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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
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Outline
• the global economic crisis and trade
• impact of crisis on services
• impact of crisis on
• Tourism
• IT and software services
• Migration
• policy responses
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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
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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
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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
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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
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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
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Nepal and the crisis
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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
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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
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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
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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
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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
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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
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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%
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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”
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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
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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
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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
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Thank you for your attention!
[email protected]
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