The global financial crisis that arosed in the mortgage market in
the U.S. in mid-2007 peaked
in autumn 2008, after the collapse of investment bank Lehman
Brothers. This event represented a turning point in the further
development of the crisis and demonstrated the systemic nature of the crisis. Distrust
and uncertainty increased in the banking and financial sector and problems
overflowed into other sectors. Many banks in the U.S. and Europe got into
trouble. Holding company Washington Mutual went bankrupt, federal mortgage
agencies Fannie Mae and Freddie Mac and insurance company AIG were
nationalized. In Britain there was a run on a mortgage bank Northern Rock. Many
investment banks have suffered billions in losses, including Citigroup, Merill
Lynch or swiss UBS. In autumn 2008, the government had to take control over
three largest banks in Island and the country subsequently declared national
bankruptcy. In December 2009, Greece got under pressure from the financial
markets due to high government debt. After Greece, other European countries
announced troubles with high debts and crisis in Europe has entered a new form,
such as a debt crisis.
The global crisis has had wide-ranging social and economic consequences.
According to data from International Monetary Fund (2013), the world GDP
declined by 1.3 percent in 2009. It has had the most serious impact on advanced
countries, but influenced developing and emerging countries as well. In advanced
countries the decline of GDP was 3.5 percent. The
sharpest decline in GDP growth in 2009 was found in European countries (- 6.1 percent).
The most affected country in Europe was Latvia, with GDP growth -17 percent,
the least affected was Poland, with GDP growth rate 1.6 percent (Poland was the
only country from Europe with positive GDP growth rate in 2009). The highest growth
rate of GDP during the crisis and in subsequent years has been reached by
region Developing Asia. From this region the highest GDP growth achieved Timor-Leste
(12.7 percent), China and India.
Global unemployment rate increased from 5.6 percent in 2007 to 6.3 percent
in 2009. Employment to population ratio declined from 61.7 percent in 2007 to
61.2 percent in 2009. Since the beginning of the crisis the global jobs gap
increased by 67 million (from 2007 till 2012). Over 30 million jobs are still
needed to return the employment to the pre-crisis level.
To mitigate the impact of the crisis, governments around the world
approved extensive stimulus packages. There have been coordinated monetary
expansion and unconventional monetary policy measures adopted by a number
of central banks.
The financial crisis
has started with problems in the
mortgage market in the USA. The U.S. exported
its subprime mortgages through mortgage-backed securities and other types of derivatives to many countries in the world. Global
crisis was transmitted through (1) the exposure to US asset backed securities, (2)
global increase in risk aversion and (3) global collapse in trade. (1) Many
countries were exposed to risk through the purchase of U.S. mortgage-backed
securities. According to data ( U.S. portfolio liabilities ) from the
Department of Treasury (2008) at the end of June 2007 mortgage securities in foreign
ownership amounted to €594 billion dollars, accounting for two thirds of all
asset-backed securities owned by foreign investors. Other developed European
countries were among the major holders of these securities, among them France,
Germany, Ireland, Luxembourg and the Netherlands. (2) Global increase in risk aversion was related to the realization of the
extent of systematic under-pricing of risk in previous years and prevalence of
real estate and asset price bubbles. (3) A third channel of transmission
operated through the reliance on those financial systems that got hit hardest
by the crisis. The most obvious channel here would be through foreign banks
pulling back funds and curtailing credit.
About crisis transmission in phases. In the first phase, crisis affected
banks with direct exposures to the U.S. market and a few selected financial
markets, sometimes related to liquidity runs. A second phase of international
spillovers was transmitted through asset markets. This happened through
liquidity shortages, freezing of credit markets, and stock price declines, as
well as foreign exchange fluctuations. The third phase occurred through large
solvency concerns following the collapse of Lehman Brothers. In this phase,
liquidity concerns gave way to solvency worries. Key channel of crisis transmission was the global
collapse in trade, and particularly in demand for durable and investment goods.
Because manufactured goods are more “cyclical”, their producers are likely to
suffer more. Openness to trade increases the exposure to external demand
shocks. International Monetary Fund in its World Economic
Outook states that for developed countries an important channel of transmission
was financial. For developing countries in particular, sales channel was important,
the more open economies have been more affected and countries that export
mainly food have been less affected. Global collapse in trade is apparent when
looking at the volume of exports and imports in the world economy. According to
data from International Monetary Fund, export and import growth was negative in
2009 in all the countries except Australia and China.
