Service on Finance and Development (Oct08/08)
Economic crisis moves on to developing countries
In recent days, the world financial crisis has expanded as stock markets continued to tumble to new lows, currencies have gyrated wildly, while more developing countries are now affected by currency, financial and economic crises.
Monday, the Asian stock markets continued to plunge, with the Nikkei
This follows the bad performance of stock markets globally last week, especially the rout on Friday (24 October) which saw falls of 8 to 11 per cent in Japan, Korea, Singapore and Hong Kong, 5% in Britain and Germany, and 3.6% in the US Dow Jones industrial average.
day brings news of new signs of recession. The
P. Morgan economists estimated the
There is also news of a fall in sales in retail shops, and of motor vehicles, signs of a decline in consumer spending as the recession bites into household incomes in rich countries. Profits of European companies are expected to fall by 40% by the end of 2009, according to a report in today's Financial Times.
Many developing countries and East European economies have quickly slid into deep trouble, with a few already entering the debt-default zone and others nearing it.
prominent people are no longer describing the situation as the worst
since the Great Depression, but as being worse than that. "This
is a once in a lifetime crisis and possibly the largest financial crisis
of its kind in human history," said Bank of
Developing countries were once thought to be "decoupled" from a Western recession but that theory has been shot to bits as the crisis is hitting them even harder than the developed countries.
The crisis has jeopardised everything the United Nations has done to help the world's poor, warned UN secretary general Ban Ki Moon at a meeting last Friday of the UN's top officials in its chief executives' board.
"It threatens to undermine all our achievements and all our progress," he said. "Our progress in eradicating poverty and disease. Our efforts to fight climate change and promote development. To ensure that people have enough to eat... It could be the final blow that many of the poorest of the world's poor simply cannot survive."
The developing countries have been affected through various routes -- the sharp fall in prices of commodities, reduced demand for their exports, the sudden outflow of foreign capital, currency depreciation in many countries.
fall in commodity prices has been deep and sudden, moving in opposite
direction from record high prices just a few months ago. For example,
palm oil exporting countries in
Other examples: the price of copper on 22 October was 54% below its peak in July and 39% below a year ago, while the price of wheat has fallen by 45% between March and the first week of October.
The oil price has plunged from a peak of $140 a barrel just a few months ago to $61-62 on 24 October despite OPEC's announcement of a production cut. While reducing the import bill of importers, this has adversely affected revenues of oil-exporting developing countries.
countries which have significant trade and current account deficits
are having their currencies come under attack. Foreign capital is also
moving out of many developing countries. Those countries like
were large movements of foreign capital last week due to the unwinding
of the "yen carry trade" as funds returned to
speculators had borrowed yen in
The stock market fall has also been sharp in emerging markets, with the MSCI emerging equities index dropping 15% over last week to levels of four years ago.
market stocks, bonds and currencies suffered steep falls amid growing
risk aversion, reported the Financial Times. Among those hit hard were
the past few days, political leaders have announced intentions to act
against the crisis. First was US President George Bush's invitation
to a summit meeting in
Second was the UN General Assembly President's announcement of the formation of a UN task force led by American economist Joseph Stiglitz to recommend reforms to the system.
Third was a meeting of the UN Chief Executives Board (comprising heads of UN agencies, the IMF, World Bank and WTO) on 24 October which issued a statement calling for immediate action to protect people, jobs, shelter and livelihoods.
It said the crisis should not deflect attention from other challenges like climate change and the Millennium Development Goals, while ODA is even more important to poor countries facing declining liquidity and worsening balance of payments positions.
UN Secretary General Ban Ki-Moon told the meeting that drastic measures are needed, including the IMF and major central banks setting up substantial standby lines of credit so that banks in developing countries have adequate funds to draw on during an emergency, according to a UN press release.
Last Saturday (25 October), a summit meeting of European and Asian leaders in Beijing (the 7th Asia-Europe Meeting) issued a statement on the international financial situation pledging to take national measures and to strengthen coordination to take comprehensive measures to restore market confidence, stabilize markets and promote growth.
On international reform, the statement said: "Leaders pledged to undertake effective and comprehensive reform of the international monetary and financial systems. They agreed to take quickly appropriate initiatives in this respect ... The IMF and other international financial institutions should bring into play their mandated role in the international financial system, to help stabilize the international financial situation."
A meeting of leaders of ASEAN-plus-3 (ASEAN countries, China, Japan and South Korea) held in Beijing on the eve of the ASEM meeting reaffirmed their intention (originally made in May) to set up a regional crisis fund to help countries in financial distress by enabling them to defend their currencies.
The $80 billion fund is understood to be a foreign-exchange reserve pool. ASEAN Secretary-General Surin Pitsuwan said that the fund is meant to enable the defence of the region's currencies but this original mandate could be widened to also cover domestic liquidity issues.
The operational details and the timeline for establishing the fund is however still under discussion. In May, the ASEAN-plus-3 leaders had agreed on such a fund, which would supersede the Chiang Mai Initiative (formed in 2000).
preliminary agreement in May was to create a foreign exchange reserve
pool of $80 billion, with
The above measures are signs of world leaders and global agencies trying to get their act together to stem the carnage caused by this worst-ever financial crisis. However, the crisis is moving faster than almost anyone anticipated, shifting towards the developing countries and extending into a real-economy recessionary crisis, which in turn has a negative impact back on the world of finance.
In fact, the crisis -- both of finance and the real economy -- is only at the beginning stage and will have a long way to go, and the really serious problems still ahead, especially for the developing countries. +