The Aftermath of Financial Crises

So what happens after a financial crisis. To have a preview of the aftermath, it is necessary to look back into the past. Professors Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard, in a recent paper entitled “The Aftermath of Financial Crises”, investigated the end-game across various countries.

Some notable points brought up in the paper:

First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.
Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.
Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes.

It is also interesting to note in that when it comes to banking crises, the emerging markets, particularly those in Asia, seem to do better in terms of unemployment than do the advanced economies. This is mainly attributed to wage flexibility and lack of social safety nets in emerging economies which make the unemployed more anxious to get back to the work force.
In addition, the declines in real GDP are much higher in emerging markets than advanced economies, due to the abrupt exodus of foreign credit.

The paper presented is rather short and relatively easy to understand - highly recommended for all.

Bottom in Singapore Housing still Far Off

The modus operandi of a slowdown as evident in the US and UK is as follows:

Equity Markets Collapse - Real Economy Slowdown (evident in drop in corporate profits) - Spike in Unemployment - Drop in Real Estate prices.

In Singapore, I think we are still in the second phase (real economy slowdown). The next shoe to drop is the employment rate. The Singapore government is pulling out all stops to prevent the unemployment rate from increasing. It remains to be seen if the measures work. Expect to see Singapore's unemployment rate to at least match that in the 2002 - 2004 slowdown.

The adjustments to real estate prices will follow but these adjustments will take time to work through. Real estate prices are usually 'sticky' primarily due to the fact that price discovery is usually delayed and information is not as readily available as exhibited in the equity markets. In addition, expectations of market participants in the real estate market are managed by estate agents who has every incentive to push prices up. Globally investors now have a slew of properties to chose from - London and New York property prices have dropped significantly (approx > 40% at SGD prices) - can Singapore still attract these investors?

A new life awaits

A new life awaits, and I cannot wait to embrace life with all of me.

Singapore will be one of 10 slowest growing economy in 2009

According to the Economist Intelligence Unit, Singapore will see it's economy shrink by 2% next year, making it one of the top 10 slowest growing economy in 2009.
Much of it, I believe is due to our reliance on exports to the US and Europe which will be facing even greater recessionary pressures next year.