Latin America face to 'Enormous Stress' for Economic Crisis

Global economic downturn has cast a pall over the new year in Latin America. While the region's leaders initially struck a positive note in the face of bad news from abroad, most are now drafting plans to create jobs, keep financial systems from wobbling and shore up social programs in case of a prolonged recession.

"It's very hard to have an upbeat outlook about the region, where countries are going to be under enormous stress," Michael Shifter, vice president for policy at the Washington-based Inter-American Dialogue and adjunct professor of Latin American politics at Georgetown University, told Catholic News Service.

The worldwide financial crisis has ended a half-decade boom that saw the region's economy expand by an average of 5 percent a year, with some countries growing by more than 7 percent. The rate slowed to 4.6 percent in 2008, and the most optimistic growth forecast for 2009, by the U.N. Economic Commission for Latin America and the Caribbean, is 1.9 percent.

The plunge in world oil prices has hit countries like Brazil, Venezuela, Ecuador and Bolivia, while in Peru decreased demand for metals has led to the layoff of thousands of workers by mining companies and their suppliers.

One concern is that economic woes could have political fallout, especially in countries that have been retooling their political systems in recent years.

Bolivians will go to the polls Jan. 25 to vote on a new constitution that has been a source of controversy and protest. If it is approved, as most observers predict, Congress will have to bring the country's legislation into line with the new text, and presidential and congressional elections will be scheduled for December. Presidential elections also will be held this year in Chile, Uruguay, Honduras, El Salvador and Panama.

In Ecuador, where a new constitution was approved last year and President Rafael Correa will seek re-election April 26, indigenous organizations have staged roadblocks to protest laws encouraging large-scale mining that they say would threaten the environment and their way of life.

While some observers fear that the economic crisis will deflect attention from environmental issues in the region, the Amazon likely is to be a concern in 2009, said Rick Jones, deputy regional director for global solidarity and justice at Catholic Relief Services, the U.S. bishops' international relief and development agency.

The crunch also is forcing Latin Americans living abroad to make hard choices. Many families in Latin America depend on remittances, the money sent home by relatives abroad. In Central American countries, remittances amount to up to 40 percent of foreign earnings.

But those financial flows have slowed. While remittances jumped from $30 billion to $45.5 billion between 2004 and 2006, the figure leveled off to $45.9 billion last year.

Only half of Latin Americans living abroad said they sent money home in 2008, down from 73 percent in 2006. Cutting the remittance lifeline could push more families below the poverty line, spurring a new wave of migration, according to the Inter-American Development Bank.

People in desperate economic straits may take even greater risks to get past tighter U.S. border controls, Jones said, making them more likely to fall prey to traffickers who force them into virtual slavery to pay off their travel debt once they get to the United States.

Drug smuggling, migrant smuggling and human trafficking have converged under the control of the same cartels, making the migration gamble even more dangerous, he said.

Drug-related corruption and violence are on the rise in the region, especially in Central America and Mexico, but also in countries like Peru, at a time when governments are likely to free up fewer funds to fight them. Shifter said that conjunction of factors should pressure the administration of President-elect Barack Obama to review its approach to combating illegal drugs.

Ultimately, though, the best crystal ball turns cloudy when queried about 2009, because it is difficult to predict how long the worldwide recession will last or its precise impact on the various parts of an increasingly diverse region.

Both Jones and Shifter expect countries to scale back social programs as they pump more money into jump-starting their economies.

Some Specific countries affected by Economic Crisis

1. Argentina
o Argentina: A crisis made abroad
o Finger-pointing or focusing on systemic reforms?
o IMF holds off on collecting Argentine loan repayment
o Argentine crisis signaling end of neo-liberal model?

