1. The Financial Crisis and its Impact on the Services sector
Deepali Fernandes
Second National Services Assesment Workshop
Kathmandu, 27th-28th October 2009
Division on International Trade in Goods, and Services and Commodities
UNCTAD

2. Outline the global economic crisis and trade
impact of crisis on services
impact of crisis on
Tourism
IT and software services
Migration
policy responses

3. The global economic crisis
global recession first time in 70 years
financial crisis  macroeconomic crisis
falling trade, production and consumption, major markets:
overall world output to decline by 1.3% in 2009
IMF predicts negative GDP growth for ICs of -3.8% (2009)
impact varies across countries and sectors
firms faced with tighter credit conditions and weaker demand  laying off and non creation of new jobs
starts in financial markets, spills over into real economy (macroeconomic crisis)

4. global economic crisis: how have developing countries been impacted?
contracting demand transmitted recession to developing countries
retraction of world trade, cross border capital flows, unemployment, fall in remittances, reduction in labour mobility
GDP growth predicted to decline
Africa  from 5.2 to 2%, Latin America and the Caribbeanfrom 4.2 to -1.5%, Developing Asia from 7.7 to 4.8%
low income countries with a high dependence on few commodities, services or remittances most hard hit
S. Asia GDP grwoth revised upward to 5.6% in 2009

5. global economic crisis: how have developing countries been impacted?
private capital flows fallen, UNCTAD estimates:
global FDI inflows fell 54% in 1st, quarter of 2009
FDI inflows to developing countries in 2008  USD 549 billion, 2009 expected to fall by 25%
reversal in poverty reduction targets
number of poor living on less than 2 dollars a day could rise by 40 million, those living on 2 dollars a day by more than 100 million
economic recovery expected in late 2009 or 2010, however
recovery in developing countries, likely to face a longer time lag
private capital flows falledn dramatically including private debt, portfolio equity and FDI, UNCTAD estimates:

6. Nepal and the crisis so far Nepal more insulated
good macroeconomic management, non integrated financial markets
however, indirect impact likely through trade
i.e export earnings, external financing for infrastrucuture
contraction of merchandise exports
links to India, China
risk of negative spill over from slowdown in economies in terms of investment, tourism

7. Nepal and the crisis
recovering from inflationary impacts of food and energy crisis (2008)
Nepal can benefit from lower commodity prices - oil
current impact on migrant workers
remittances, reabsorbtion
services sector expected to offset other sectors given limited impact of crisis on  remittances and tourism
economy expected to recover in 2010
Asia expected to lead this recovery
Sharp rise in food and energy prcies contributed to a surge in inflation which reached a high of over 30% in mid 2008
While growth in remittances has slowed, amounts remain substantial and have grown in relative importance to the large drop in the trade deficit

8. Nepal and the crisis
Nepal  from 5.3% in 2008, 3.8% in FY, 2009, 4% in 2010
South Asia as a whole, slight drop in GDP growth from level, but recovery to 2008 levels expected in 2010
This mirrors India, where there is a drop in 2009 from 2008 levels but then a recovery in 2010 to beyond 2008 levels
For Nepal, fall from 2008 level of nearly 5% to about 3.8% in 2009, with recovery in 2010 of about 4%

9. What has been the impact on Services sectors?
fall in discretionary spending by households
declining household wealth, tight credit conditions
limited decline in demand for necessary services
e.g. health, water, energy, education, telecommunications, business and professional
contraction of demand for income sensitive services
e.g tourism, transport, construction
decline in consumer goods sector  distribution services and employment in supply chains
services are not affected by inventory effect, reductions in demand less abruptly
Impact also varies across countries
US, construction sector impacted, East Asia, manufacturing sector worst impacted, Philippines fall in demand of merchant marine fleet workers as trade and transport are impacted
interestingly some sectors have seen growth in employment
Eg. Health care (US and Ireland) , domestic services and education

