global financial crises the asian story

GLOBAL FINANCIAL CRISIS: THE ASIAN

STORY

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2

Global financial turmoil intensified after Lehman’s mid- September collapse

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200

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600

800

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1200

1/1/

07

3/1/

07

5/1/

07

6/29

/07

8/29

/07

10/2

9/07

12/2

7/07

2/26

/08

4/25

/08

6/25

/08

8/25

/08

10/2

3/08

U.S. Corporates, AAAU.S. High Yield, BBEuro area High Yield, BBB

Corporate Spreads (in basis points)

Source: Bloomberg LP.

0

100

200

300

400

500

600

1/1/

2007

3/1/

2007

5/1/

2007

6/29

/200

7

8/29

/200

7

10/2

9/20

07

12/2

7/20

07

2/26

/200

8

4/25

/200

8

6/25

/200

8

8/25

/200

8

10/2

3/20

08

U.S.

EU

Bank CDS Spreads (5-year, in basis points)

Source: Datastream.

3


Financial firms accelerated deleveraging, selling assets….

40

50

60

70

80

90

100

110

120

1/1/

2007

2/28

/200

7

4/27

/200

7

6/26

/200

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8/23

/200

7

10/2

2/20

07

12/1

9/20

07

2/15

/200

8

4/15

/200

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6/12

/200

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8/11

/200

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10/8

/200

8

U.S. (S&P 500)Japan (Nikkei 225)Europe (Eurofirst 300)

Stock Market Indices (January 1, 2007=100)


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100

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300

400

500

600

700

1/3/

2007

3/6/

2007

5/4/

2007

7/5/

2007

9/4/

2007

11/1

/200

7

1/3/

2008

3/5/

2008

5/5/

2008

7/3/

2008

9/3/

2008

VIX Index(Index, January 1,2007=100)


4


...and cutting credit lines, causing dollar shortages

-125

-100

-75

-50

-25

0

25

1/1/

2007

3/1/

2007

5/1/

2007

7/1/

2007

9/1/

2007

11/1

/200

7

1/1/

2008

3/1/

2008

5/1/

2008

7/1/

2008

9/1/

2008

Japan yen British poundEuro

Cross-Currency Basis Swaps with U.S. Dollar(one-year tenors, in basis points)



5

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


6

..resulting in a large expansion of the Fed balance sheet

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200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-

07

Feb-

07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-07

Aug

-07

Sep-

07O

ct-0

7

Nov

-07

Dec

-07

Jan-

08

Feb-

08M

ar-0

8

Apr

-08

May

-08

Jun-

08Ju

l-08

Aug

-08

Sep-

08

Oct

-08

TAF PDCF

AIG loan Estimated forex swap lines

ABCP Credit Facility Other

Total Assets on Federal Reserve's Balance Sheet (In billions of U.S. dollars)

Source: Federal Reserve.

Late

st


7

Liquidity strains have eased somewhat, but remain acute

-1

0

1

2

3

4

5

2-Ja

n-07

2-Fe

b-07

7-M

ar-0

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9-Apr

-07

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ay-0

7

12-J

un-0

7

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ul-0

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15-A

ug-0

7

17-S

ep-0

7

18-O

ct-0

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ov-0

7

21-D

ec-0

7

23-J

an-0

8

25-F

eb-0

8

27-M

ar-0

8

29-A

pr-0

8

30-M

ay-0

8

2-Ju

l-08

4-Aug

-08

4-Se

p-08

7-O

ct-0

8

United StatesEuro areaUnited Kingdom

Money Market Spreads (3-month LIBOR minus government bond yields, in percent)

Sources: Bloomberg LP; and Datastream.

8


..and the crisis has spread to emerging markets

50

60

70

80

90

100

110

120

130

140

150

Jan-

07

Mar

-07

May

-07

Jul-07

Sep-

07

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-07

Jan-

08

Mar

-08

May

-08

Jul-08

Sep-

08

MSCI: Emerging market

MSCI: Developed market

MSCI Equity Markets(January 1, 2007=100)


100

200

300

400

500

600

700

800

900

1000

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-08

Aug

-08

Sep-

08

Oct

-08

Emerging Market CDS Spreads(5-year sovereign spread; basis point)



9

Asia has been hit quite hard, as funds have been pulled from the region

-40

-30

-20

-10

0

10

20

30

Jan-

06

Mar

-06

May

-06

Jul-06

Sep-

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-06

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07

Mar

-07

May

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Jul-07

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-07

Jan-

08

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-08

Jul-08

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08

ASEAN-5 excl. MalaysiaIndiaTaiwan POCKoreaJapan


Selected Asia: Net Equity Inflows(In billions of U.S. dollars)


10

...and new financing has dried up

0102030405060708090

100

2003

-Q1

2003

-Q2

2003

-Q3

2003

-Q4

2004

-Q1

2004

-Q2

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-Q3

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-Q4

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-Q1

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-Q4

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-Q4

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2008

-Q3

BondEquityLoan

Asian External Financing: Bond, Equity and Loan(In billions of U.S. dollars)

Source: Data provided by the Bond, Equity and Loan database of the IMF sourced from Dealogic.

