The global financial crisis: Asia Pacific not immune

The global financial crisis that began in mid-2007 and worsened in October 2008 resulted in major falls in the US stock market. Asia Pacific markets are closely tied to those of the USA, particularly those of the more industrialised countries, and therefore suffered similar losses.

However, since Asia’s financial systems are relatively resilient, the greater effect will be felt on the real economy, particularly since the negative impact of the crisis will exacerbate existing trends of worsening fiscal deficits and currency weakness.

Economic growth will slow across the region, although India and China will retain relatively higher rates of growth.

Key points

  • The global financial crisis originated in the US sub-prime mortgage sector in 2007 owing to concerns about the high proportion of bad mortgage loans;
  • A rapid credit contraction and negative investor sentiment led to a major downturn in the Dow Jones and Nasdaq beginning in mid-2007;
  • A knock-on global effect led to swift declines in Asia Pacific bourses, such as in Hong Kong, Singapore, India and Pakistan;
  • Negative global investor sentiment will lead to a decline in foreign direct investment to the region, slowing economic growth;
  • In addition, slowing demand in the USA (a major export destination) as well as the EU will reduce export revenues in export-facing countries across the region;
  • While slowing global commodity prices will offer some inflationary relief, it will damage revenues for commodity-reliant countries such as Bangladesh and Pakistan;
  • Overall economic growth in Asia Pacific will slow in line with the global economic slowdown, although growth in leading economies such as India and China will remain strong by regional standards. The idea that emerging economies had decoupled sufficiently from developed economies has proven not to be the case;
  • Of the Asian economies, Japan will be the worst affected, owing to the fact that its export-oriented economy has been badly hit by the global slowdown, as well as historical problems with economic growth and deflation;
  • The export-orientated economies of Hong Kong, Singapore and South Korea will also be badly affected, all expecting growth of only 2.0% in 2009.


Asia Pacific’s financial systems experienced a severe shock during the 1997 financial crisis, which originated in Thailand and spread across the region, resulting in slumping economic growth and a withdrawal of foreign direct investment. Following this, the region made strenuous efforts to improve financial oversight and reduce national debt to avoid a recurrence of the fiscal crisis.

The region is therefore better placed to withstand the 2007-2008 global financial crisis, although it will still experience an economic slowdown in line with the global downturn. Hopes that financial reform had allowed the region to successfully decouple from the tribulations of Western economies have proven unfounded.

Asia Pacific stock market losses

Asian financial markets traditionally track those of the USA:

  • Many of the firms listed on Asia Pacific bourses are linked to industry, both heavy manufacturing and electronics. These are largely dependent on US demand. Bourses particularly weighted this way are those of Japan, South Korea, Hong Kong, Singapore, Malaysia and India;
  • Japan’s Nikkei stock index suffered the most, losing 51.5% of its value between July 2007 and December 2008;
  • Such losses were closely followed by Singapore (49.9%), China (47.4%) Malaysia (39.3%) and India (37.6%) over the same period:


Asia Pacific equity index losses: July 2007-December 2008
% decline

Source: Bloomberg.

  • India’s stock index losses were exacerbated by sharp falls following the Mumbai terrorist attacks in November 2008;
  • Japan’s equity loss was great because it closely tracks the US Nasdaq (industrial index) and reflected investor concerns about lower demand from the USA. Japan officially entered recession in the third quarter 2008;
  • China’s stock exchange lost 47.4% of its value over the period owing to concerns regarding slowing export demand and lower growth in the region’s largest economy;
  • As in other regions, concerns over debt in the banking sector are reducing financial systems’ willingness to extend credit. This is particularly important for Asia Pacific, where credit has proven a key engine of growth.

Equity losses in the region were not primarily concerned with negative domestic economic fundamentals but with the impact of lower US economic and demand.

Export decline

Asia Pacific will suffer heavily in terms of lower demand for its exports, particularly of manufactured and electronic goods:

  • In 2007 Asia Pacific exported 15.2% of exports or US$614 billion to the USA;
  • A slowing economy in the USA is reducing demand for imports. US imports fell by 5.6% month-on-month in October 2008 to US$212 billion;
  • In particular, US industrial machinery imports fell by US$8.1 billion month-on-month in October 2008. This will have a negative impact on industrial producing countries in Asia Pacific;
  • Additionally, Asia’s agricultural exporters are suffering from a decline in commodity prices following a bumper harvest. Bangladesh, India and China are major rice exporters. The global rice price was US$14.4 per 2,000 cwt (hundred weight or 100 lb of rice) in December 2008, down from a peak of US$24.2 per 2,000 cwt in May 2008;
  • Although falling prices have a beneficial effect on reducing inflation, the loss of export revenues will reduce profits for governments (via taxes and state exports) and businesses;
  • The main food importers benefiting from reduced food import costs are Bangladesh (one of the poorest countries in the region), the Philippines, Myanmar, Cambodia and Sri Lanka. This should help to support consumer incomes, especially for the poorer sectors of society in extreme poverty.

