Park Bun Soon

1

• 2008.4.12
• Park Bun Soon
• (Senior Fellow, SERI)

2
Developments in the Wake of the US Subprime
Mortgage Crisis

• Deteriorating credit market
• Huge write-downs at major financial institutions
  holding securitized subprime mortgages
• IMF estimates the aggregate potential loss
  originated from sub-prime loan amounts
  US945(April 8, 2008)
• Declining US housing prices ? heavier household
  and corporate debt burdens ? a slowdown in
  private consumption and domestic companies
  investment (including facilities investment)
• The financial sector soaring US subprime-related
  losses ? worsening global credit crunch and
  shrinking wealth
• US Feds rate cuts to prop up economy further
  weakens dollar
• Benchmark rate cut from to 2.25 from 5.25 since
  August 2007
• Discount rate cut to 2.5 from 6.25
• US financial measures are not enough to address
  global credit crunch fundamentally
• Subprime mortgages rate resets will peak in the
  first half of 2008 and thus further raise number
  of potential foreclosures
• However, uncertainties in global financial
  markets are expected to ease in the second half
  of 2008

3
The US Economy Tipping Toward a Recession

• Increasing signs of looming recession in the US
  economy
• 2007 fourth-quarter growth was 0.6 (Annualized
  growth rate compared to the previous quarter).
• Sales of new homes in February sank to a 13-year
  low.
• Non-farm sectors shed 80,000 in March 2008
  (1st-quarter total 230,000), the unemployment
  rate was 5.1.
• The growth rate for February 2008 retail sales
  was -0.6.

?Trends in US Major Economic Indices?
2007 2007 2007 2007 2007 2008 2008 2008
Yearly 1Q 2Q 3Q 4Q Jan. Feb. Mar.
Real GDP() 2.2 0.6 3.8 4.9 0.6 - - -
Existing Home Sales () -13.0 -7.3 -11.4 -13.2 -20.2 -23.4 -23.8 -
New Home Sales () -26.7 -23.1 -22.3 27.4 -34.0 -33.9 -29.8 -
Increase in non-farm employees (1,000) Unemployment rate () 1,096 4.6 328 4.5 315 4.5 212 4.7 241 4.8 -76 4.9 -76 4.8 -80 5.1
Retail Sales () 4.1 1.4 1.3 0.9 1.2 0.4 -0.6 -
Note 1. Real GDP (the annualized rate) and
retail sales are quarter-on-quarter growth rate.
2. Existing and new housing sales
are year-on-year growth rate. Source BEA, BLS,
US Census Bureau
4
Weak Dollar

• Major currencies appreciated against US dollars
• Korean Won depreciated recently because current
  account deficits
• Export competitiveness is deteriorating along the
  appreciation of currencies

? Exchange rate of major currencies ?
()
10
5
0
-5
-10
-15
2007
2006
2008
-20
3
2
1
12
11
10
9
8
7
6
5
4
3
2
1
12
11
10
9
8
7
6
5
4
3
2
1
5
US imports from East Asia are sagging

• US imports have been declining since 2005
• The growth in US imports fell to 5.3 in 2007
  from 13.7 in 2005.
• US imports have a huge influence on the ASEAN
  regions
• The exports from Malaysia and Thailand to the US
  have been lackluster
• Chinas export growth is stagnating
• Largely due to a drop in exports to the US,
  Chinas export growth fell to 16.8 in 2007 from
  25.7 in 2006

? US import growth rates from East Asia ?
()
2005 2006 2007 07.1/4 07.2/4 07.3/4 07.4/4 08.1
Total 13.7 11.0 5.3 3.7 3.9 3.2 0.4 10.6
China 23.8 18.2 11.7 19.3 13.2 9.4 7.1 2.1
Japan 6.6 7.2 -1.8 1.9 -2.9 -2.2 -3.6 2.3
Korea -5.2 4.7 3.8 7.4 6.6 0 1.3 -7.6
Taiwan 0.6 9.7 0.2 2.1 -0.8 -3.1 2.7 -0.3
Malaysia 19.6 8.4 -10.2 1.2 -14.6 -17.2 -8.6 -5.7
Thailand 13.2 13.0 1.3 4.1 4.4 -4.5 1.8 1.4
Source US trade statistics
6
Stock markets in East Asia
?Stock market performances in Korea, China, and
Japan?

• Capital flight from emerging markets in Asia
• Increased risk-aversion toward emerging markets
• Uncertainty is rising over East Asian currencies
  and asset prices
• Volatility has increased in East Asia stock
  markets
• The Shanghai index was down 43.8 on April 2 from
  its 2007 high

250
200
150
100
50
2007
2008
0
01
02
03
04
05
06
07
08
09
10
11
12
01
02
03
04
?Stock purchasing of foreign investors?
( US million )
2006 2007 2008 2007.11 2007.12 2008.1 2008.2
Korea -11,753 -26,672 -11,299 -7,357 -2,257 -9,069 -2,230
Thailand 1,917 1,570 -165 -1,213 -520 -1,173 1,007
Philippines 1,359 1,253 -327 -198 -200 -281 -45
Indonesia 1,851 3,851 333 69 479 91 242
7
Forecast of East Asian economies
?Forecast of economic growth rates ?

