Transcript Slide 1

Global Financial Crisis:
Implications For Asia
Presentation to the Government Task
Force on Economic Challenges
Hong Kong SAR
November 3, 2008
David Burton
Director, Asia and Pacific Department
International Monetary Fund
1
Global financial turmoil intensified after
Lehman’s mid- September collapse
Bank CDS Spreads
Corporate Spreads
(5-year, in basis points)
(in basis points)
1200
600
U.S. Corporates, AAA
U.S. High Yield, BB
Euro area High Yield, BBB
500
Source: Bloomberg LP.
10/23/2008
8/25/2008
6/25/2008
4/25/2008
2/26/2008
12/27/2007
10/29/2007
8/29/2007
6/29/2007
5/1/2007
1/1/2007
10/23/08
8/25/08
6/25/08
0
4/25/08
0
2/26/08
100
12/27/07
200
10/29/07
200
8/29/07
400
6/29/07
300
5/1/07
600
3/1/07
400
1/1/07
800
U.S.
EU
3/1/2007
1000
Source: Datastream.
2
Financial firms accelerated
deleveraging, selling assets….
Stock Market Indices
VIX Index
(January 1, 2007=100)
(Index, January 1,2007=100)
120
700
110
600
100
500
90
400
80
300
70
U.S. (S&P 500)
Japan (Nikkei 225)
Europe (Eurofirst 300)
Source: Bloomberg LP.
9/3/2008
7/3/2008
5/5/2008
3/5/2008
1/3/2008
11/1/2007
9/4/2007
7/5/2007
1/3/2007
10/8/2008
8/11/2008
6/12/2008
4/15/2008
2/15/2008
12/19/2007
10/22/2007
8/23/2007
6/26/2007
0
4/27/2007
40
2/28/2007
100
1/1/2007
50
5/4/2007
200
3/6/2007
60
Source: Bloomberg LP.
3
...and cutting credit lines, causing dollar
shortages
Cross-Currency Basis Swaps with U.S. Dollar
(one-year tenors, in basis points)
25
0
-25
-50
-75
Source: Bloomberg LP.
9/1/2008
7/1/2008
5/1/2008
3/1/2008
1/1/2008
11/1/2007
5/1/2007
3/1/2007
1/1/2007
-125
9/1/2007
-100
7/1/2007
Japan yen
British pound
Euro
4
Bold policy actions have been taken to
keep markets functioning



