1 The Global Financial Crisis: Impact and Response in Southeast Asia

Abstract

Introduction The global financial crisis, started in the summer of 2007 in the United States, triggered the greatest post-World War II economic recession that spread rapidly to all parts of the world. The ensuing shocks to the international financial system severely disrupted credit plans and dislocated economic activity everywhere. Though the financial sector in Southeast Asia was spared the more serious repercussions of the sub-prime crisis, the resultant economic recession was experienced in the region as exports of raw materials and manufactured products took a sharp downturn as external demand shrank. The countries in the region had experienced considerable damage during the Asian financial crisis in 2008–09, and have implemented many important and necessary reforms which have placed the countries in a good position to overcome the latest global economic crisis. Economic growth had been moving on a satisfactory path throughout the region in recent years, but was severely disrupted by the economic recession. Some countries experienced a marked slowdown in their economic growth in 2008 and 2009, while the others even recorded a contraction as the impact of the recession became more serious. Businesses were affected by shrinking demand and unemployment rose to record levels in most countries. The governments in the region acted swiftly by putting in place significant stimulus packages designed to prop up the damaged sectors and to stem the rise in unemployment. By and large, the bold policy responses have enabled the countries to prevent the economic downturn from worsening and to permit the normal trajectory of economic growth to resume expeditiously. With the economic recovery well on track, the countries might have to move on to the next stage of how and when to start unwinding the stimulus packages. Origin of Financial Crisis The root of the financial crisis that started in the United States can be traced to the method of mortgage loans offered by financial institutions to home buyers. The normal procedure is for the lenders to go through a standard process of due diligence by verifying the status of the borrowers’ income and assets to ensure that they are in a good position to pay the regular mortgage payments.