May 12, 1998
FINANCE: WORLD ECONOMY, TRADE WILL BE AFFECTED BY CRISIS
Geneva 10 May (Chakravarthi Raghavan) -- The financial crisis in Asia is likely to have far greater impact on global trade and the world economy (than foreseen by some others), the UN Conference on Trade and Development has said - thus differing from some reassuring assessments of the WTO, IMF and other institutions.
UNCTAD, in a preliminary assessment, said that while the main trading partners of the East Asian economies are the leading OECD members, the region's financial crisis is also having trade consequences on developing countries, mainly in Asia but also elsewhere.
In March, focusing only on the five crisis-hit countries (South Korea, Malaysia, Thailand, Indonesia and the Philippines), the WTO economists had said that if the financial crisis could be contained within these countries, there should be no more than a small dent in world economic growth.
But the East and South-East Asian economies account for about a quarter of the world merchandise trade and nearly a third of world service imports, UNCTAD said, in a note to the Group of 15 developing countries meeting in Cairo.
And while the ASEAN and Korea accounted for less than three percent of world GDP, the slowdown (and its transmission through various channels to others) encompassed the economies of N.E.Asia including Japan, Hong Kong, and rest of South-East and East Asia, the US and Europe and notably Brazil and Argentina in Latin America, UNCTAD pointed out. India and Taiwan were the exceptions in Asia.
In an address to the G-15 trade ministers meeting in Cairo (prior to the G-15 summit), UNCTAD Secretary-General Rubens Ricupero said the effect of the crisis was having an impact on other developing countries - through slower growth in export markets, declines in commodity prices and sharp changes in exchange rates.
The UNCTAD note to the meeting said that the economic slowdown now not only encompassed those who had been hit by the acute financial crisis since July 1997, but also the rest of Asia and South-East Asia.
The economic malaise emanating from the region is likely to have a far greater impact on global trade and the world economy than could be concluded by focusing only on the countries where an acute financial crisis has erupted, UNCTAD said.
The impact on other regions and countries will vary from region to region, and country to country, depending on a number of factors including trade patterns and competitiveness, and through several channels.
A precise assessment of the impact of the crisis on the rest of the world is difficult at the moment because of the rapid and significant changes in economic and financial situations in many of the concerned countries and the lack of knowledge of the exact course of policy adjustment. But what is probable is that a large part of the adjustment will take place in terms of changes in trade flows - declines in demand and imports, and an export drive on the part of the countries.
The latest data available, UNCTAD said, showed a downward trend in imports of Indonesia, Korea, Malaysia, Taiwan and Thailand in 1997, with noticeable declines in the second half of that year. And for countries with a high share of exports to Asia, there are already signs of a fall-off in exports to the region.
As for Asian recovery through exports, two factors are crucial. Given their patterns of manufacturing exports, import content of exports like electronics may be quite high, thus offsetting competitive advantage of devaluations. And export recovery will also depend on availability of financing for expanding export production.
The economic slowdown in the region encompasses North-East Asia including Japan, which is in recession, financial stresses and low confidence. In Hong Kong, high interest rates to defend the currency will continue to depress the economy. With the major exception of India and Taiwan, the other Asian economies are having a sharp economic slow-down.
The GDP and trade of the region are large enough to have a significant impact on the rest of the world, including the US and Europe. Also, economic growth in Latin America, notably in Brazil and Argentina, are slowing - due to defence of currencies and fall in commodity prices. In 1997 exports were the engine of growth, jobless though, in Germany and France, but due to import slowdown in Asia, growth in these two seems likely to falter.
The OECD in its April economic outlook has said the Asian crisis will have a significant impact on OECD growth which, overall, is projected to slow down to 0.7% in 1998, and with US and Japan slowing down by upto 1.1 percent. Slower OECD growth will impact negatively on developing country exports and growth.
UNCTAD said that since the Asian economies trade intensively with each other, they are already experiencing an interactive downward spiral in regional trade. February trade figures for Japan show exports to Asia fell by 11.9% compared to Feb 1997. Declines in Japanese exports to Indonesia, Thailand, S.Korea and Malaysia have been dramatic - falling respectively by 56, 41, 38 and 24 percentages. On the import side, Japanese imports from Indonesia, Malaysia and Vietnam fell by 23, 22 and 30 percent respectively.
And for the first time in 17 years, Taiwan recorded its first quarterly trade deficit in the first quarter of 1998 - exports dropping by 27% to S.E.Asia, 24% to Japan and 3.2% to Hong Kong.
Further afield, India's rate of growth of exports (April-Nov 1997) to rest of Asia decelerated, with actual declines in exports to S.Korea, Thailand and Singapore, and slower export growth to Indonesia and Hong Kong. India is also concerned about an acute loss of competitiveness vis-a-vis Indonesia, Malaysia, Thailand and S.Korea due to their currency devaluations.
In Latin America as a whole, while exports to Asia represent about 10% of total merchandise exports, for some countries (Chile, Peru and Ecuador) exports account for a significant share of total exports, ranging upto 38%. While Latin American exports to Asia grew quite rapidly in the first eight months of 1997, there was a sharp fall-off in exports in late 1997, and this is particularly notable for Chile.