10. Services- varying sectoral impact
impacts vary across sectors
most pronounced in financial, distribution, construction, manufacturing, automobile, tourism
impacts vary across countries
heavy impact on SMEs
banks not lending, SMEs end of payment chain
Nepal services sector charachterized by SMEs
impact on balance of payments situation
financing gap expected in 2009
Gap could worsen with expected decline in remittances, FDI and official aid

11. Services- construction, tourism
construction services every region to fall in spending
globally, construction market to shrink to USD 5.6 trillion in 2009
GCC countries  (2008) decline of 80% in value of new construction contracts
Tourism demand contraction of 3% in 2009
5 million job cuts in 2009
UNWTO figures indicate
(late 2008) intl tourist arrivals flatttened in ICs
Nepal remains attractive tourist destination
Tourism receipts seem stable for the moment
construction sector also impacted
globally, construction market projected to shrink to USD 5.6 trillion in 2009, compared to 2007 peak of USD 5.8 trillion
new home construction in industralized countries fell sharply in 2008, Eg. US and Europe new housing starts fell by 33 and 37% respectively

12. Services : IT and software
DCs incl. Nepal, benefit from a low-wage skilled labor force
2009, global IT spending expected to decline by 4.7 %
largest dip in IT budgets, likely in professional, telecom, technology at 10 %, manufacturing at 8 %, utilities and financial services - 4 %
However longer term perspective, resillience and recovery
NASSCOM estimates crisis impact in 2009 with, rebound from 2010 onwards
industry faced with dual challenge
protectionist tendencies versus cost cutting benefits
reverse outward investment by IT companies to EU/US
resulting in flow of capital, job creation

13. What is the Impact on employment and migration?
global unemployment expected to rise
from 5.7% (2007) to between % (2009)
number of unemployed expected to increase by
between million workers compared to 2007 pre crisis levels
11-17 million in ICs, million in DCs
bad econ. conditions  unemployment  migration
more restrictive policies for labour movement
labour migration flows fall globally
Less remittances

14. Impact on Migration
crisis most pronounced in migrant employing sectors
falling employment results in fall in migration
UN DESA  annual growth rate of global non-refugee migrant lower in than , UK  45% reduction in migrants from Eastern Europe
possible bankruptcy of migrants  poverty implications
introduction of restrictive policy responses
financial incentives – Spain, Japan, UK
close-off entry of new migrants – Korea, US

15. Impact on Migration: remittances
remittances usually more resilient to economic downturn than aid and investment flows
drop in remittances possible due to a reduction of jobs in many services sectors industries
remittance flows to developing countries USD 328 billion (2008)
Represents over half the value of FDI inflows ($550 b) and more than twice ODI ($119 b)
expected to fall sharply for developing countries in 2009 by 7.3%

16. Migration and Nepal migration key contributing sector
ADB: remittances account for 20% of GDP
Nepal (2007) earned nearly Rs 100 billion from remittances
Major destinations: India, Middle East, Southeast Asia
during the crisis
remittances remain resilient, supporting domestic consumption and current account
remittance growth slowed
with decline of capital  role of remittances as a“crisis smoothener”
Approximately 700,000 Nepalis work "overseas," meaning beyond India, mainly in the Middle East, East Asia, and Southeast Asia. About five percent of these are women. At least another 700,000 work in the private sector in India, and 250,000 in India's public sector.

17. Policy responses need for a global response for
fulfilling pledges for development assistance, maintaining aid flows, supporting social safety nets, labour intenstive infrastructure, SMEs and AfT
address issue of financing gaps for DCs
in likely to be between USD billion

18. Policy responses diffrentiated sectoral policy responses
some may require reduction in number of workers, others addressing condition of employment
resist pressure for trade protection
renewed commitment to the Doha round, multilateral monitoring of trade related measures and policies being undertaken
reform of national and international regulation of financial markets

19. Policy responses IT sector and tourism sector good time to take stock
build on south-south and regional trends i.e India, China, Gulf focus
optimal use of available financing including G-20, Aid for Trade
Migration
re-integration of returnees, scaling up of skills
bilateral discussions and policies

20. Thank you for your attention!