Trade, Finance and Capital
Security in South Asia
Rashmi Banga
Senior Economist
UNCTAD-India Project
Global Slowdown Triggered
• Due to increased integration of the world markets, transmission of
economic crisis from one country to the rest of the world has
become easier.
•
The larger the country, where the crisis originates, the greater is the
impact on other countries.
• US, one of the largest economy in the world, both in terms of its
share in world GDP (27%) and global imports (17%) experienced
the sub-prime mortgage collapse in August 2007.
• From the financial sector, the crisis creeped into the real sector of
countries around the world through different channels.
• One of the most important channel through which the financial crisis
erupting in US and in other advanced countries has been
transmitted to developing countries is international trade.
Transmission of Impact Globally:
Channels
 Bilateral trade declines as demand slows
down
 “Echo effect” or third country effect
 Supply Chain Effects
 Contraction in trade finances
Other Channels of Transmission
Portfolio Flows decline
Foreign Direct Investment decline
Credit squeeze-risk-averse banks cut
lending
Remittances-income transfers decline
Snapshot of the World Economy
Real GDP (% change) 2006
2007
2008 2009P 2010P
United States
2.80
2.00
1.10
-4.00
0.00
Euro Area
3.00
2.60
0.70
-4.10
-0.30
Canada
3.10
2.70
0.50
-3.00
0.30
United Kingdom
2.80
3.00
0.70
-3.70
-0.20
Japan
2.00
2.40
-0.60
-6.60
-0.50
India
9.70
9.00
6.00
4.30
5.80
China
11.60 13.00
9.00
6.30
8.50
Impact on South Asia:
Growth in South Asia :
 Decelerated in 2008, falling from 8% in
2007 to 5.6 %.
 Projected to decline to 3.7 % in 2009,
before recovering to 6 % in 2010 (World
Bank: Feb 09)
South Asia: Projections for Real GDP Growth
(annual %) by GEP, 2009
Forecast
2005
6.0
2006
6.6
2007
6.4
2008
6.2
India
9.2
9.7
9.0
6.3
5.8
7.7
Nepal
3.1
3.7
2.6
5.5
3.8
4.9
Pakistan
7.7
6.2
6.0
6.0
3.0
4.5
Sri Lanka
6.0
7.7
6.8
6.3
4.0
5.5
Bangladesh
2009 2010
5.7
6.2
Changes in Exports - by developing countries regions in 2008
(USD monthly percentage change with respect of the same month of 2007)
80%
60%
40%
20%
0%
-20%
2008m1
2008m2
2008m3
2008m4
Latin America
2008m5
East Asia
2008m6
South Asia
2008m7
2008m8
East Europe and Central Asia
2008m9
2008m10
2008m11
Africa
Source: UNCTAD calculations based on data from Datastream, Global Trade Atlas,.
• Pakistan suffered the most rapid deterioration in the current account
balance, which turned from a surplus of around 4 percent of GDP in 2003 to
a deficit of over 8 percent in 2008.
• Sri Lanka similarly registered a sharp increase in current account deficit.
Even in India, the current account widened sharply from a surplus of more
than 2 percent of GDP in 2004 to a deficit of over 3 percent in 2008.
• The current balance in Nepal that was in surplus for a fairly long period
finally turned into a deficit in 2008.
• Only Bangladesh continued to enjoy a surplus in its current balance.
Drying up of Trade Finance for Developing
Countries
• Around 90 percent of total international
trade transactions involve credit.
• Obtaining such finance has become
scarce and costly, the bond market and
syndicated loans are effectively nonexistent, while customers are seeking
longer repayment periods.
• Interest rates on export credits are
climbing far above bank refinancing rates;
•
Survey-based data point to a trade finance
gap in developing countries of between
US$100 billion and US$300 billion on an
annual basis (UNCTAD 2009)
•
According to the IMF, trade financing of
low-income countries dropped by 18 per
cent in the fourth quarter of 2008.
•
Supply chain operations are also being
disrupted by lack of financing for
developing country suppliers, particularly
in Asia.
Commodity group
Peak in 2008*
Jan 2009*
% change
All commodities
(excluding crude
petroleum)
299.5
189.4
-37
Food
280.6
196.5
-30
Tropical beverages
193.5
165.5
-15
Vegetable oilseeds and
oils
370.5
191.7
-48
Agricultural raw materials
228.6
145.6
-36
Minerals, ores and metals
391.6
203.5
-48
Crude petroleum
469.5
155.6
-67
•
•
Source: UNCTAD(2009)
The long and steep commodity price boom peaked in middle of 2008, prices then fell
until the middle of the year and since then have leveled off.
•
The contraction of demand and deterioration of suppliers’ financial positions
contributed to the fall in commodity prices leading to further fall in production
and demand.