2. Thailand
o Thai economic policies remain unchanged
o Flitting foreign capital angers Thais
o Siamese twins: The currency crisis in Thailand and the Philippines

3. Brazil
o Why Brazil should look at Malaysia's policies
o Shockwaves from Brazil's devaluation
o The Real plan and its crisis
o The Brazilian economic crisis - Oxfam
o Brazil: The Real and global crisis
o Brazil crisis underlines the need for new solutions
o Brazil's IMF-sponsored economic disaster
o The Brazilian financial scam

4. Russia
o IMF book-loan to prevent defaults -to IMF!
o The Russian crisis of 1998

5. Malaysia
o Why Brazil should look at Malaysia's policies

6. Korea
o The IMF-Korea bailout
o Korean crisis caused by financial liberalization and economic deregulation

Economic Crisis Causes and Effects

A. Causes of the crisis
1. Argentina: A crisis made abroad
2. OTC derivatives played important role in Asian crisis
3. "Financial warfare" triggers global economic crisis
4. Trade and Development Report 1998: The causes of the crisis
5. An East Asian financial crisis made in the US
6. The Financial Crisis in East Asia: A Background Note by UNCTAD Secretariat
7. Asia's financial crisis
8. Analysis of BIS Report - Asia: The financial intermediation path to a vicious circle

D. Effects of the crisis
1. Only minor improvements in the near-term
2. Higher bank capital requirements on the way
3. Everyone should look for "exit strategies", says BIS
4. BIS study confirms some perceptions of Basle accord
5. Banks continue retreat from South
6. Asia: Crisis causes massive unemployment
7. Massive retreat by banks from emerging markets
8. Putting Asia in its place
9. Financial turmoil spreads across the world

Today Russia's Economic Crisis

On 30 April the internet site gazeta.ru published an article by Andrei Illarionov, former economic advisor to the President. The title "A leap backwards" speaks for itself. The article shows that industrial production fell to its lowest point in February this year, a fall of 23.4% from the peak in December 2007.

In April the Federal Service of State Statistics' index of industrial production showed a further deterioration, a fall of 16.9% by comparison with the previous April. This was the most significant fall since February 2009 - 16%. It was also the biggest fall since production fell by 18% in 1994. Between January and April industrial production fell by 14.9% by comparison with the same period in the previous year. Although March saw a growth of 11% over February, there was a further fall in April of 8.1%.

Mining production figures remained unchanged between March and April at 11.8%. There was a slight increase in the production and distribution of electricity and gas.
As for manufacturing, there was a 20.8% fall in March by comparison with the previous year, and the April figure was 25.1%. The headlong downward spiral in manufacturing has continued and has spread to the production of gas and steam turbines, which fell in April by 60.1% and 90.1% respectively.

A preliminary report on fluctuations in GDP from the Russian Ministry of Economic Development for the first quarter suggests that there has been a decline of 9.5%. It is clear from this report that Russians have not yet felt the full force of the crisis. Real incomes and salaries have only fallen by 2.3%. Turnover in the retail sector has decreased by even less, and activity in the service sector has fallen by 1.5%.

However, the prospects are far from rosy. In previous years the main engines of growth were wholesale and retail trade, vehicle repairs and motorcycles, household goods and items of personal use. In 2009 the picture will be very different. The Ministry's figures show a decline of 6.1% in value added in the wholesale and retail sectors.

Thus, a review of the wholesale sector leads to the conclusion that the current comparatively comfortable situation in the retail and service sectors will not last long. The situation in retail did not look so bad in the first quarter of 2009 because of the rush to stockpile durables in expectation of worse times to come.

The situation in the labour market is serious. According to the International Labour Organization there were 7.5 million people unemployed in March 2009. This represents 10% of the economically active population. Furthermore, as the Ministry report shows, the number of unemployed is likely to increase if people who are now working part time, on down time or taking unpaid leave proceed to lose their jobs. As of 18 March this year the total number of such employees was 1.2 million.

Any review of the Russian economy and its problems, particularly employment, should bear in mind that the socio-economic situation of the country's many regions is very different. There are also many so-called "mono-industrial cities", where a single major enterprise provides employment to a large section of the population and life in the city depends on it.