11


…leading to sharp falls in equity markets and pressures on currencies

40

60

80

100

120

140

160

1-Ja

n-07

1-Fe

b-07

6-M

ar-0

76-

Apr

-07

9-M

ay-0

711

-Jun

-07

12-J

ul-0

714

-Aug

-07

14-S

ep-0

717

-Oct

-07

19-N

ov-0

720

-Dec

-07

22-J

an-0

822

-Feb

-08

26-M

ar-0

828

-Apr

-08

29-M

ay-0

81-

Jul-08

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-08

3-Se

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6-O

ct-0

8

MSCI: Asia

Japan (Nikkei-225)

MSCI: Emerging markets

Asia: Stock Market Developments (January 1, 2007=100)


50

60

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80

90

100

110

120

1-Ja

n-07

5-M

ar-0

7

7-M

ay-0

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9-Ju

l-07

10-S

ep-0

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12-N

ov-0

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14-J

an-0

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17-M

ar-0

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19-M

ay-0

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21-J

ul-0

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22-S

ep-0

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IndonesiaKoreaMalaysiaThailandIndia

Exchange Rates Against the U.S. Dollar(January 1, 2007=100)



12

…and increases in CDS spreads

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7/2/

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9/2/

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/08

IndonesiaMalaysiaPhilippinesThailand

Selected Asian Countries: CDS Sovereign Spreads (Basis points)



13

Domestic liquidity conditions have also tightened

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1.2

Hong Kong SAR (left scale)Singapore (right scale)Japan (right scale)

Hong Kong SAR, Japan, and Singapore: "TED" Spreads1

(In percentage points)

Sources: CEIC Data Company Ltd; and IMF staff calculations 1For 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.


14

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

15


Recent pressures also reflect concerns about the global outlook...

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-Q1

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-Q1

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-Q1

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-Q3

U.S. Euro Zone Japan

Industrial Production(Percent change from a year ago)

Source: Haver Analytics.

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2005

-Q1

2005

-Q3

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-Q3

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-Q1

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-Q3

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-Q1

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-Q3

US Euro Area Japan

Purchasing Manager Index(Index, above 50=expansion, below 50=contraction)

Source: Haver Analytics.

16


Economic activity in the region has already slowed...

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NIEs ASEAN-5 Japan

Selected Asia: Industrial Production(3-month percent change of 3-month moving average, SAAR)

Sources: CEIC Data Company Ltd; and IMF staff calculations.

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Jan-

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Jul-0

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-06

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To U.S.To EUTo China

Emerging Asia: Direction of Exports(12-month percent change of 3-mma)

Sources: CEIC Data Company Ltd; and IMF staff calculations.


17

...and leading indicators of global trade suggest further weakness ahead

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/6/2

008

Baltic Dry Index1 (in $)(Benchmark for commodity shipping costs)

Source: Bloomberg LP.1 A composite of the Baltic Capesize, Panamax, Handisize, and Supramax indices.

18


... putting pressures on corporate and banking sector performances

800

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900

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1050

1100

Dec

-06

Feb-

07

Apr-

07

Jun-

07

Aug-

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Oct

-07

Dec

-07

Feb-

08

Apr-

08

Jun-

08

160

170

180

190

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210

220

Japan: enterprise bankruptcycase (left scale)Korea: companies in default(right scale)

Japan and Korea: Number of Corporate Bankruptcies(3-month moving average)

Source: CEIC Data Company Ltd.

0

200

400

600

800

1000

1200

7/2/

077/

30/0

78/

27/0

79/

24/0

710

/22/

0711

/19/

0712

/17/

071/

14/0

82/

11/0

83/

10/0

84/

7/08

5/5/

086/

2/08

6/30

/08

7/28

/08

8/25

/08

9/22

/08

10/2

0/08

India Japan

Korea Singapore

Australia

Selected Asian Countries: Banking Sector Credit Default Swap Spreads1

(Basis points)

Sources: Bloomberg LP; and IMF staff calculations. 1 Country spreads are weighted averages based on relative assets.


19

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).


20

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).


21

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


22

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.

global financial crises the asian story

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