Published March 10, 2009

Collapsing asset values hit Asia hard

ADB finds open economies suffer more now, but they gain in the long run

By ANTHONY ROWLEY
IN TOKYO

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THE global financial crisis has so far cost emerging Asian economies a massive US$9.6 trillion in terms of collapsing asset values, according to a report released yesterday by the Asian Development Bank. Globally, losses in the value of stocks, bonds and bank assets may amount to an 'astounding US$50 trillion or one year of world GDP', the report suggests.

Asia is proving to be especially vulnerable in the crisis because of the region's extreme openness to global financial and trade flows compared with other parts of the world, although this could also prove to be a source of more rapid recovery as and when demand turns up again, according to the ADB.

'This is by far the most serious crisis to hit the world economy since the Great Depression,' ADB president Haruhiko Kuroda commented in connection with the release of the report, which was produced for the ADB by the Centennial Group Latin America and the Emerging Market Group.

'I am afraid things may get worse before they get better,' Mr Kuroda added. 'However, I remain confident that Asia will be one of the first regions to emerge from (the crisis), and it will emerge stronger than ever before.'

The report, Global financial turmoil and emerging market economies, says that most emerging market economies, including those in developing Asia and Latin America, are 'at a cross-roads and the next 12-18 months will be very difficult'.

It calls the impact on emerging market exports, finance and investment 'earthshaking' and says that 'at a minimum', growth will fall sharply. 'The situation is extremely serious and the effect on output, wealth and poverty is critical.

'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.'

One reason why Asia has suffered such a dramatic collapse in asset values is because these were run up so rapidly between 2003 and 2007, before the crisis erupted, the ADB study says. Financial assets in emerging Asia soared by nearly 50 per cent in value to reach 370 per cent of GDP during this period, says the ADB report, calling this a 'speculative bubble'.

Since the end of 2007, stock markets in emerging Asia plus the newly industrialised economies (NIEs) of South Korea, Hong Kong, Singapore and Taiwan have plunged by a total of US$7.17 trillion in total, which is equal to 81 per cent of these countries' combined GDP. Bank assets and public and private debt values have also plunged, though less sharply.

'Such losses have an enormous impact on domestic expenditures,' the report says. At the same time, Asian and other emerging economies have suffered enormous declines in their export levels and in their terms of trade. This will reduce overall emerging market growth this year by three percentage points and cause an 'unavoidable setback in the fight against poverty'.

The fall in growth across Asia as a whole will be a somewhat less severe 2-2.5 percentage points because of the resilience of China and India, the report suggests. But the Asian NIEs 'are very likely to experience a serious recession as their exports are being hit markedly by the world crisis' and their growth will decline by three percentage points.

Asia has outstripped other regions over the past 25 years in the growth of its trade, which has expanded at a rate of more than 10 per cent annually - well ahead of the 6 per cent growth in world trade. The overall ratio of exports to GDP in Asia had risen to 55 per cent by 2007, except in China and India where domestic demand is more important and where export to GDP ratios are lower.

'It would be easy to suggest that the countries that have been most open to international trade (Singapore and other Asian NIEs) may be subject to the greatest shock on account of reduced world demand, thus justifying protectionism,' the report says.

'However, this should be viewed in a broader light.. Countries that opened more vigorously to trade grew the fastest and benefited more from global prosperity. It may be the case that they will experience a significant short-term loss.'

But the losses are temporary and from a high base.

These 'more open traders may benefit from a more flexible productive structure that allows them to adjust more efficiently' and to take advantage of any recovery in demand while more closed economies 'will have more difficulty in correcting imbalances', the report adds.