Capital injections into banks
Bank guarantees
Monetary measures
 Rate cuts
 Massive Liquidity Injections
 Fed FX swaps with foreign central banks
5
..resulting in a large expansion of the
Fed balance sheet
Total Assets on Federal Reserve's Balance Sheet
(In billions of U.S. dollars)
2,000
1,800
1,600
1,400
TAF
AIG loan
ABCP Credit Facility
PDCF
Estimated forex swap lines
Other
1,200
1,000
800
600
400
200
Source: Federal Reserve.
Latest
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
0
6
Liquidity strains have eased somewhat,
but remain acute
Money Market Spreads
(3-month LIBOR minus government bond yields, in percent)
5
United States
Euro area
United Kingdom
4
3
2
1
0
7-Oct-08
4-Sep-08
4-Aug-08
2-Jul-08
29-Apr-08
27-Mar-08
25-Feb-08
23-Jan-08
30-May-08
Sources: Bloomberg LP; and Datastream.
21-Dec-07
20-Nov-07
18-Oct-07
17-Sep-07
15-Aug-07
13-Jul-07
12-Jun-07
10-May-07
9-Apr-07
7-Mar-07
2-Feb-07
2-Jan-07
-1
7
..and the crisis has spread to emerging
markets
MSCI Equity Markets
Emerging Market CDS Spreads
(January 1, 2007=100)
(5-year sovereign spread; basis point)
150
1000
140
900
130
800
120
700
110
600
100
500
90
Source: Bloomberg LP.
MSCI: Emerging market
Source: Bloomberg LP.
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
MSCI: Developed market
Jan-07
Oct-08
50
Sep-08
100
Aug-08
60
Jul-08
200
Jun-08
70
May-08
300
Apr-08
80
Mar-08
400
8
Asia has been hit quite hard, as funds
have been pulled from the region
Selected Asia: Net Equity Inflows
(In billions of U.S. dollars)
30
20
10
0
-10
Source: Bloomberg LP.
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
Nov-06
May-06
Mar-06
Jan-06
-40
Sep-06
-30
Jul-06
ASEAN-5 excl. Malaysia
India
Taiwan POC
Korea
Japan
-20
9
...and new financing has dried up
Asian External Financing: Bond, Equity and Loan
(In billions of U.S. dollars)
100
90
80
70
60
50
40
30
20
10
0
2007-Q4
2008-Q1
2008-Q2
2008-Q3
2005-Q1
2005-Q2
2005-Q3
2005-Q4
2006-Q1
2006-Q2
2006-Q3
2006-Q4
2007-Q1
2007-Q2
2007-Q3
2003-Q3
2003-Q4
2004-Q1
2004-Q2
2004-Q3
2004-Q4
2003-Q1
2003-Q2
Bond
Equity
Loan
Source: Data provided by the Bond, Equity and Loan database of the IMF
sourced from Dealogic.
10
…leading to sharp falls in equity markets
and pressures on currencies
Asia: Stock Market Developments
(January 1, 2007=100)
160
Exchange Rates Against the U.S. Dollar
(January 1, 2007=100)
120
110
140
100
120
90
100
80
80
70
MSCI: Asia
Japan (Nikkei-225)
MSCI: Emerging markets
Source: Bloomberg LP.
Source: Bloomberg LP.
22-Sep-08
21-Jul-08
19-May-08
17-Mar-08
14-Jan-08
12-Nov-07
10-Sep-07
9-Jul-07
7-May-07
5-Mar-07
50
1-Jan-07
1-Feb-07
6-Mar-07
6-Apr-07
9-May-07
11-Jun-07
12-Jul-07
14-Aug-07
14-Sep-07
17-Oct-07
19-Nov-07
20-Dec-07
22-Jan-08
22-Feb-08
26-Mar-08
28-Apr-08
29-May-08
1-Jul-08
1-Aug-08
3-Sep-08
6-Oct-08
40
60
1-Jan-07
60
Indonesia
Korea
Malaysia
Thailand
India
11
…and increases in CDS spreads
Selected Asian Countries: CDS Sovereign Spreads
(Basis points)
1000
900
Indonesia
Malaysia
Philippines
Thailand
800
700
600
500
400
300
200
100
Source: Bloomberg LP.
10/2/08
9/2/08
8/2/08
7/2/08
6/2/08
5/2/08
4/2/08
3/2/08
2/2/08
1/2/08
12/2/07
11/2/07
10/2/07
9/2/07
8/2/07
7/2/07
0
12
Domestic liquidity conditions have also
tightened
Hong Kong SAR, Japan, and Singapore: "TED" Spreads1
(In percentage points)
6.0
1.2
Hong Kong SAR (left scale)
Singapore (right scale)
Japan (right scale)
5.0
4.0
1.0
0.8
0.0
10/21/08
0.0
8/26/08
9/9/08
9/23/08
10/7/08
0.2
6/17/08
7/1/08
7/15/08
7/29/08
8/12/08
1.0
5/6/08
5/20/08
6/3/08
0.4
3/25/08
4/8/08
4/22/08
2.0
1/15/08
1/29/08
2/12/08
2/26/08
3/11/08
0.6
1/1/08
3.0
Sources: CEIC Data Company Ltd; and IMF staff calculations
1
For Hong Kong SAR, 3-month HIBOR and exchange fund bills; for Japan, 3-month
LIBOR and OIS rates; for Singapore, 3-month SIBOR and treasury bill rates are used.
13
Some countries have been more
affected than others

Vulnerability factors include:




