As the World Bank was warning of negative growth this year and the IMF was calling on countries to do more to stimulate their economies, another leading multi-national government group says the fall in the value of financial assets worldwide might have reached more than $US50 trillion, equivalent to a year’s global economic output.
The Asian Development Bank warned yesterday in a report (Global Financial Turmoil and Emerging Market Economies: Major Contagion and a Shocking Loss of Wealth?,) yesterday for a meeting this week that Asia has been hit disproportionately hard by the slump and has to do more to restart their flagging economies.
“Even as Asia and Latin America have diversified their investment and trading partners, the effect of the slowdown on exports, finance and investment is earthshaking,” the report says.
The ADB report estimates capital losses last year in Asia, excluding Japan, at $US9.625 trillion, or 109% of gross domestic product, compared with a global average of 80-85%, of GDP.
For Latin America, the study estimates 2008 losses at $US2.119 trillion or 57% of GDP.
The ADB’s estimates take into account falling stock market values and losses in the value of bonds supported by mortgages and other assets, though not financial derivatives such as credit default swaps.
Much of the loss comes from the slump of most regional currencies in Asia (outside of the Japanese yen) against the US dollar as investors sought the greenback as a ‘haven of safety’.
ADB President, Haruhiko Kuroda, said in a statement: “I am afraid things may get worse before they get better.
The ADB said Asia was hit harder than other parts of the developing world because the region’s markets have expanded much more rapidly.
“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,” Mr Kuroda said.
"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.
"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."
Another report on the impact of the global crunch on South Asia from the ADB, concluded that South Asian countries can weather the global financial crisis by taking both short- and long-term measures to stimulate their economies.
The study titled The Impact of the Global Economic Slowdown on South Asia notes that the subregion has been hit by capital outflows and weaker commodity prices, and faces a sharp slowdown in exports and remittances as the global troubles worsen.
A number of short-term measures have been taken to cushion the impact of the crisis, including monetary easing and fiscal stimulus packages.
The study suggests there is further room for interest rate reductions, particularly in India and Sri Lanka.
While most countries have little scope for large stimulus packages, given deficit constraints, India, which has introduced two of them, should disburse the funds swiftly for maximum impact, the study says.
It adds that governments could consider incentives to encourage overseas workers to remit money home, such as special savings instruments, and they should also discuss currency swap arrangements and other measures to keep their financial systems stable.
In the longer term, South Asian countries need to reduce their fiscal deficits, diversify their economies, step up infrastructure investment and boost intra-regional trade to take up the slack of lower demand from G7 nations, the study says.
“While some countries in South Asia have had relatively less exposure to the crisis from the adverse impacts of capital flows, more than half of the 900 million people in developing Asia who survive on US$1.25 a day live in the subregion, so any tempering of growth is a serious cause for concern,” says Mr Kuroda.