Trade in Services
• Travel and tourism-hard hit in South Asia
• Export of ICT services declining
• Other services exports mainly affected
are-construction services, maritime
services and financial services
International tourist arrivals (UNWTO)
• According to the United Nations World Tourism Organization
Barometer, international tourism is expected to stagnate at the
least if not decline in 2009. They estimate the growth to be in
the range of -2% to 0% in 2009 from an average growth of 7%
between 2004 and 2007.
• In the last six months of 2008, tourist arrivals in South Asia
grew by 4% in 2008 as compared to 9.8% in 2007.
Foreign Direct Investment (FDI) is sharply
decreasing in developing countries
• Tighter credit conditions and lower
corporate profits have weakened
companies’ capability to finance their
overseas projects;
• while the global economic recession and a
heightened appreciation of risk have
eroded business confidence.
In South Asia-FDI is Resilient
• FDI inflows in 2008 to East Asia, South-East
Asia and South Asia amounted to $181 billion,
$60 billion and $49 billion, respectively
(UNCTAD)
• For South Asia, FDI has increased by 40% as
compared to 2007, while declined by 14% in
South East Asia.
• In 2009, FDI inflows do not seem to have
declined (till March 2009); mainly because of
India.
• But FDI rose in 2008 as compared to 2007 in –
Pakistan, Bangladesh and Sri Lanka.
Flow of Remittances
UNCTAD-India Study
Identification of Vulnerable Sectors in
terms of exports and employment
Suggest Mitigating Strategies
India: Case Study
• Heavy reliance of India on US and other
Developed countries for its exports
• In 2007, around 17% of India’s exports
sought US markets, while 29% were
directed to G7 countries and around 58%
of the exports were directed towards
advanced countries
60.0
Figure: India's Export Growth: Quaterly
Comparisons
40.0
20.0
0.0
-20.0
-40.0
2005-06
2006-07
2007-08
2008-09
Apr-June
34.5
23.6
20.5
37.4
Jul-Sep
32.4
30.8
19.2
25.6
Oct-Dec
22.5
20.5
33.0
-13.5
Jan-Mar
10.8
16.4
41.9
-27.7
Apr-June
Jul-Sep
Oct-Dec
Jan-Mar
Although India is expected to grow, India has not been able
to remain insulated. The impact was strongly felt in Oct-Dec
2008-09 and became stronger in Jan-March 2009.
Main Objectives of the Study on India
• Forecast the impact of slowdown in global
GDP on India’s total merchandise exports.
• Sectoral forecasts of export growth in ten
major sectors of India.
• Impact of changed export growth on sectoral
employment and total employment
• Mitigating strategies in terms of “new
products” and “new markets”
• Potential exportable products and markets
have also been identified
Forecast Impact on Export Growth:
Methodology
 The global income demand elasticities for
India’s total exports and sectoral exports
are estimated. This shows if global
incomes rise/decline by 1% how much will
the demand for India’s exports
rise/decline.
 Price elasticities for India’s total exports
and sectoral exports have been estimated.
This indicates the price sensitivity of
exports.
Econometric Model Estimated
• India's Real Export Growth = α1 + α2 Growth
in Real GDP of World + α3 (Real Exchange
Rate*relative prices) + ut
• α2 -are estimated Income Elasticities
• α3 -are estimated Price Elasticities
• Using the forecasted change in GDP growthtotal and sectoral export growth is estimated.
Data Sources
• Relative prices are proxied by ratio of world GDP
deflators and India’s GDP deflator.
• The data for world GDP at current and constant
prices is taken from World Development
Indicators;
• Real exports are arrived at by deflating nominal
exports with export unit value index (source:
Reserve Bank of India).
• Exchange rate is taken from ERS International
Macroeconomic Data Set; and India’s
merchandise export is taken from World
Integrated Solutions (WITS; COMTRADE).
• Standard Stationarity tests have been conducted
Income Elasticity and Price Elasticity
• Income elasticity of India’s exports is found to be
very high..1.88
• A 1% rise/fall in global GDP growth will lead to around
2 percentage points increase/decrease in India’s
Export growth.
• India’s Exports are not very sensitive to price
changes.. (-0.54)
• therefore lowering of prices may not be an effective
strategy.
