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G L O B A L
E C O N O M I C
11/29/08
7:13 AM
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Figure A3 Exchange rates decline sharply as carry trades unwind
Figure A4 Gross capital inflows to East Asia contracted 40 percent in 2008
Local currency unit/US$ index (Jan. 01, 2008 5 100)
US$ billions
120
60 Philippine peso 50
110
Malaysian ringgit 40
100 30 90
20
Japanese yen Thai baht
80 Jan. 1 2008
Mar. 1 2008
10 May 1 2008
Jul. 1 2008
Sep. 1 2008
Nov. 1 2008
0
Bond issuance
Equity issuance
Bank borrowing
Source: Thomson/Datastream. Note: Increase implies weaker local currency.
Jan.–Aug. 2007
Jan.–Aug. 2008
Source: World Bank.
825 basis points as of late October, well above the high of 450 basis points at the peak of the East Asian crisis in 1998. But as conditions in international markets began to unfreeze, and more and more countries announced fiscal stimulus packages to underpin their economies, spreads narrowed once more to 560 basis points during the first week of November. As of November 7, 2008, spreads were up by a modest 50 basis points for China, 300 points for Malaysia, 250 points in the Philippines, but a more-substantial 570 points in Indonesia. Spreads for corporate borrowers have increased by far more, and those for noninvestment grade corporations—the majority of private sector issuance in the region—have skyrocketed (see chapter 1). For several countries in East Asia, the hike in spreads has become problematic, effectively shutting down bond issuance as a cost-effective means of finance. Given the process of deleveraging now under way among high-income financial institutions, the retreat from regional equity markets should be viewed together with a substantial falloff in capital flows to the region over the course of 2008. Gross capital flows to East Asia and the Pacific, not including foreign direct investment (FDI), dropped from $100 billion to $60 billion from January through August 2008, down 40 percent from
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the same period in 2007. The bulk of the falloff may be traced to sharp contractions in the issuance of initial public equity offerings (IPOs), largely from China, which were off 65 percent, from $56 billion to $19 billion in the year, in line with the deterioration of conditions in international markets. But banking flows also dropped 12.5 percent to $35 billion, and bond issuance eased by 7.5 percent to $7 billion (figure A4). In contrast, FDI flows to the region surged by some two-thirds to a fresh record $175 billion in 2007, with FDI to China picking up 75 percent to near $140 billion, and with advances of 40 percent in Malaysia to $8.5 billion. Estimates for 2008 suggest a modest increase in overall FDI flows, showing some resilience in the face of the crisis. Measured by the extent to which sovereign spreads have increased, equity markets declined and exchange rates depreciated since September 15, together with the sharp falloff in capital flows in the last year, East Asian economies hit hardest by the crisis to date include Fiji, Indonesia, the Philippines, Thailand, and Vanuatu.
Difficult policy decisions The general stance of policy in the region is moving from a tightening posture—initiated