Global financial crisis effects on India

The economy now is the backwash effect of the American financial crisis. Central banks in several countries, including India, have moved quickly to improve liquidity, and the finance minister has warned that there could be some impact on credit availability. That implies more expensive credit.
For those looking to raise capital, the alternative of funding through fresh equity is not cheap either, since stock valuations have suffered in the wake of the FII pull-out. In short, capital has suddenly become more expensive than a few months ago and, in many cases, it may not be available at all.
The big risk is a possible repeat of what happened in 1996: Projects that are halfway to completion, or companies that are stuck with cash flow issues on businesses that are yet to reach break even, will run out of cash. If the big casualty then was steel projects, one of the casualties this time could be real estate, where building projects are half-done all over the country and some developers who touted their 'land banks' find now that these may not be bankable.
The only way out of the mess is for builders to drop prices, which had reached unrealistic levels and assumed the characteristics of a property bubble, so as to bring buyers back into the market, but there is not enough evidence of that happening.
The question meanwhile is: Who else is frozen in the sudden glare of the headlights? The answer could be consumers, many of whom are already quite leveraged. More expensive money means that floating rate loans begin to bite even more; even those not caught in such a pincer will decide that purchases of durables and cars are not desperately urgent.
It is not just the impact of those caught on the margin that must be considered. The drop in real estate and stock prices robs a much larger body of consumers of the wealth effect. In short, the second round effects of the financial crisis will be felt straightaway in the credit-driven activities and sectors, but will spread beyond that in a perhaps slow wave that could take a year or more to die down.
At the heart of the problem lie questions of liquidity and confidence. What the RBI needs to do, as events unfold, is to neutralise the outflow of FII money by unwinding the market stabilisation securities that it had used to sterilise the inflows when they happened. This will mean drawing down the dollar reserves, but that is the logical thing to do at such a time. If done sensibly, it would prevent a sudden tightening of liquidity, and also not allow the credit market to overshoot by taking interest rates up too high.
Meanwhile, there is an upside to be considered as well. The falling rupee will mean that exporters who felt squeezed by the earlier rise of the currency can breathe easy again, though buyers overseas may now become more scarce. Overheated markets in general will all have an element of sanity restored. And for importers, the oil price fall will neutralise the impact of the dollar's decline against the rupee.

Global Economic Crisis Impact on Bangladesh

The financial crisis that started in the US in March of this year has now turned into a full-fledged economic crisis that has pushed the European Union, Japan, Hong Kong and others into recession there is a saying that when America sneezes, countries around the world get flu. This has been evident from the fact that the American financial crisis has left everyone in a state of shock.
October 10 was the day when stocks and shares dropped to the lowest level in US, Japan, Britain and Australia and pretty much across the world. No country was spared from the financial crisis because of globalization and inter-locking of financial interests.
Financially 10/10 is the new 9/11 because the financial system and the money markets will never the same. 10/10 has dramatically changed forever, according to economists, the global financial system. Governments have intervened with funds to avoid collapse of reputable banks and some say nationalization in part of banks was unthinkable during 21st century.
The crisis is compounded by the fact that the Bush administration has not been prudent in having a deficit budgets for several years. It is reported the current budget deficit of the US in this financial year that ended on October 1st hit a record high to $ 455 billion, partly because of the on-going huge expenses in the misconceived war in Iraq.
The US regulators have not supervised adequately the way the banks were providing loans to all kinds of people during the housing- boom period. And the financial regulatory bodies in the US ignored the warning signs of financial storm since August 2007 and believed that free-market system would take care of it.