In Africa, says UNCTAD, the crisis could mean smaller exports to Asia for Zambia, Tanzania and the Democratic Republic of Congo, as well as for South Africa and Angola. The crisis could also have another adverse consequence to Africa -- reducing inward FDI. Some developing Asian countries like Malaysia have been large investors in Africa.
Another effect of the crisis is via commodity prices.
Asia accounts for 16% of agricultural exports and 13% of mining product exports from Latin America. The corresponding shares of exports of Africa to Asia are now around 20% and 13% respectively; and 57% of Middle Eastern exports of mining products, basically oil, go to Asia.
The effect of reduced business activity and demand in Asia is already being felt in many commodity markets.
Since, mid-1997, commodity prices have experienced a sharp overall decline of about 10-16 percent - with larger falls in agricultural raw materials and metals than in food and beverages.
Price declines, some of them very pronounced, have been observed for many commodities, which altogether account for about a third of non-oil primary exports of developing countries. But some of the declines are also due to other factors.
Among metals, copper prices have declined by 36% since June 1997 and Feb 1998, nickel prices by 24 percent, zinc by 22 percent and lead by 18 percent. Among agricultural raw materials, sawn wood prices fell by 34 percent, rubber prices by 29 percent, wool prices by 27 percent and jute prices by 25 percent.
Agricultural commodity prices appear to have more or less stabilized, albeit at lower levels than in mid-1997. But most metal prices and petroleum prices were still deteriorating as of Feb 1998.
The impact of these price declines, UNCTAD notes, will vary from country to country, depending on whether it is net exporter or importer of the commodity in question. Those who are net importers, particularly of oil, will benefit, while the net exporters will face a negative effect on their export earnings, fiscal revenues and growth.
The adverse effects cover 12 countries from Africa, 8 from Latin America and 18 from Asia.
The trade balance of Colombia, Ecuador, Mexico, Trinidad and Tobago and Venezuela - for whom petroleum is the principal or major export item - is significantly affected by the price of oil. Chile and Peru are affected by the fall in copper prices, with their copper exports hit both in volume and price terms. Bolivia and Paraguay will be affected by the price declines for tin and cotton.
In Africa, Angola, the D.R.of Congo, Gabon, Libya and Nigeria (where oil exports account for more than 50% of export earnings) will be seriously affected, as will Algeria, Egypt and Cameroon for which oil is a major export item. Cameroon, Cote d'Ivoire and Swaziland will also be affected by fall in price of sawn wood; similarly Sudan, Togo and Tanzania will be affected by price falls of cotton; and Zambia by price falls of Copper which accounts for more than 50% of its exports.
In Asia, Cambodia will be hit by the fall in price of timber and Papua New Guinea by price falls in copper.
The large depreciations in currency values since mid-1997, UNCTAD says, also has some major implications for patterns of international competitiveness both inside and outside the region, as well as for trade adjustment and economic recovery of the crisis-hit economies.
In US dollar terms, the regional currencies have experienced average declines between June 1997 and March 1998 - ranging from 11.5% for the Japanese yen to about 74% for the Indonesian rupiah. Other currencies within and outside the region have also weakened significantly.
These exchange rate movements are likely to alter international competitiveness among countries and shares in third-country markets.
But available data, UNCTAD adds, do not reveal a significant boost to exports so far or provide evidence of the extent to which, if at all, the devaluations may be producing competitive pressures on other developing country exporters in third markets.
Data so far indicate that the relative improvement in current accounts of the crisis-struck countries is essentially due to import reduction rather than significant expansion of exports. The only limited exception is South Korea.
There has been no acceleration of export growth, in US dollar terms, in Thailand, Malaysia, Indonesia, the Philippines, Singapore and S.Korea.
UNCTAD said that the effect of the financial crisis on developing countries was also being felt by reduced availability of foreign private financing and increased premiums on foreign borrowing.
Private financing to developing countries, although up in 1997, eased sharply in the last quarter of that year, particularly for Asia where it was down from about $17 billion for Oct 1997 to $0.9 billion in Feb 1998; in Latin America it was down from $7.5 billion for Oct 1997 to $3.7 billion for Feb 1998.
The first months of this year have also seen sharp decline in private flows to Africa and the Middle East -- from a $5.9 billion in Dec 1997 to $0.9 billion in Jan and 0.6 billion in Feb.
The increased cost of borrowing is reflected in the risk premiums on bond issues -- with average spread on the Eurobond market, for issues with a 3-6 year maturity, increasing by about 165 basis points above the US treasury bond rate (the no-risk benchmark).
While most spectacular increases have been recorded for Indonesia (833 base points), S.Korea (471), Thailand (389) and the Philippines (223), other developing countries issuing sovereign securities have also been affected -Brazil (204), Argentina (197), Mexico (148), Venezuela (137), Colombia (123) and Uruguay ( 105) in Latin America; and Tunisia (93) and South Africa (85) in Africa.