IMPLICATION OF FINANCIAL CRISIS FOR ASIAN REGION
The Financial crisis began with the busting of the US housing bubble and high default rates on “sub-prime” and adjustable rate of mortgage and then spread throughout the world. The ccrisis has led to plunging property prices, a slowdown in the world economy, and consequently it might pose a threat to peace, security and trigger stability in regional countries. 1. Implication for Asia Region Deteriorating global financial conditions on the one hand, causes rising uncertainty and risk aversion, serious downward pressure in all regional stock markets, waning external as well as regional investors’ confidence and volatile currency swings, affecting Asian trade performance. On the other, US companies would cut back on investment abroad as facing difficulties at home market and as profit falls and financial conditions tighten. Also, the portfolio inflows by foreign institutional investors could reverse rapidly in the event of a flight to safety. Companies in the regions still rely heavily on banks and financial markets for funding, both of which will be hit by tightening credit. Also, profit falls would reduce opportunities for local businesses to self-fund investments. The intensifying crisis and a sharp US slowdown could indirectly expose financial-sector weaknesses that have been hidden until now as a result of strong economic growth and buoyant asset prices in the region. In term of trade weakening demand from the US would hurt Asian tradedependent economies. This is explained by that most Asian countries still send a substantial share of their exports to the US. Just as importantly, many of the exports that Asia sends to China are ultimately destined for the US as well and therefore again dependent on US demand. Unlike other economies (US, EU), Asian economic performance is less impacted by the financial crisis due to following reasons: i/ In comparison with the 1997- 1998 crisis, many regional economies now have large foreign reserves, stronger current-account positions and more flexible exchange-rate regimes (although in some cases still heavily managed) and the Non Performance Loan (NPL) ratios of East Asian economies have declined dramatically during the last 5 years., for example, China’s NPL ratio was just 7.5% at end of 2006, compared with almost 30% in 2001.
ii/ Extensive regulatory reforms and consolidation have improved the health of the banking sector in a number of countries. Commercial banks’ net foreign asset positions are also generally much healthier iii/Countries in the region have so far remained sound macro economicindicators, thus, direct impacts of the US financial turbulence on regional banking system and balance sheets have been limited up to now. Table 1. Exports as percentage of GDP China Hong Kong, China Korea Japan Cambodia Indonesia Lao PDR Malaysia Philippines Singapore Thailand Viet Nam 1990 17.7 1995 24.0 2000 25.9 143.6 40.8 11.0 49.7 41.0 30.2 124.4 55.7 66.8 55.0 2004 38.1 190.3 44.0 13.4 69.4 32.2 24.7 121.2 53.6 230.4 70.5 66.7 2005 42.2 203.7 42.5 74.6 34.3 27.2 123.0 48.0 243.0 73.6 69.1 2006 40.66 205.0 45.78 16.2 88.6 36.37 44.15 120.82 50.19 252.0 76.04 84
130.6 143.2 28.0 28.8 10.6 9.2 4.0 32.4 23.1 23.9 11.8 23.0 74.5 94.1 27.5 36.4 34.1 36.0 41.8 32.8
Source World trade developments (various years)
2. Implication for China The implications for China specifically are important to the rest of the regional outlook, given the huge contribution the country makes to regional and global growth and the strong linkages with the US. The more integrated into the global economy, the more vulnerable the country is to external shocks. After its entry to the WTO in 2001, China is now more entrenched in global supply chains, thus, more vulnerable to turmoil in other markets. China is the largest oversea holder of US mortgage-backed securities – around $260 billion, mostly through the central bank’s international reserve holdings. Yet, the majority of China's US mortgage-backed securities were underwritten by US government agencies (as Fannie Mae and Freddie Mac), which made them less risky and allowed them to keep their value.
