Impact of the Present Global Crisis on East Asia

East Asia was not directly affected by the financial sector meltdown in the US and EU due to its relatively sound and conservative financial sector. The East Asian financial sector was structurally sound because of the measures introduced during the 1998 Asian financial crisis, such as higher capital adequacy ratios, better quality of capital, and more stringent corporate governance. However, it has been badly affected indirectly through the collapse of exports and consequentially a decline in domestic production and rising unemployment.

The impact on East Asia began to be felt from the third quarter of 2008 through the sharp fall in exports. Thus, it was not surprising that the overall 2008 gross domestic product (GDP) growth rate was much lower than had been seen in the early months of 2008. Brunei Darussalam and Japan experienced recession in 2008, while Hong Kong, China; Republic of Korea; Singapore; Thailand; and Taipei,China grew feebly. The full impact of the crisis on the East Asian economies was felt in 2009. As shown in Table 1 [ PDF 64.5KB | 1 page ], eight out of the 15 economies in East Asia contracted, with Singapore recording the worst economic performance (-9.99%) The 2010 GDP projections forecast weak growth.

As might be expected, the severity of the economic downturn is related to the magnitude of each country's exposure to the global economy. For example, Singapore's trade-to-GDP ratio of 447 (World Trade Organization 2007) caused the very steep fall noted above. The effects of the decline in exports can be seen through the shrinking of industrial production. Table 2 [ PDF 64.5KB | 1 page ] shows that in the fourth quarter of 2008, in the nine countries sampled, industrial production and manufacturing production was less than in the third quarter of 2008. The fall in industrial production was much more pronounced in the first quarter of 2009: Japan, in particular had a very sharp drop.

The quantum of export fall in East Asia was unprecedented. For example, from November 2008 to April 2009, Japanese exports declined by about 40% year-on-year, as shown in Table 3 [ PDF 18KB | 1 page ]. The sharpest fall was in high- and medium-technology manufacturing, in which East Asia participates strongly in supply-chain networks, for example in the production of motor vehicles, electronic goods, and capital machinery. Drastic falls in the volume of business of East Asia's trading partners between September 2008 and February 2009 reduced exports to 30% of their earlier levels. The magnitude of the current crisis is one-and a-half times the Asian Crisis and almost three times the information technology sector bust (International Monetary Fund 2009).

Sharp falls in exports from East Asia created excess capacity that led in some cases to excess inventories in related manufacturing and construction sectors. The number of (registered) unemployed workers rose by 0.6 million during 2008 (World Bank 2009). The World Bank expects that the labor markets in the region are soon going to experience shifts in employment across sectors combined with declining real wages. There is a strong likelihood that unemployment will further increase causing a rise in poverty. The incidence of poverty in absolute terms is expected to increase in 2009, especially in Cambodia, Malaysia, and Thailand (World Bank 2009).

As noted above, the real economy will bear the brunt of the current crisis, but the capital markets and financial sectors of the region will not remain unscathed. East Asia's financial ties with the US and EU have deepened since the 1998 crisis; cross-border bank flows into the region and corporate borrowing from international bond markets have both increased. Asian banks expanded their reliance on wholesale funding and the proportions of non-Asian equities and securities held by Asian residents have soared. Likewise, a large amount of capital from the US and EU has flowed into Asia for investment in equity markets. Not surprisingly, when business confidence was shaken due to financial troubles in East Asia's developed countries, investors started to withdraw their funds from the region as part of a de-leveraging process. The massive capital outflows in the region were visible in the precipitous falls in stock market values across the region—during the period from January to October 2008, the stock markets of Shanghai, Indonesia, and Thailand fell by 58.7%, 40.7%, and 37.3% respectively.

The Asian financial crisis in 1997–1998 demonstrated the importance of the exchange rate in creating or ameliorating a crisis. In the current financial crisis, the impact of the exchange rate has been less severe than that experienced in 1997–1998, with the exception of Indonesia and the Republic of Korea. The won and the rupiah depreciated by about 20% and 10% in nominal effective terms between September 2008 and March 2009 (International Monetary Fund 2009). Bucking the trend, the Japanese yen has appreciated by about 25% in nominal terms during the same period, following the unwinding of carry trade positions and narrower interest rate differentials against key countries. Japan's trade balance, which for the past thirty years had been in surplus, reversed because of a stronger yen and lower export earnings. The main currency problem East Asia has had during the global crisis so far has not been exchange rate volatility or sharp depreciation but a shortage of US dollars, especially in late 2008, which led to the difficulties faced by central banks and monetary authorities in meeting the demand for the US dollar.

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