• Growth forecasts of major world economies have
  been slashed.
• Goldman Sachs cuts its forecast for US economic
  growth to 0.9 in March 2008 from 1.8 in October
  2007.
• East Asian outlook remains bright
• Economic growth of the region remains relatively
  high, although its lower than 2007
• Export-driven Singapore, Malaysia, the
  Philippines are suffering sharp slowdown

Forecasting time ?? ?? EU
Citi Group 2007. 10 2.4 1.6 2.1
Citi Group 2 1.6 1.9 1.7
Citi Group 3 0.8 1.7 1.3
JP Morgan 2007. 10 2.5 2.0 1.8
JP Morgan 2008. 2 1.9 1.7 1.7
JP Morgan 3 1.2 1.3 1.6
Goldman Sachs 2007. 10 1.8 2.1 2.0
Goldman Sachs 2008. 2 0.9 1.1 1.6
Goldman Sachs 3 0.9 1.1 1.6
?Growth rates of East Asia?
2005 2006 2007 2008 2008
2005 2006 2007 World Bank (End of March) ADB (End of March)
Korea 4.2 5.1 5.0 4.6 5.0
China 10.4 11.1 11.4 9.4 10.0
Singapore 7.3 8.2 7.7 5.2 5.2
Malaysia 5.0 5.9 6.3 5.5 5.4
Thailand 4.5 5.1 4.8 5.0 5.0
Indonesia 5.7 5.5 6.3 6.0 6.0
Philippines 4.9 5.4 7.3 5.9 6.0
Vietnam 8.4 8.2 8.5 8.0 7.0
8
Role of China in East Asia

• As a market Chinas role is increasing
• For Korean and Taiwan, China is No 1 market
• 6 ASEAN countries share of China is 10.3
• Chinas import from East Asia is still OK
• Up to Feb. 2008, Chinas total import increased
  rapidly
• Imports from Japan and Taiwan increased by 20.8
  and 26.6, respectively, topping 2007

?Export linkages to China and US(2007) ?
Export share of GDP(2006) China Share of Exports US Share of Exports
Korea 36.7 22.1 12.3
China 36.6 - 19.1
Japan 14.8 15.3 20.1
Taiwan 59.0 30.1 13.0
ASEAN 72.7 10.3 12.6
Note In case of export shares of ASEAN is as of
September 2007, and indicates 6-
industrialising countries
9
What is the problem and implication for the
financial cooperation?

• From Decoupling to Recoupling
• In real sector, it is clear that East Asias
  dependence upon the US has been decreasing
  rapidly
• . Despite the drop in US import demand, East Asia
  may continue to grow with the regional
  cooperation
• However, recoupling is occurring in spite of
  lower dependence on the US market
• Over sensitivity to financial market turmoil
• Globalization of financial sector is much more
  volatile than trade and investment
• As long as the international financial market is
  dominated by Western financial capital, East Asia
  cannot have true decoupling
• Learning new financial techniques and financial
  cooperation are urgently needed
• East Asias portfolio of US financial assets is
  mainly US Treasury bonds in contrast to European
  equities.

10
East Asias US Securities asset holding and
Foreign Reserves as of June 2007
( US 100million , )
US Securities Holding by countries US Securities Holding by countries US Securities Holding by countries US Securities Holding by countries US Securities Holding by countries Total Foreign Reserves (c) B/D
Total(A) Treasury (B) Equities Others b/a Total Foreign Reserves (c) B/D
Korea 1,379 428 54 897 31.0 2,506 17.1
China 9,220 4,665 285 4,270 50.6 13,346 35.0
Japan 11,965 5,532 2,202 4,231 46.2 8,989 61.5
HK 1,378 566 305 507 41.1 1,363 41.5
Taiwan 1,210 431 109 670 35.6 2,661 16.2
Indonesia 194 149 5 40 76.8 494 30.2
Malaysia 266 94 10 162 35.3 981 9.6
Philippines 111 80 8 23 72.1 235 34.0
Singapore 1,754 347 1,079 328 19.8 1,441 24.1
Thailand 217 173 6 38 79.7 701 24.7
Vietnam 86 56 0 30 65.1 203 27.6
Asias Total 27,780 12,521 4,063 11,196 45.1 32,920 38.0
Total Europe 42,024 3,484 15,938 22,602 8.3 - -
Sources US treasury and ADB