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					                        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 trade-
dependent 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.

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       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 economic-
indicators, 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

                           1990    1995          2000     2004        2005        2006
        China              17.7    24.0          25.9     38.1        42.2        40.66
        Hong Kong,
        China              130.6   143.2      143.6       190.3      203.7        205.0
        Korea               28.0   28.8       40.8        44.0       42.5         45.78
        Japan               10.6    9.2       11.0        13.4         -          16.2
        Cambodia            4.0    32.4       49.7        69.4       74.6         88.6
        Indonesia           23.1   23.9       41.0        32.2       34.3         36.37
        Lao PDR             11.8   23.0       30.2        24.7       27.2         44.15
        Malaysia            74.5   94.1       124.4       121.2      123.0       120.82
        Philippines         27.5   36.4       55.7        53.6       48.0         50.19
        Singapore                                         230.4      243.0        252.0
        Thailand           34.1    41.8          66.8     70.5       73.6         76.04
        Viet Nam           36.0    32.8          55.0     66.7       69.1          84
                                          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.


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        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.




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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          Imports        Total trade
                            Intra External   Intra External   Intra External
           Brunei           24.8    75.2     50.1    49.9     28.9     71.1
           Cambodia         06.7    93.3     33.9    66.1     19.1     80.9
           Indonesia        18.3    81.7     31.7    68.3     23.4     76.6
           Lao              72.0    28.0     85.2    14.8     79.8     20.2
           Malaysia         26.1    73.9     25.2    74.8     25.7     74.3
           Myanmar          61.2    38.8     55.5    44.5     59.0     41.0
           Philippines      17.3    82.7     19.7    80.3     18.6     81.4
           Singapore        30.9    69.1     26.1    73.9     28.6     71.4
           Thailand         22.2    77.8     18.5    81.5     20.3     79.7
           Viet Nam         16.8    83.2     31.0    69.0     24.2     75.8
           ASEAN            25.2    74.8     25.0    75.0     25.1     74.9
                                     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

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    World Trade Development 2008

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   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 2007 2 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)




   2
       Government State Statistics Department 2009

                                                     5
                     25
                                                                                            23

                     20

                     15     12.7
                                                                                            12.6
                     10                    9.2                            9.5
                                                                                8.4
                                                                                      6.6
                      5       4.5                              4
                                     3.6                0.8           3
                                            0.1
                      0                      -0.6
                           95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08
                     -5

                                 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



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       Government State Statistics Department 2009
   4
       Report of the Ministry of Labor, Invalid and Social Affaires

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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./.

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       Government Statistics Department 4/2009.

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