Published in NIDA Economic Review (Vol 8, Issue 2, 2014), a research
study from Lubica Slušná from Department of Economics, University of
Economics Bratislava in Slovakia and exchange students at the International College of NIDA examines the
comparative study of crisis transmission between Slovakia and Thailand. Both
economies are extremely open and dependent on export to their major trading
partners. Global crisis was transmitted to these countries through export
channel by global trade, respectively decline in global trade. Year 2009 was
characterized by decline in gross capital formation and decline in exports and
imports. Both countries did have strong and healthy financial and banking
systems, so the crisis did not have a significant impact on them.
In terms of GDP loss during the crisis, both encountered some decline in
GDP. In Thailand, GDP growth declined in 2009 by 2.3 percent. During period 2000-2007
its average growth rate was around 5 percent. Slovak GDP decreased more deeply in 2009, by 4.9 percent, while
average growth rate during 2000-2007 was
5.6 percent, which makes the difference of –10.5 percent. Recovery in Thailand
was very strong, with 7.8 percent growth in 2010. In 2011 situation was highly
affected by extensive floods, but year 2012 saw impressive growth again. In
Slovakia, we saw a recovery in 2010 as well, but in subsequent years, the
dynamics of this recovery has slowed down. The recovery was driven mostly by
the foreign demand in 2011 and 2012. In Thailand, foreign demand was more
volatile. Both countries already in 2010 managed to get above the pre-crisis
level of real GDP.
Gross domestic product measures the total production
and income level of
the economy. When we want to see
how the crisis has affected people's
lives, it is better to focus on
indicators that measure the situation
at the level of households and
individuals. One such indicator
is real household consumption
expenditure per capita. According
to the World Bank data (2013) [1], the household
expenditure per capita in Thailand
fell by 1.2 percent in 2009, but the
following year 2010, increased
by 4.6 percent and in 2012, by 6.3 percent. Slovak consumption
expenditure per capita in 2009
fell only slightly by 0,04 percent, but continued
in decline. For 2010 decline was -2.7
percent. In 2011, growth rate was
weak, in 2012 this indicator decreased by 0.7 percent, while in the period before the crisis (2000-2007), the average
growth was 4.9 percent. In Thailand, the average growth rate in
per capita consumption expenditure
was only 3.6 percent.
Global crisis has caused a slight increase in unemployment rate in
Thailand, but it was decreased in the next years and during 2012, the rate was
below 1 percent. Slovakia experienced in 2009 increase in unemployment rate by
2.5 percentage points and almost the same increase in 2010 when it reached 14.4
percent. In 2012, the unemployment rate was still at the level of 14 percent.
High unemployment is the main problem of the Slovak economy. Development of
unemployment in Slovakia is significantly influenced by foreign demand but Thailand
is the country with high degree of openness too. Explanation for the difference
can be found in different structure of their labor markets. Thailand has a
large share of informal sector and a high proportion of people working in
agriculture. Unemployment rate therefore does not state true impact. According
to National Statistical Office of Thailand (2013), the share of informal employment
on total employment was 62.7 percent (of which being constituted 62 percent of
agricultural employment) in 2012. This percentage has remained stable over the
period 2007-2012. In 2009, the share of informal employment increased slightly
(63,7 percent in 2008) but declined in subsequent years. The share of
agricultural employment on total employment in 2012 was 42 percent.
It is difficult to find one source containing statistical data for both
countries on measures such as underemployment or employment in informal sector.
According to ILO (2012), persons in informal employment in 2010 represented
9,642,000, that is 42.3 percent of non-agricultural employment. In Slovakia it
was 139,000 workers, that is 7.4 percent of non-agricultural employment. In the
study of ILO (2012) informal employment was found to be negatively correlated
with income per capita.
According to National Statistical Office of Thailand (2013),
underemployment workers, available for additional work, represented 0.6 percent
of the total employed persons. Eurostat (2013) provides
some statistical data on underemployment in Europe. According to this data 0.7
percent of active population were underemployed part time workers in 2008, in
Slovakia. This percentage increased to 1.4 percent in 2012. European average
was 3.1 percent in 2008 and 3.8 percent in 2012. But as we can see, there is a
difference in definition, as Eurostat provides percentage of active population
and Statistical Office of Thailand provides percentage of employed persons.
