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The impact of the financial crisis on developing countries
In the recent months, financial crisis have cascaded from the sectors which was originally affected to others as well and the world is watching the same with grave concern as it has the power and the ability to topple everything, even the economic giants. Instability started its journey from housing, and then crept in to financial markets and banking but now it has found a vent in to the real economy. It has even crossed the national boundaries and now there are enough reasons to believe and fear that it is going to swamp developing countries and emerging markets. Impact on developing countries First and foremost, it will have a great impact on the exports. The trade expansion is sharply decelerating and this will lead to the considerable reduction in the export volumes of the developing countries. As projected by IMF, expansion in world trade volume will go down from 9.3% in 2006 to 4.1% in 2009. This scenario will be same for advanced as well as developing economies but the fall in the growth of export volume will be more for the advanced economies. The developing economies may suffer from trade declines, especially the commodity exporters, as it is expected that there will be a fall in the prices of non-oil commodity by 1/5th in 2009. In addition to this, the financial crisis will spread a negative alarm to the investments. In the first round impact of financial crisis there will a sharp reduction in the external source of investment. Due to greater risk aversion capital is kept closer to home which causes portfolio investment to fall. Though FDI is more flexible to shocks, it is expected that it will decline too. Moreover, developing countries having access to resources will have to pay higher rate of interest, because of the greater risk aversion and flight to safety of lenders. Moreover, the global hold-up or slowdown have reduced the demands for manufactured goods and commodities, cutting into import and export earnings. More than half of the developing nations are running their current account under a deficit of almost 5 percent GDP, which in certain cases have even gone up to 10 percent. Furthermore, large numbers of projects especially related to investment are already in progress. Now, there can be two important and far-reaching outcomes possible as the investment financing is dropping off, neither of the two attractive. First case, the entire project would remain incomplete, making them infertile and at the same time would saddle the balance sheet. Second case, the project would be completed and they will be put in to the surplus production capability due to global slowdown, adding to the peril of deflation. This is not all, the developing countries might even suffer from their own market value collapse or asset market bubbles burst, which in the worst case could even weaken their banking sectors.


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