Current account deficits
Reliance on external funding, including by
banks
Significant foreign participation in domestic
equity and bond markets
Domestic macro imbalances
14
Recent pressures also reflect concerns
about the global outlook...
Industrial Production
Purchasing Manager Index
(Percent change from a year ago)
(Index, above 50=expansion, below 50=contraction)
6
60
5
58
4
56
3
54
2
52
1
50
0
48
-1
46
-2
U.S.
Euro Zone
US
Japan
Euro Area
Japan
44
-3
Source: Haver Analytics.
2008-Q3
2008-Q1
2007-Q3
2007-Q1
2006-Q3
2006-Q1
2005-Q3
2005-Q1
2008-Q3
2008-Q1
2007-Q3
2007-Q1
2006-Q3
2006-Q1
2005-Q3
2005-Q1
42
Source: Haver Analytics.
15
Economic activity in the region has
already slowed...
Emerging Asia: Direction of Exports
Selected Asia: Industrial Production
(12-month percent change of 3-mma)
(3-month percent change of 3-month moving average, SAAR)
40
30
To U.S.
To EU
To China
35
20
30
25
10
20
0
15
10
-10
5
NIEs
ASEAN-5
Japan
Sources: CEIC Data Company Ltd; and IMF staff
calculations.
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Jul-07
Sep-07
May-07
Mar-07
Jan-07
Nov-06
Sep-06
Jul-06
May-06
Mar-06
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Sources: CEIC Data Company Ltd; and IMF staff
calculations.
Jan-06
-20
0
16
...and leading indicators of global trade
suggest further weakness ahead
Baltic Dry Index
1
(in $)
(Benchmark for commodity shipping costs)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
Source: Bloomberg LP.
1
A composite of the Baltic Capesize, Panamax, Handisize, and Supramax indices.
10/6/2008
9/4/2008
8/5/2008
7/4/2008
6/4/2008
5/5/2008
4/3/2008
3/4/2008
2/1/2008
1/2/2008
0
17
... putting pressures on corporate
and banking sector performances
Selected Asian Countries: Banking
1
Sector Credit Default Swap Spreads
Japan and Korea: Number of Corporate
Bankruptcies
(3-month moving average)
(Basis points)
1100
220
1050
210
1000
200
1200
1000
India
Korea
Australia
Japan
Singapore
800
600
950
190
400
900
180
200
Source: CEIC Data Company Ltd.
Jun-08
Apr-08
Feb-08
Dec-07
Oct-07
Aug-07
Jun-07
Apr-07
Feb-07
160
Dec-06
800
170
0
7/2/07
7/30/07
8/27/07
9/24/07
10/22/07
11/19/07
12/17/07
1/14/08
2/11/08
3/10/08
4/7/08
5/5/08
6/2/08
6/30/08
7/28/08
8/25/08
9/22/08
10/20/08
Japan: enterprise bankruptcy
case (left scale)
Korea: companies in default
(right scale)
850
Sources: Bloomberg LP; and IMF staff calculations.
1
Country spreads are weighted averages based on
relative assets.
18
Asian authorities have responded by
taking measures to maintain
confidence in the banking system

Nearly all economies in the region have injected liquidity,
including through new facilities, extending the range of
collateral or easing access to central banks’ discount
windows.

A number of economies have extended guarantees to bank
deposits (Hong Kong SAR, Malaysia, Taiwan Province of
China, Singapore and Australia) and bank debt (Australia,
Korea).

Some economies announced plans for bank recapitalization
contingency funds (Japan, India, Hong Kong SAR).
19
A macroeconomic policy response is
also taking shape in Asia

With inflation pressures easing, a number of
economies have cut policy rates (e.g., Australia,
China, India, Korea, New Zealand, Taiwan
Province of China, and Vietnam).

A few economies have also adopted fiscal stimulus
measures (e.g., Australia, China, Japan, Korea, and
New Zealand).
20
Looking Ahead: Key Challenges for
Policymakers in Asia

Policy makers need to minimize further tightening of
overall credit conditions and its spillovers to the
economy, including




continuing to supply the banking system with appropriate
liquidity
standing ready to recapitalize banks, and extend bank
guarantees, if necessary
considering steps to support trade credit
Moreover, there is still room for macro policies


with inflation projected to moderate, monetary policy could
be eased further to support growth
many economies also have room to ease the fiscal stance
21
International Response



While the fundamentals in Asia are strong,
Asia and the international community need to
stand ready to provide financial support if the
crisis intensifies and any country experiences
serious external financing difficulties.
The IMF has just established a new facility to
provide large and rapid disbursements to
countries with sound fundamentals but
pressing liquidity needs.
Swaps under the Chang Mai Initiative are also
potentially available to Asean+3 countries.
22