The global financial crisis slashed the value of financial assets worldwide by a massive $50 trillion in 2008, with developing Asia suffering more than other emerging market regions. The loss was the equivalent of annual global GDP (gross domestic product).
According to a new study commissioned by the Asian Development Bank (ADB) entitled Global Financial Turmoil and Emerging Market Economies: Major Contagion and a Shocking Loss of Wealth?,losses on financial assets in developing Asia in 2008 totaled $9.6 trillion, or just over one year's worth of gross domestic product (GDP).
Separately, the World Bank said on Sunday, that developing countries face a financing shortfall of $270-700 billion this year, as private sector creditors shun emerging markets, and only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty, the World Bank said.
The ADB study says, that between 2003 and 2007, the value of financial assets grew much more rapidly than GDP, entailing an increase in the ratio of financial assets to GDP of 45%, which stood at 490% by end-2007. These assets include collateralized financial instruments (mortgage backed securities or MBS, and Collateralized debt obligations or CDOs). They do not include the complex set of financial derivatives like CDS (Credit Default Swaps) that further multiplied the size of the financial market. The study says clearly these operations deepened the capital markets, but simultaneously they constituted the base of the speculative bubble that was building up. During the period under review, financial assets in Emerging Asia rose from 250% of GDP in 2003 to 370% in 2007, an increase in the ratio of 48%. The rise in the ratio of Financial Assets to GDP in Latin America was more modest, from 135% to 176%, representing an increase of 30%. The loss of wealth at a world-wide level may amount to an astounding USS50 trillion, or one year’s worth of GDP.
Asia was hit harder than other parts of the developing world because the region's markets have expanded much more rapidly. The value of financial assets to GDP rose to 370% of GDP in developing Asia in 2007 from 250% of GDP in 2003. In Latin America, the ratio only rose by 30%, with the result that estimated losses on financial assets were a much lower $2.1 trillion, or 57% of GDP.
“This is by far the most serious crisis to hit the world economy since the Great Depression. While this crisis originated in the US and some European countries, by now no region or country is insulated. I am afraid things may get worse before they get better. However, I remain confident that Asia will be one of the first regions to emerge from it, and it will emerge stronger than ever before,” says ADB President Haruhiko Kuroda.
The ADB estimates measure the losses in equity and bond markets, including those backed by mortgages and other assets, and the depreciation of many currencies against the U.S. dollar. Not included are financial derivatives such as credit default swaps that further multiplied the size of the financial markets.
The data provide clear proof of the close connections between the markets and the economies around the world, leaving few, if any, countries immune to financial or economic fallouts elsewhere. A recovery can only now be envisaged for late 2009 or early 2010, according to the study.
"Most emerging market economies, including in developing Asia and Latin America are at a crossroads, and the next 12 to 18 months will be very difficult," the study says. "However, there has been no destruction of physical and human capital, boding well for a strong recovery, possibly more cautious and sustainable, after the adjustments in the financial markets are worked through over the next year or so."
ADB President Haruhiko Kuroda and other experts on Monday began a two-day conference at ADB headquarters in Manila, titled 'South Asia Forum on Impact of the Global Economic and Financial Crisis.'
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In a paper for next Saturday’s meeting of the Group of 20 (G-20) finance ministers and central bank governors, the World Bank said that international financial institutions cannot by themselves currentlycover the shortfall -- that includes public and private debt and trade deficits -- for these 129 countries, even at the lower end of the range. A solution will require governments, multilateral institutions, and the private sector. Only one quarter of vulnerable developing countries have the ability to finance measures to blunt the economic downturn, such as job-creation or safety net programs.
The G-20 comprises the seven major industrialized nations—Britain, Canada, France, Italy, Japan, Germany, and the United States—plus Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, and Turkey, along with the European Union.
“We need to react in real time to a growing crisis that is hurting people in developing countries,”said World Bank Group President Robert B. Zoellick on Sunday. “This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis. We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest.”
The global economy is likely to shrink this year for the first time since World War Two, with growthat least 5 percentage points below potential.World Bank forecasts show that global industrial production by the middle of 2009 could be as much as 15 percent lower than levels in 2008. World trade is on track in 2009 to record its largest decline in 80 years, with the sharpest losses in East Asia.
The financial crisis will have long-term implications for developing countries. Debt issuance by high-income countries is set to increase dramatically, crowding out many developing country borrowers, both private and public. Many institutions that have provided financial intermediation for developing country clients have virtually disappeared. Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future.
“When this crisis beganpeople indeveloping countries, especially those in Africa, were the innocent bystanders in this crisis, yet they have no choice but to bear its harsh consequences,”World Bank Managing Director Ngozi Okonjo-Iweala said in remarks prepared for delivery on Monday at a conference in London organized by Britain’s Department for International Development. “We must look at poor people as assets and not liabilities. The new globalization should mean we adopt new ways of caring for our infants, educating our youth, empowering our women and protecting the vulnerable.”
The paper said that 94 out of 116 developing countries have experienced a slowdown in economic growth. Of these countries, 43 have high levels of poverty.To date, the most affected sectors are those that were the most dynamic, typically urban-based exporters, construction, mining, and manufacturing. Cambodia, for example, has lost 30,000 jobs in the garment industry, its only significant export industry. More than half a million jobs have been lost in the last three months of 2008 in India, including in gems and jewelry, autos and textiles.
Many of the world’s poorest countries are becoming ever more dependent on development assistance as their exports and fiscal revenues decline because of the crisis. Donors are already behind by around $39 billion on their commitments to increase aid made at the Gleneagles Summit in 2005. The concern now is that aid flows will become more volatile as some countries cut their aid budgets while others reaffirm aid commitments, at least for this year.
In remarks prepared for delivery at the same conference in London on Monday, World Bank Chief Economist and Senior Vice PresidentJustin Yifu Lin said developed countries should spend some of their fiscal stimulus in developing countries as the economic effect could be significant.
“Clearly, fiscal resources do have to be injected in rich countries that are at the epicenter of the crisis, but channeling infrastructure investment to the developing world where it can release bottlenecks to growth and quickly restore demand can have an even bigger bang for the buck and should be a key element to recovery,”Lin said in his prepared remarks.
For more information read:
Swimming Against the Tide: How Developing Countries Are Coping with the Global Crisis