enrolling in undergraduate and postgraduate study in Australia, Canada, France, Germany, Japan, New Zealand, United States, United Kingdom
Availability of university places at Availability of university places at home: the expanding supplyhome: the expanding supply
0
20
40
60
80
100
120
1990 1995 2000 2005 2006
Primary
Junior Secondary
Senior Secondary
Tertiary
Chinese enrolment rates (%)Chinese enrolment rates (%)
Cost of study abroad: exchange rates Cost of study abroad: exchange rates depreciations in Australia, NZ and UKdepreciations in Australia, NZ and UK
NZ$
A$
GBP
Ability to pay from savings: the Hang Ability to pay from savings: the Hang Seng IndexSeng Index
Hang Seng Index Nikkei Index
Ability to pay by borrowing: risk Ability to pay by borrowing: risk aversion and the credit squeezeaversion and the credit squeeze
0
50
100
150
200
250
300
350
400
Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
US 5-year CDS index
BNP Paribas subprime funds frozen; German lender SachsenLB requires credit line
Bear Stearns aquired by JP Morgan with Fed assistance
Lehman Brothers files for bankruptcy
US Congress passes TARP package
US Treasury bails-outFreddie Mac and Fannie Mae; Emergency loan from the Federal Reserve to insurer AIG
Sou
rce: R
BN
Z
Ability to pay by borrowing: Asian Ability to pay by borrowing: Asian banking system solventbanking system solvent
Sou
rce: R
BN
Z
0
200
400
600
800
1000
1200
2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 (to date)
0
200
400
600
800
1000
1200
Losses, Asia
Losses, Europe
Losses, Americas
Total new capital raised
US$ billion US$ billion
Willingness to pay: deteriorating Willingness to pay: deteriorating growth and employment outlook in Asiagrowth and employment outlook in Asia
Falling exports to US, Europe
Slowing economic growth (China), recession (Japan)
Rising unemployment
Growing fear of unemployment
Reports of international students failing to return due to economic hardship in the family
Ability and willingness to pay: fewer Ability and willingness to pay: fewer jobs while studying and on graduationjobs while studying and on graduation
Many international students have: Part-time jobs in term-time Full-time jobs in the holidays Right to full-time work in host country on graduation
In-country employment covers part of living/tuition costs
Employment prospects in host countries deteriorating quickly, international students disproportionately affected
Employment prospects in home country also worsening, return on investment reduced
Factors influencing international Factors influencing international student demand: summarystudent demand: summary
Availability of university places at home
Cost of study abroad
Ability to pay from savings
Ability to pay by borrowing
Willingness to pay – uncertainty
Ability to pay – jobs in host country
Willingness to pay – jobs on graduation
Potential implications for Australasian Potential implications for Australasian business schools (4)business schools (4)
Pubic funding Lessons from US state schools, with balanced budget
constitutions
Pressure on government expenditure as deficits fuel public debt, debt service costs
Political inclination to see pain of recession shared – caps on public subsidies for domestic tuition, moral suasion in terms of pay settlements
23
The price of fiscal stimulus packagesThe price of fiscal stimulus packages
0
2
4
6
8
10
12Fiscal expansions post crisis (percent of GDP)
Sou
rce
: R
BN
Z
Potential implications for Australasian Potential implications for Australasian business schools (5)business schools (5)
Faculty recruitment and retention Demographic timebomb – baby-boomers (1945-60),
massification and Asia Competition from private sector and salary inversion
Short-term: Shake-out in corporate sector Collapse in competition from US schools Offset by exchange rate depreciation
Medium-term: increase in attractiveness of academic careers (ICT post tech-boom, but SUVs post-oil speculative bubble)
Potential implications for Australasian Potential implications for Australasian business schools (6)business schools (6)
Public attitudes to business schools Enron, WorldCom
GFME, Corporate Social Responsibility
Quants vs bankers
Nerds vs Suits
Student demand for vocational business degrees rising, now 20-25% of UG – time for a correction?
ConclusionsConclusions
Universities – and so business schools – traditionally counter-cyclical
Now many sources of revenue non-public and cyclical: Endowment income, executive education,
international education…
….even possibly public funding
Short-term gains in hiring
Potential damage in terms of public attitudes