Monetary policy measures in Thailand during the crisis
included a loosening of monetary policy, the provision of liquidity to
financial markets and the banking sector, assistance to banks to manage the
risk of introducing a scheme sponsored by the government loan guarantees for
small businesses and encouraging banks to provide assistance in restructuring
and rescheduling debt of consumers. During the second half of 2007 and the
first half of 2008 a key interest rate, 1-day repurchase rate, was 3.25
percent, in order to stimulate the economy after the political crisis. In
August 2008, this rate was increased to 3.75 percent , due to rising inflation.
In December 2008, in response to the global crisis interest rate has been
sharply reduced to 2.75 percent and from April 2009 till June 2010 it was at
the level of 1.25 percent in order to stimulate economy. From May 2013, key
interest rate is 2.5 percent, which is certainly much higher than in advanced
countries, such as US, Japan or Eurozone, where the interest rate is near 0 and
there is no room for other monetary stimulus.
Slovakia is from January 2009 a member of
Economic and Monetary Union, which means that monetary policy is no longer
conducted autonomously by National bank of Slovakia, but is part of
a common monetary policy conducted by European Central Bank. ECB’s
interest rate was set at the level 4 percent from June 2007 till june 2008,
then for the next three months it was increased by 0.25 perc. points. In late
2008, after the first signs of economic slowdown, ECB had to decrease its key
interest rate. It went down gradually. In May, key interest rate reached 1
percent and it was held on this level till April 2011, when it was increased
slightly. In 2013, because of persistent debt crisis, interest rate has been
kept at the very low level 0.5 percent.
Governments conducted expansionary policies as well. Slovak
government approved three stimulus packages, which were subsequently extended to
certain other measures. In 2009, 282 million eur (0.4 percent of GDP) were
approved for anti-crisis measures from the government budget. In 2010, the sum
was 399 million eur (0.6 percent of GDP). Within these packages, measures aimed
at various sectors of the economy. In Thailand, in 2009 the Government
introduced the first stimulus package of 117 billion baht. The second stimulus
package was approved by Thai parliament in the sum of 1.43 trillion baht. Major government measures in Slovakia and Thailand are summarized below
Both countries adopted several measures to tackle the crisis. The first
stimulus packages consisted of measures focused on increasing demand and
consumption in both countries. Some measures had the objective to increase the
income of low or middle income class. In Slovakia, it was increase in tax
allowance for PIT and increase of employee premiums. In Thailand government
approved living allowances for low income class, seniors or village health
volunteers and increased the years of free education to 15. In Slovakia,
several measures to promote employment were adopted as this is one of the key
issues. Another stimulus package concentrated more on long-term measures, such
as public investments and infrastructure projects in both countries.
Both countries adopted measures to promote automotive industry as it is
important industry in both countries. In Slovakia, it was the contribution for
purchasing a new car while handing the old to the scrap yard. In Thailand, government provided first time
car buyers excise tax rebate on the purchase of locally manufactured car.
Summary of Major Government Measures in Slovakia and Thailand
|
SLOVAKIA
|
THAILAND
|
|
1.
stimulus
package.
|
SP1
– special package program of government
|
|
Adopted in November 2008 and actualized
in December 2008. Measures implemented in 2009-2010.
|
Adopted
in March 2009. Implementation 2009
|
|
For 2009 from government budget 282 mil.
eur
|
117
bn. baht
|
|
Measures to increase demand and employment (short
term effect):
·
Increase of
the tax allowance for PIT and increase of employee premiums.
·
Reduction
in premium rates to reserve fund for self-employed mandatorily insured from
4,75% to 2%
·
Contribution
to support the maintenance of employment (for employer that cannot assign
work to employees because of the serious operational reasons and provides
employees the wage compensation in the amount of at least 60 percent.
·
Contributions
for the creation of new jobs and contributions to the promotion of
self-employment
·
Scrapping –
financial contribution for the purchase of a
new car while handing the old to the scrap
yard where it is ecologically disposed.
|
Measures
to increase income and promote consumption (short term effect)
· 2000 baht living allowance for low income groups
(that is below baht 15,000 per month)
· 500 living allowance for seniors
· 600 living allowance of village health volunteers,
· free 15 years of education- free tuition fees,
books, uniforms and materials for 8.5 mil. students (increase of free
education from 12 to 15 years)
· First car program
·
small water
development projects for farmers, river and canal development
·
productivity
improvement for unemployed – trainings
·
tourism
promotion measures
·
tax
measures – income tax deduction on new home purchase from 100,000 to 300,000
baht, increase of minimum corporate taxable income from 60,000 to 1 million
baht per year.
