Global Financial Crisis: Implications For Asia David Burton Director, Asia and Pacific Department International Monetary Fund Presentation to the Government Task Force on Economic Challenges Hong Kong SAR November 3, 2008

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

Financial firms accelerated deleveraging, selling assets….

...and cutting credit lines, causing dollar shortages

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

Capital injections into banks

Bank guarantees

Monetary measures

Rate cuts

Massive Liquidity Injections

Fed FX swaps with foreign central banks

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

Liquidity strains have eased somewhat, but remain acute

..and the crisis has spread to emerging markets

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

...and new financing has dried up

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

… and increases in CDS spreads

Domestic liquidity conditions have also tightened

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

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

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

Economic activity in the region has already slowed...

...and leading indicators of global trade suggest further weakness ahead 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 1/2/2008 2/1/2008 3/4/2008 4/3/2008 5/5/2008 6/4/2008 7/4/2008 8/5/2008 9/4/2008 10/6/2008 Baltic Dry Index 1 (in $)‏ (Benchmark for commodity shipping costs)‏ Source: Bloomberg LP. 1 A composite of the Baltic Capesize, Panamax, Handisize, and Supramax indices.

... putting pressures on corporate and banking sector performances

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).

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).

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).

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).

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

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

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.

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.