Weathering the financial storm in East Asia

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"The East Asia and Pacific Region has not been spared the full fury of the economic storm." – East Asia & Pacific Update

ImageThe above quote is from the just-released World Bank East Asia Update, and the storm clouds are still gathering over Asia. Growth in East Asian countries was already slowing before the crisis reached a new level of intensity in the middle of September. Governments around the region have made efforts to boost domestic demand through fiscal stimulus programs and monetary policy actions, but the pace of economic expansion is set to weaken further in 2009. GDP growth estimates are now only 5.4 percent for the region in 2009, as compared to 9 percent in 2007. This reflects the significant deceleration in exports in particular, as well as decreased foreign investment and domestic consumption.

Given that the three largest trading partners of developing East Asia (U.S., EU and Japan) have fallen into a recession in 2008, export growth from the region is likely to decelerate further and faster, and countries more dependent on exports will be hit hardest. In fact, the recently released Global Economic Prospects Report found that world trade will decrease for the first time since 1982 and will decline by 2.1 percent in 2009! An example of how the declines in exports is hitting Asia: exports in China, Korea, and Taiwan fell for the first time in seven years (by 2.2 percent, 18 percent, and 23 percent respectively). In addition, industrial output is sliding across the region, with China being the latest to report a severe decline in growth. This worsening of conditions comes on the heels of the recent economic turmoil that hit Asia in late 2007 and early 2008 — the rise in inflation. The earlier turmoil was largely a result of imported inflation (i.e., food and fuel) and domestic factors, such as rapid credit expansion.   

The financial systems in emerging Asia now face serious risks from the financial crisis, largely from the impacts on the real sector, in particular exporters and manufacturers, and other key domestic industries including real estate, construction, and infrastructure. Bank customers are under increasing stress and evidence indicates that credit is already drying up in various economic segments, as well as for certain classes of borrowers with particular emphasis on small- and medium-sized enterprises. As discussed in early August on this blog, this may be a sign of a wave of bad debt on the horizon because a number of the financial systems still have weak risk assessment, supervision and transparency among other issues.

Early signs of stress are emerging in the banking systems across emerging Asia. Recent reports issued by ratings agencies indicate that the nominal rise in overdue loans in Chinese banks had edged up by 30 percent in the first six months of 2008 (although the total amount is still relatively small in comparison to total lending). In Korea, the capital adequacy levels of the banks were recently reported to have fallen to the lowest levels in over seven years (but the average level is still above 10 percent). In addition, a small bank failed in Indonesia recently due to liquidity problems and was the first bank in the region to be taken over by a government since the 1997 Asian crisis. Three weeks later, another bank in the region failed – the fourth largest bank in Mongolia. Most recently in Hong Kong, the leading financial center in Asia, banks have been warning on profits for the year. In fact, the second largest bank in Hong Kong, Bank of China, just this week received a $2.5 billion loan from its parent bank in China. This is four times the size of its announced losses so far this year, which as a news report indicated could imply that the bank is preparing for much larger losses next year.

Editor’s note: This is the first of two posts looking at East Asia’s position in the ongoing financial crisis. Part two (click here to read) looks at what governments in the region have done to cope.


James Seward

Senior Financial Officer

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