Bangladesh is captive to what transpires in international markets and economies of leading countries. Against the background, Bangladesh cannot be immune from the global economic slowdown and is most likely to be adversely affected sooner or later. Why this crisis?
To put it simply, it has been argued the whole meltdown of the financial system was "Made in America" for having relaxed rules of providing loans to jobless people with no income for buying houses, amounting to about $2.1 trillion dollars.
Banks and financial institutions that bought security-paper have lost money. In its latest calculations, the IMF reckons that worldwide losses on "toxic assets" originated in America will reach $1.4 trillion and so far $760 billion has been written down by banks and financial institutions.
During the crisis, money markets ceased to function as investors and banks who ordinarily arrange foreign exchange swaps among themselves for a set time period are nervous about the risk that their counter-party will go bust because of liability of "toxic assets" while the swap is being put into place and so have shied away from such deals.
Thus the global money market was closed and a severe credit-crunch was felt across the world. If it were allowed to continue further it would have led to depression.How does it affect Bangladesh? In the industrialized countries, it is reported that manufacturers are not making money, the retailer is not making money and the consumer is complaining because they are paying more. An unprecedented gloom in the confidence of consumers is being experienced in these countries.
About 75 % of the exports of garments and knitwear go to the US and Europe.The exports of knitwear and ready made garments to the US and Europe are likely to fall because there will be no demand in those countries as people would keep money with themselves for meeting their basic needs during rainy days. Everyone will be tight with spending money for non-essentials.

Bangladesh needs foreign direct investment up to 28% per cent of GDP every year to reduce poverty in the country. Whatever FDI was coming to Bangladesh was encouraging but it is likely to slow down considerably.
Likewise the volume of foreign aid and loans to Bangladesh may also likely to be affected from the industrialized countries. It is noted that during the financial year, nearly 14% of its expenditure of the development budget of Bangladesh relies on foreign aid and loans.
There is one flip side of the financial crisis in that price of oil has plummeted to a level, unimaginable this summer. At the time of writing it was less than $50 dollars, from the highest $147 dollars per barrel. That would enormously help Bangladesh which imports oil.Suggested steps against the background, private sectors are likely to shed employees in the country and as a result, unemployment is likely to increase in the country. The government's principal aim is to keep unemployment in check.
New business friendly policies may be adopted to attract foreign investment and a cut in interest rate by Bangladesh Bank is an option to be considered to boost investment by private sectors. Real estate developers and garment manufacturers may be given more incentives in cutting taxes and customs duties in importing raw materials so that engine of growth is maintained.
Bangladesh seems to be in unchartered territory because such global economic crisis has never occurred before. It is qualitatively different from earlier economic break down in 1987 and in 1997 in South East Asia.
Bangladesh's economic security is likely to be threatened. No one can be sure what lies ahead for at least two years. It is commendable that the government has set up a task force with local think-tanks and private sectors as to how to address slowing economic growth in the country. The volatile situation is both a challenge and an opportunity for Bangladesh to show innovation and creativity to come out from the likely adverse effects of global economic crisis.

The America's Economic Crisis

The world's largest economy has began to show weakness and drift as a result of a collapse of the housing market, the subprime mortgage turmoil, a severe credit crunch, high oil prices, and the deep devaluation of the dollar. The share prices in Japan, Europe, China, Hong Kong, Britain, France, and Canada already fell on average 5 percent, reminding us of the 1990 Asian financial crisis.

Investors have been lured to overseas markets with the promise that surging growth and solid economic fundamentals in Asia and the Middle East would insulate them from the economic recession in America.

Economic recession resembling the gloom of 1992 market is characterized by decline in housing market, bleak outlook of job opportunity, skyrocketing oil prices, a stock market collapse, a fall in asset value, and the huge federal government deficit and the trade deficit of almost $800 billion.

Rising health care costs reawakened additional fears for the middle class. In a high cost economy in terms of energy, health and financing ― while the equity value declining on average 20 percent if holding the level of income constant ― disposable income of consumers obviously falls.

Although the huge losses from bad loans and corporate earning losses will spur fears for economic woes, partial governmental intervention in the failed market economy hopefully builds up confidence on the part of consumers and investors. Thus consumers continue spending and investors are strongly motivated to increase investment expenditures in response to the falling interest rates.