Why Has Asia Been Hit So Hard By The Global Economic and Financial Crisis? Presentation by Mr. Takatoshi Kato, Deputy Managing Director, IMF, at the Eighteenth General Meeting of the Pacific Economic Cooperation Council
IMF News, May 12, 2009
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- Why Has Asia Been Hit So Hard By The Global Economic and Financial Crisis? Presentation by Mr. Takatoshi Kato, Deputy Managing Director, IMF, at the Eighteenth General Meeting of the Pacific Economic Cooperation Council
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- Authors: The Global Economic, Financial Crisis
- Published: May 12, 2009
A. How hard has Asia been hit by the Crisis?
- Key findings on the depth and transmission of the shock:
- "The abrupt deceleration in growth in Asia has been more rapid than in other regions, and in key countries even sharper than at the epicenter of the global crisis."
- "In the fourth quarter of 2008, GDP in Asia, excluding China and India, plummeted by close to 15 percent on a seasonally-adjusted annualized basis."
- Economic activity decelerated significantly faster than anticipated by IMF staff and professional forecasters and outstripped IMF model predictions based on historical G2-regional correlations.
- Countries with a larger share of advanced manufacturing in GDP experienced sharper output declines because advanced manufacturing is more cyclically sensitive.
- The collapse in demand propagated through integrated supply chains with dramatic effects on intra-regional trade; service-oriented economies (for example, Hong Kong, SAR, and Singapore) were also hard hit as demand for their services dropped.
- Private investment slowed significantly in most countries; private consumption showed relative resilience so far, but falling incomes and tighter financial conditions foreshadow a slowdown.
- China: growth is coming down from a much higher base but domestic demand has shown resilience supported by a timely and aggressive policy response; China’s exports are more diversified.
B. How acute are the financial market pressures?
- Market and financing dynamics:
- "Asian financial markets have been significantly hit by global deleveraging."
- "Net capital flows to the region shifted into reverse in the second half of last year."
- Sudden stop in access to financing was more acute for the private sector; some sovereign issuance occurred but on expensive terms.
- "Most of these economies have enough reserves to cover projected external financing requirements in 2009."
- Korea case study:
- Korean banks accumulated substantial short-term foreign currency debt; when cross-border lending was curtailed in the last four months of 2008, Korean banks had difficulty rolling over external debt.
- The Bank of Korea stepped in with foreign exchange swaps to alleviate funding pressures.
- Foreign investor withdrawals led to substantial exchange rate depreciation.
- "Encouragingly, the rollover of Korean banks’ external liabilities has improved substantially in January and the first half of February, 2009."
- Financial centers: Hong Kong, SAR’s financial system contracting (asset management, brokerage); Singapore’s bank intermediation affected, especially in the Asian Dollar Market; Japan faced stricter lending standards, wider risk spreads, and significant stock market declines.
C. Impact on Asian corporates and financial institutions
- Corporate sector developments and risks:
- "The crisis is taking an increasing toll on Asia’s corporate sector."
- Many SMEs borrowed heavily in the prior decade and banks immediately started to rein in lending to these firms.
- Large corporates entered the crisis with strong balance sheets but liquidity positions have dwindled; a credit crunch combined with a sharp fall in demand can quickly put previously healthy corporates into trouble and profits can evaporate.
- Potential near-term outcomes:
- Further retrenchment of production by large corporates if demand does not recover.
- Possible wave of consolidation through mergers and acquisitions, with painful near-term job losses.
- Market indicators show rising corporate risks; even top corporate names are being rationed out of financial markets and may consider approaching governments for direct assistance.
D. How has policy responded so far?
- Monetary policy actions:
- Central banks have cut interest rates over the last few months; the easing cycle started later than in the United States but accelerated since last September.
- Rate cuts often offset by declining inflation expectations so real interest rates remained relatively constant in a number of countries.
- Greater bank caution and rising risk premia weakened monetary transmission; China is an exception where considerable monetary easing led to a surge in lending.
- Some countries are at or close to the zero interest rate constraint and are using unconventional (credit easing) measures that expanded balance sheets (examples: Japan, Korea) to reduce risk premia and unlock credit markets.
- Despite these measures, broader money supply contracted and term interest rates remain high in several countries.
- Fiscal policy actions:
- "Nearly all governments in the Asia-Pacific region have introduced multiyear fiscal stimulus packages to support growth."
- Many countries entered the crisis with room for countercyclical fiscal support due to sound policies and conservative fiscal histories.
- "The average size of discretionary fiscal measures taken in the region is slightly above the G20 average for 2009, and the reduction of the stimulus in 2010 about the same as the G20 average."
- The effectiveness of fiscal packages depends on consumer propensity to spend and the ability to overcome spending implementation constraints.
E. What lies ahead for the region?
- Overarching risks and scenarios:
- Asia has not "decoupled" from the global economy; recovery prospects hinge critically on a rebound in global activity.
- Important to avoid a serious outbreak of protectionism, trade or financial.
- Specific risk channels:
- Prolonged weak export demand could feed into domestic demand; private consumption has held up so far but employment adjustments and rising unemployment are expected.
- Feedback loop between financial and real sectors: likely rise in non-performing loans that will affect bank balance sheets.
- Structural reduction in demand for automobiles and consumer electronics could lead to permanently lower demand for Asian manufacturing and exports, challenging the export-led growth model.
- Smaller vulnerable economies risk falling into full-blown financing crises, especially where public debt is high, current account deficits are large, and maturity/currency mismatches exist.
- Tentative positive signs ("green shoots"):
- Some evidence that the rate of deceleration in the global economy is abating; question remains whether this is "green shoots" or "false dawn."
- Regional examples:
- China saw a strong first quarter in industrial production, retail sales and credit growth.
- Korea: first quarter GDP was up by 0.1 percent.
- Japan: March 2009 industrial production increased by 1.6 percent.
- Possible drivers of stabilization:
- Several regional exchange rates have depreciated since last year, which should help regional exports (effect depends on demand recovery in main export markets).
- Asian corporates aggressively reducing inventories and excess manufacturing capacity.
- Unprecedented policy responses and stimulus packages may be starting to contain spillovers to domestic demand.
F. Role of the IMF
- Four points emphasized for the IMF’s contribution:
- Provide candid, even-handed independent surveillance, including monitoring fiscal and financial policy implementation.
- Continue reforming lending facilities; stand ready to assist qualifying countries with the Flexible Credit Line.
- G20 agreement: the IMF should issue up to $250 billion in new Special Drawing Rights allocations to augment international reserves of all member countries, including in Asia.
- Develop an early warning system to better anticipate crises.
- Accelerate reform of the IMF’s governance structure to better reflect global realities.
As prepared for delivery, May 12, 2009 — Presentation by Mr. Takatoshi Kato, Deputy Managing Director, IMF.