China has its own problem before the turmoil break out: inflation, overpricing stocks. (signals of an overheating economy) Exports of goods and services accounted for around 40% of Chinese GDP, double the share a decade earlier. Weakening demand from the U.S would negatively impact on China’s growth, China’s economy may be least affected among the region for reasons below: i/ The majority of China's US mortgage-backed securities were underwritten by US government agencies, which made them less risky and allowed them to keep their value. ii/ China’s NPL ratio was just 7.5% at end-2006, compared with almost 30% in 2001. iii/ China has a largely closed financial system despite moves under way to ease restrictions on outward investment, which help them decoupled from the financial contagion iv/ Historic data shows the correlation between US recessions and Chinese economic growth is very little v/ The size of market and stimulus program of its Government 3. Implication for ASEAN countries The crisis causes rising uncertainty and risk aversion, serious downward pressure in all regional stock markets; reverse foreign portfolio investment inflows; Volatile currency swings, weakening ASEAN trade performance. While companies in the regions which still rely heavily on banks and financial markets for funding, were severely hit by costly credit access and the credit crunch situation. The intensifying crisis has indirectly exposed financial-sector weaknesses that have been hidden until now as a result of strong economic growth and buoyant asset prices in the region. On trade Aspect, most of export of ASEAN economies relies on external market. Unlike EU or NAFTA, intra trade of ASEAN countries accounts for only about 25% of total trade, the rest, 75% is exported to markets of developed countries. Due to heavy dependence on external markets, declined demand from the US, EU and Japan has serious impacts on ASEAN trade-dependent economies. Most ASEAN countries still send a substantial share of their exports to the US. Just as importantly, many of the exports that ASEAN sends to China are ultimately destined for the US as well and therefore again dependent on US demand Table 1 indicates that most ASEAN countries, except Lao and Myanmar, still send a substantial share more than 70% of their exports to the external market.
ASEAN Key Trade Partners are Japan, US, EU each accounts for about 11,5% of total ASEAN trade, followings are China – 10,4% and South Korea 4%1 Just as importantly, many of the exports that ASEAN sends to China are ultimately destined for the US as well and therefore again dependent on US demand. Table 2. ASEAN Trade Statistics Exports Intra External 24.8 75.2 06.7 93.3 18.3 81.7 72.0 28.0 26.1 73.9 61.2 38.8 17.3 82.7 30.9 69.1 22.2 77.8 16.8 83.2 25.2 74.8 Imports Intra External 50.1 49.9 33.9 66.1 31.7 68.3 85.2 14.8 25.2 74.8 55.5 44.5 19.7 80.3 26.1 73.9 18.5 81.5 31.0 69.0 25.0 75.0 Total trade Intra External 28.9 71.1 19.1 80.9 23.4 76.6 79.8 20.2 25.7 74.3 59.0 41.0 18.6 81.4 28.6 71.4 20.3 79.7 24.2 75.8 25.1 74.9
Brunei Cambodia Indonesia Lao Malaysia Myanmar Philippines Singapore Thailand Viet Nam ASEAN
Source: ASEAN Trade Database 2007
On financial and investment aspects, the crisis will cause current account deficit risk to countries of the Association. For years most ASEAN countries enjoyed positive current account balance, especially Malaysia and Singapore have large CA surplus of 38 billion USD and 26 billion USD respectively. Yet, given declining global demand, some ASEAN countries are facing increasing CA deficit: Vietnam had large CA deficit: -10% in 2007 and -15.8% in 2008 (as of GDP), Indonesia: -0.2%, Thailand expected to be in CA deficit by 2009 at -3%. a/ Malaysia The country is not as isolated from the financial turmoil as it hoped. Estimated GDP growth in 2008 is 5.7%, and forecast for 2009 is down to 3.5% from 5.4%. Malaysian Stock Exchange is now at its lowest point in 4 years. 50,000 contractual employees could be retrenched by the end of 2008 and more jobs might be lost due to shrinking export activities. An 11% drop in government revenue is
World Trade Development 2008
expected (or US$44 billion). The budget deficit for this year is expected to reach 4.8% of GDP against a previously forecast 3.1%. Foreign portfolio investors have recently dumped ringgit- denominated assets and exited the markets. Malaysian Government can defend itself against global financial turmoil using stimulus fiscal package successfully, yet risks of political and social instability remains: Divisive issues of race and religion and the NEP liberalization issue. b/ Vietnam The more integrated into the world economy, the more Vietnam’s economy affected by the up and down in the world economy. Yet, the economy has its own issues before the global turmoil break out. Vietnam’s Economy is heavily dependent on the world market. Export and import account for 80% and 90% of GDP respectively. In 2008, Vietnam’s economy faced with risks and vulnerabilities, high inflation, 23% in comparison with 6,4% in 2006, 12% in 20072 as the results of various factors: Over credit expansion in the previous years, oil price hike, large foreign capital inflow with inappropriate management policy; Increasing trade deficit $18 Billion (14 billion in 2007); Drying up of liquidity as the consequence of tightening monetary policy and rising uncertainty (benchmark rate reached record height of 14%) and particularly, financial crisis has driven stock market down. In 2008 VN Index slashed by more than halve compared to that of 2007. Figure 1. Inflation of Vietnam (1995-2008)
