A.D.B. warns Asia of recession risks

Written by Cai U. Ordinario / Reporter

Sunday, 29 March 2009 21:45

Despite the resilience shown by many Asian countries, there is still a high probability these countries, including the Philippines, may still experience recession in the face of severe financial downturns in advanced economies, according to the Asian Development Bank (ADB). This was among the key findings in an ADB working paper titled “Crises in Asia: Historical Perspective and Implications,” a joint study by South Korean Ewha Womans University Prof. Kiseok Hong of its Department of Economics, ADB Economics and Research Department officer in charge Jong-Wha Lee, and ADB Office of Regional Economic Integration Economist Hsiao Chink Tang. The paper stated the probability of an Asian recession is 14 percent conditional on an Organization for Economic Cooperation and Development (OECD)/United States (US) recession, and 24 percent on a severe OECD/US recession. “Our results also support the strong links between Asian economies and the global economy. Severe financial downturns or recessions in advanced economies are often associated with financial crises or recessions in Asia,” the paper stated. “Given the severity of the current global crisis and financial downturns, the risk that many Asian economies will experience a deeper recession is high.” The paper stated that on average, recessions and financial downturns are more frequent, longer lasting and more severe in Asian economies than in OECD countries. The paper also stated that the likelihood and severity of a recession tends to increase when it is associated with a financial crises, such as credit crunches and stock-market crashes. The authors said the probability of an Asian recession is also 19 percent conditional on stock price decline, and jumps to 52 percent conditional on a stock-market crash. The probability of an Asian credit contraction is 63 percent and stock-price decline is 88 percent conditional on a stock market crash in the US. The study stated that of the five occasions where the US real gross domestic product (GDP) per capita contracted by more than a cumulative 10 percent from peak to trough, the 1929–1933 Great Depression stands out. This resulted in a US real GDP per capita contraction of 29 percent, Indonesia 11.4 percent, Malaysia 19.3 percent, the Philippines 13.4 percent, and Singapore 41.2 percent. The biggest declines were recorded, however, during World War II, in the vicinity of 50 percent for most Asian economies, and lasted between five to nine years, though not strictly triggered by the US recession.