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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 UNCTAD/CD-TFT 1 Outline • the global economic crisis and trade • impact of crisis on services • impact of crisis on • Tourism • IT and software services • Migration • policy responses UNCTAD/CD-TFT 2 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 UNCTAD/CD-TFT 3 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 Caribbeanfrom 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 UNCTAD/CD-TFT 4 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 UNCTAD/CD-TFT 5 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 UNCTAD/CD-TFT 6 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 UNCTAD/CD-TFT 7 Nepal and the crisis UNCTAD/CD-TFT 8 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 UNCTAD/CD-TFT 9 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 UNCTAD/CD-TFT 10 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 UNCTAD/CD-TFT 11 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 UNCTAD/CD-TFT 12 What is the Impact on employment and migration? • global unemployment expected to rise • from 5.7% (2007) to between 6.5-7.4% (2009) • number of unemployed expected to increase by • between 30-59 million workers compared to 2007 pre crisis levels • 11-17 million in ICs, 19-42 million in DCs • bad econ. conditions unemployment migration • more restrictive policies for labour movement • labour migration flows fall globally • Less remittances UNCTAD/CD-TFT 13 Impact on Migration • crisis most pronounced in migrant employing sectors • falling employment results in fall in migration • UN DESA annual growth rate of global nonrefugee migrant lower in 2005-2010 than 20002005, 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 UNCTAD/CD-TFT 14 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% UNCTAD/CD-TFT 15 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” UNCTAD/CD-TFT 16 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 2010 likely to be between USD 200-700 billion UNCTAD/CD-TFT 17 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 UNCTAD/CD-TFT 18 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 UNCTAD/CD-TFT 19 Thank you for your attention! 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