Government State Statistics Department 2009
25 20 15 10 5 0 -5 4.5 12.7
12.6 9.2 4 3.6 0.1 0.8 3 9.5 8.4 6.6
-0.6 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Source: Government State Statistics Department 2009
Macroeconomic performance for 2009 expected to be deteriorated. According to estimates of IMF and ADB, Vietnam GDP will stand at 4,6% - 5%, in compression with 8,4% in 2007 and 6,4%3 in 2008. Due to global economic recession, demand declines substantially, most of foreign companies doing business in Vietnam have to reduce their production, consequence they sacked employees. Number of unemployment added by Vietnamese worker coming back from abroad (Malaysia, Eastern European countries) will rise to more than 300.0004 people at the end of 2009. Coping with the economic downturn, Vietnam Government approved a stimulus program of $ 6 billion, consisting of 1 billion from government expenditure and 5 billions from other sources, such as tax delays and exemption. Stimulus measures are aimed at subsidizing interest rates for enterprises, implementing infrastructure projects, helping low income families, providing benefits for unemployment sacked by foreign companies and workers coming back from abroad. A part from the stimulus program is provided for domestic companies to look for new export markets. The government supports and encourages the companies using opportunities of economic downturn, to buy facilities, equipment, collapsed factories for future business. Beside that, in the years of 2007, 2008 and 2009 Vietnam continues to look for foreign direct investment by providing favorable conditions to foreign companies. Leaders of Vietnam visited Qatar, Kuwait, Saudi Arabia, countries have enormous capital to ask them to invest in Vietnam’s economy. The result of the stimulus program so far is
Government State Statistics Department 2009 Report of the Ministry of Labor, Invalid and Social Affaires
positive. GDP in the first quarter increased by 3,1%, exports rose by 2,4%, trade deficit declined5. 4. Global financial crisis and peace, security, and stability Impact of the financial crisis on the region economies is undeniable. All countries, regardless the size, are already suffered from economic recession and this time the damage spreads wildly throughout the world market. Unemployment are significantly increasing, social and economic welfare is deteriorated, in somewhere people became dissatisfied because they are facing a long and painful economic malaise, even they are ready to rally for protesting against their governments due to failing to cope with the economic downturn. The question now is whether the current financial turmoil will pose a dangerous threat to peace, security and stability in Asian Region? The answer to this question is dependent on the ability of the regional governments, at the national and regional level, to tackle their economic problems. The Asian financial crisis 1997 was overcome without serious consequences in term of regional security. But the current financial turmoil its extent and devastating of is bigger, so close co-ordination among regional countries is badly needed. The crisis, to some extent, provides opportunities for countries to look at their financial system, to join efforts in dealing with common problems. 5. Policy Recommendations i/ Increasing the active role of regional governments as a market stimulator and supervisor. Standing aside and hoping the problem goes away is not a good idea. ii/ Enhancing intra - trade flows in Asia, reducing the impact of the slowdown in US demand on Asian exports through FTAs and more incentives iii/ Easing policies and stimulus measures to help enterprises to cope with the current drying - up of liquidity iv/ Reducing the dependence of Asian currencies on US dollar (in the context of dollar volatility): CMI Multilateralization, Asian Currency Cooperation. v/ Improving regional financial surveillance mechanisms (an early surveillance, legal framework, risk management skills and policy coordination) as well as risk pricing capacity vi/ Finding new channels to help enterprises to cope with the current drying-up of liquidity./. ------------
Government Statistics Department 4/2009.