The Financial Crisis and its Impact on the Services sector Deepali Fernandes Second National Services Assesment Workshop

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

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 hardhit

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

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

8. Nepal and the crisis

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

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

12. Services : IT and software • DCs incl. Nepal, benefit from a low-wage skilled labor force • 2009, global IT spending expected to declineby 4.7 % • largest dip in IT budgets, likely in professional, telecom, technology at 10 %, manufacturing at 8 %, utilities and financial services - 4 % • Howeverlonger 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 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

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 2005-2010 than 2000-2005, 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”

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 2010 likely to be between USD 200-700 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! Deepali.Fernandes@unctad.org