·
Other
measures – support to prices of agriculture products and credit guarantees.
|
|
2. and 3. Stimulus package.
|
2.
stimulus package.
|
|
Adopted in February 2009.
|
Adopted
in mid 2009. Implementation : 2009-2012
|
|
For 2010 from government budget 399 mil.
euro
|
1,43
tn. baht (1,11 mld baht government projects and 321 bn. baht state-owned enterprise
investment projects
|
|
Measures :
·
Absorption
of EU funds
·
Realization
of PPP projects for the construction of highways (1. and 2. Package)
·
Completion
of 3. a 4. blocks of nuclear power plant
·
Decreasing
deadline for the refund of excess VAT from
60 days to 30 days.
·
Incentives
for research and development carried out by businesses
·
Increase in
capital of Eximbank – business support ( pro-export projects, SMEs)
|
Measures
focused on long term economic
development
·
Public
investments
·
Infrastructure
·
Public
health facilities
·
Investment
loan for water resource management - allows the government to borrow at most
Bt350 billion by June 2013 to finance infrastructure projects for water
resource management
|
|
Measures in financial sector
·
Amendment
to the Deposit Protection Act – introduced in November 2009, refund of
unavailable deposit in full amount, without limit. (From December 2010 bank
deposit are protected only up to 100,000 euro)
·
Stricter
requirements for liquidity management of banks and branches of foreign banks.
|
Measures in financial sector
·
The Deposit
Protection Agency (DPA) in august 2008
replaced the Bank of Thailand's Financial Institutions Development Fund,
which has given a blanket guarantee on all deposits in all financial
institutions since the 1997 financial crisis.
|
Analyses from Bank of Thailand by using SAM have shown that the SP1 could
increase Thai GDP by 0.9 percent and contribute to the increase of employment
by 0.4 percent. SP2 is a three year program. It is estimated that it could
increase growth in 2010 by 1,5 percent, in 2011 by 1.2 percent and in 2012 by
1.1 percent. SP2 would help increase GDP by 1,3 percent per year. For SR,
expansive fiscal impulse in 2009 was estimated at the level 2,4 percent GDP in
2009 and 1.9 percent in 2010 (Ministry of Finance, 2009b).
The estimated expenditure for SP2 from the government budget for
2009-2010 represented 2.23 percent of GDP, 4.2 percent in 2011 and 4.7 percent
of GDP in 2012. Total cost of stimulus measures in SR in 2009 amounted to 1 462
million euro, which represented 2,3 percent of GDP, in 2010 the total cost were
579 million euro, representing 0.9 percent of GDP (Ministry of Finance, 2009a).
Economic stimulus resulted in an increase in budget deficit in SR. Since
2009, SR is in the excessive deficit procedure. Based on that, it is required
to reduce the deficit below 3 percent in 2013. In 2012, the budget deficit has
been reduced to 4.3 percent of GDP, or about 0,8 percentage points compared to
2011. The extent of this deficit reduction was more pronounced than the EU
average. Government debt increased in 2012 by almost 9 percentage points to 52.1
percent of GDP. In addition to deficits, guarantees from participation in the
ESM and ESFS have contributed to higher debt as well. Although the fiscal
consolidation may act as a burden on economic growth, it is important and
necessary for long-term fiscal stability of the economy.
Public debt in Slovakia increased mostly because of the global crisis.
Before the crisis, Slovakia had a lower public debt to GDP than Thailand,
but in 2009 debt increased by 7 perc. points. Thailand accumulated large debt
during the Asian crisis and in subsequent years. In recent years government
deficits have been considerably lower.
Public debt to GDP ratio was in 2012 the same as in 2009 that is 45
percent of GDP.
It is going to be extremely difficult for Slovakia to fight high unemployment
when the demand is low or unstable and there is no room for fiscal stimulus due
to the need for fiscal consolidation. Additional risks for the future arise from excessive orientation to the
automotive industry and too much focus on European markets. Opportunities for
both countries can be found in a shift from slow-growing European and advanced
markets to emerging Asian markets.
More detailed information of this research paper can be retrieved from http://www.econ.nida.ac.th/components/com_booklibrary/ebooks/8-2-jul-2557-1.pdf
[1] World bank Statistics : Indicator name : Household final consumption
expenditure per capita growth (annual percent)