• However sectors-specific differences are prominent
Results with respect to Price and Income
Elasticities
Price Elasticity
Income Elasticity
1 Textiles and Textile Products
-0.29*
1.16*
2 Ore & minerals
-1.27*
4.85*
3 Leather and Leather products
-0.88*
1.25*
4 Marine Products
-0.47*
1.26*
5 Plantation
-1.05*
0.33*
6 Chemicals Chemical products
-0.23
2.55*
7 Petroleum products
-1.30
5.40*
8 Engineering and Electronic
-0.56*
2.28*
9 Agriculture and allied Products
-0.71*
1.38*
-0.92*
4.11*
-0.54*
1.88*
10 Gems & Jewellery
Total export
Estimating Export Growth using
Income Elasticities
Estimated Impact of Global Slowdown on
India’s Exports
• According to the projections, global GDP growth is
expected to decline from 2.2% in 2008 to -2.7% in
2009 but it is expected to revive in 2010 to 2.1%.
• The results show that there will be a flat export
growth in 2009-10, tending towards marginally
negative (-2.2%)
• However, in line with forecasted global recovery in
some of the developed countries, India's exports are
estimated to grow at 8.3% in 2010.
Export
Export
growth in Growth
2007-08
2008-09
over 200708
Export
Growth
2009-10
over
2008-09
Projected
Export
Growth
2010 over
2009
Textiles & Products
15.7
-8.9
-3.6
4.6
Ore & minerals
30.4
-12.3
-4.9
26.6
Leather & products
16.3
2.5
-1.6
5.7
Marine Products
-2.6
-4.4
-0.1
5.3
Agriculture
55.6
2.6
1.5
14.6
Plantation
11.6
54.6
14.2
14.3
Engineering
26.6
22.0
0.4
9.5
9.7
-4.3
8.1
Chemicals &Products
21.5
Gems & jewellery
23.3
-4.9
-11.1
15.3
Petroleum products
52.0
4.7
-11.8
21.2
Total sectors
29.1
3.40
-2.2
8.3
Estimating Impact on Employment
Impact on Employment-2009-10 and
2010-11: Methodology
• latest available input-output matrix for
India for the years 2003-04 is used.
• Using the actual sector-wise exports for
the years 2006-07 and 2007-08 (provided
by RBI); the inverse matrix and the labour
coefficients- total employment change in
employment for ten major sectors has
been estimated.
Impact of Global Slowdown on
Employment in India: Results
 Estimated Job Losses in 2008-09 is 1.16
million, but the net employment created by
exports is estimated to be 1.25 million.
 In 2009-10, projected export growth was 2.2%, total job losses are estimate to be 1.32
million and net job loss of 0.7 million.
 In 2010-2011, projected export growth is 8.3%
and net employment created is 5.22 million.
Strategies for Building Resilience of
the Economy to Trade Shocks
Key Areas for Mitigating Strategies
• (a) diversification of exports to new geographical
destinations and new products;
• (b) simplification in customs procedures for
reducing transaction costs;
• (c) examination of the likely impact of antidumping and safeguard duties imposed by India
on down-stream user industries;
• (d) measures aimed at assisting exporters to
retain their market presence during the crisis
period; and
• (e) expeditious multilateral examination of
adverse impact of bailouts and stimulus
packages and prompt remedies.
“New products”- “New Markets”
• A detailed analysis at six digit level of India’s
competitiveness in markets of developing
countries is undertaken to identify “new
products” and “new markets”
• 958 products have been identified in
developing countries markets.
• It is estimated that with this diversification, India
has the potential to increase its exports of new
and potential products by almost 21% (USD 35
billion)
Strategies to build Resilience of the
Region
“Look within” to Boost Regional Trade
and Investment
• Need to give fresh push for ‘full implementation
of SAFTA’ with substantially reduced negative
lists.
• Formation of possible “Regional Supply Chains”to boost intra-regional investments-UNCTADIndia Study
• Encouraging BITs within the region and interregional Investment Agreements
“Regional Voice” against Protectionism
• Regional effort is required against the
protectionist policies of some of the developed
countries-Especially trade under mode 4.
• Impact of bail-out packages on region’s exports
and export of individual countries in the region
needs to be carefully monitored.
Partnership for Development
• Regional stand to start implementation of “duty-free,
quota-free” treatment for exports of LDCs in 2009.
• Assurance by developed countries to keep their
GSP schemes free of new restrictions and
conditions.
• Regional support for trade financing should be
encouraged e.g., South Asian Development Bank
for SARRC countries.
• Close mutual financial cooperation through SAARC
finance (1998).
Future Growth Poles
• For the region to emerge stronger in future it is
important to identify areas and sectors that may
become future growth poles, e.g., different forms
of sustainable agriculture (including organic) and
resource-efficient products, like solar energy
using products, etc.
• Investing in human resources and skill
development.
Research Directions
• Detailed Country-specific and region-wise
studies on identification of vulnerable sectors is
required.
• Research on identifying trade and investment
supply chains.
• Involving industry groups in consultations for
disseminating research on regional opportunities
• Policy advocacy required for boosting regional
efforts
Thank You