The beneficial effects of slowing inflation will be cancelled out by the negative effect of lower demand for exports, which will weigh on business profits and potential wage increases.

Financial effects

Lower export revenues will have negative implications for government budgets:

  • Lower government revenues will reduce available funding for social spending, reducing potential income support for consumers;
  • It will exacerbate current account deficits that have been widening throughout 2008 owing to slowing exports and high commodity import prices;
  • Pakistan’s current account deficit is forecast to almost double in 2008 to -8.7% of GDP from -4.8% of GDP in 2007 as ongoing political concerns encourage capital outflows and inflation boosts import demand;
  • Likewise, Vietnam’s current account deficit will widen to -11.7% of GDP in 2008 from -9.8% of GDP in 2007 as prices of key export commodities such as rice, coffee and rubber fall;
  • This is despite the beneficial effects of falling global oil prices, with oil having fallen from US$147 per barrel in July 2008 to US$44.9 per barrel in December 2008;
  • As well as lower export revenues and remittances, the region will also suffer from lower foreign direct investment inflows as global investors have less funding and willingness to invest in risky emerging markets. China received FDI inflows of US$59.9 billion in 2007, while Japan received US$22.2 billion.

Consumer confidence

A worsening economic environment is damaging consumer confidence:

  • Concerns regarding slowing export demand, especially from the USA, and the prospect of an economic downturn is reducing consumer willingness to spend;
  • Retail sales in China (a proxy for consumer confidence) grew by 20.8% year-on-year in November 2008. Although still high, this was the slowest growth for nine months;
  • Likewise, car sales in India (another proxy) fell by 19.4% year-on-year in November 2008 as economic concerns made consumers less likely to make major budgetary outlays;
  • Rising unemployment as a result of the slowdown is also affecting consumer confidence. In China, a survey by the Ministry of Human Resource and Social Security in October 2008, found that demand for workers had dropped 5.5% year-on-year;
  • Falling remittances from Asian nationals living in other regions will also curb consumer spending growth. In November 2008 the World Bank estimated that remittance flows to South Asia would grow 16.0% year-on-year in 2008 to US$51 billion, while flows to East Asia and the Pacific would grow 7.0% to US$62 billion. However, this is forecast to slow sharply in 2009;
  • The World Bank noted that strong remittance growth to South Asia was largely owing to funds from nationals working in the oil-producing Gulf and remittances are therefore likely to drop sharply in 2009 as lower oil prices reduce profits in the Gulf.

Consumer confidence will be most dented in poorer countries such as Bangladesh and Sri Lanka, which are heavily dependent on remittances, with remittance inflows totalling 9.5% of Bangladesh’s GDP in 2007. Slower remittance growth will result in lower domestic demand as consumer spending power declines.

Regional implications

All countries will be affected by the regional slowdown:

  • Japan will be the worst affected with the economy forecast to contract by -0.2% in 2009, its first recession in seven years. This reflects ongoing problems of low growth and deflation while the economic slowdown has hit its export-oriented economy hard;
  • Singapore and Hong Kong will experience low growth of 2.0% annually in 2009. This is largely due to their large financial services sectors (with Hong Kong acting as a financial intermediary for investment in China) and export-facing industries, with the USA a significant export partner;
  • South Korea’s growth will also slow to 2.0% in 2009 from 4.1% in 2008 as global demand for industrial products declines;
  • Some insulation will be provided by ongoing strong economic growth in India and China, which are forecast to grow by 6.3% and 8.5% respectively in 2009, from 7.8% and 9.7% in 2008.
Real GDP growth forecast in Asia Pacific: 2008-2009

Source: IMF.

Future scenarios

The global economic downturn will affect Asia Pacific well into 2009:

  • The USA is forecast to enter recession in 2008-2009, with the economy contracting by -0.7% in 2009. The eurozone is forecast to contract by -0.5% in 2009 following growth of 1.2% in 2008;
  • The prolonged slowdown in export demand will weigh on economic growth in Asia Pacific. The region is expected to grow by 6.0% in 2008 down from 7.6% in 2007, and then by 4.9% in 2009;
  • Relatively high rates of growth in India and China will provide some compensation for lower export demand from the USA, stimulating domestic demand;
  • Individual countries are introducing fiscal packages to provide economic stimulus. In December 2008 Japan announced a ¥23 trillion fiscal aid package, including tax breaks and assistance to struggling financial institutions;
  • In November 2008 China announced a fiscal stimulus package, cutting taxes and funding infrastructure programmes to increase employment and income growth.

Asia Pacific’s recent strong economic growth will slow in 2008-2009 as the combination of lower export demand, remittances and foreign direct investment weigh on prospects for job creation and wage growth. A recovery is expected by 2010 in line with a gradual global upturn.