Global Finance Crisis Effects on Nepal Inc.

Though unaffected till now from the ongoing financial crisis across the world, Nepal has to brace up for the fallouts from this global malaise.

While the central banks and the governments across the developed and developing world were preparing to inject additional liquidity in the market so that the banks and financial institutions would be able to continue lending, the Nepali central bank on September 29 announced the monetary policy for the current fiscal year with measures that mop up liquidity from the market.

Obviously, Nepal Rastra Bank (NRB) was not oblivious of the global phenomenon. However, it was confident that Nepal is quite insulated from the global market and the main concern at present for Nepal was to control inflation.

Seen from that angle, NRB seems right, but it is also true that Nepal will soon get affected by the ongoing global malaise though indirectly. And these effects are both positive as well as negative.

Inflation Concern

Though the NRB’s monetary policy for this year emphasizes the need for inflation control, the initial fear in Nepal was that the ongoing global financial crisis would depreciate US dollar which would mean appreciation of Indian rupee. That could have increased the Indian inflation causing further increase in Nepali inflation. However, that fear is now reduced as dollar has not depreciated because after the US government came up with the bail out package, the global investors chose to increase their investment in the US.

Policy Debate

One positive effect of this crisis on Nepal is that it has sparked off a policy debate. The leftist economists and political thinkers have been citing this as a proof for their argument for greater control in the economic activities. With a government controlled by the leftists, chances have increased tremendously that the government may go for tighter controls on the economy than was earlier envisaged.

For example, Dr. Govind Bahadur Thapa, a leftist economist and former executive director of Nepal Rastra Bank, blames the current financial crisis to the past US government policy of reducing tax on high incomes. According to him, the tax breaks were given to rich people and big companies so that they would invest the untaxed money into development activities. However, the policy was unsuccessful as the money was spent on luxury rather than in the development of the economy thus widening the rich-poor gap, hence the current crisis. Thus his recommendation is to tax the rich more and spend the state revenue in activities that benefit the poor.

The basic principle of free market economy is that the government should keep its nose out of people’s businesses. However, the recent financial catastrophe has shaken this ideology as several unregulated US investment banks are failing to its worst since the Great Crash of 1929. As a result, the US government has got approved from its parliament a $ 700 billion plan which in effect is nationalizing the big investment banks and financial institutions.

Nationalization of these big financial houses has raised some doubts over capitalism with few even joking how the USA is morphing into the USSA: The United Socialist State of America. That may be too far-fetched, but the free-market principle may now need to be modified to accept more market regulation. The European countries are also following the footsteps of the US as more troubled banks are being bought by the governments.  

The recent financial crisis has taught a lesson that in a modern economy, financial sector is too important to be left entirely on the vagaries of market turmoil. It is well accepted fact that the financial system of a country should be stable and sound because activities in this sector have a huge impact on the broader economy. Thus the government has a role in it. At present, Nepali financial sector looks stable, but this doesn’t imply that it is sound. There is a difference between stability and soundness, though both look similar. Soundness in the long run determines stability.

The two largest commercial banks, Rastriya Banijya Bank and Nepal Bank Limited, still have huge non performing loan despite significant improvement in their situation over the last few years after their management was handed over to professionals. And this problem is not limited only to the government banks. Private sector banks such as Nepal Bangladesh Bank, NCC Bank and Lumbini Bank have been in trouble for few years though they too are reporting speedy improvement in their situation over the last couple of years. The present global financial crisis forces us to rethink about these as well as other banks of the country. The NRB data shows that banks and financial institutions have a huge exposure in construction, land purchase and plotting, vehicle, shares and trust receipt loans. If the speculative investment in these sectors is not regulated well then there might be a crisis sooner or later in the Nepali financial market as well.

Regulation & Control

However, need of regulation does not imply more government control. Here the purpose of regulation is to have proper monitoring and guiding system so that Nepal will not experience similar financial crisis as in the US. In US too, the commercial banks have been regulated for long time and these banks are still in a safe zone. Some of them are reluctant now to lend due to ongoing uncertainty and that reluctance now may adversely affect their future profitability. But they are not likely go under as the unregulated big banks did.

The crisis there was ignited by the big investment banks (not commercial banks) such as Bear Stearns, Lehman Brothers, Washington Mutual etc. and insurance companies like AIG and mortgage lenders like Fannie Mae and Freddie Mac. These financial giants were not regulated as they were considered to be self-regulated and guided by professional restraints. This fact was categorically pointed out by former chairman of US Federal Reserve Board Alan Grenspan in his testimony before the US Congress after the recent problem erupted. But these very big banks were over-innovative to create complex and obscure financial instruments called credit derivates and mortgage backed securities, which were traded in a market that was again unregulated. Excessive speculation on these derivatives is identified as the main cause for the present crisis.

Nepali authorities too are planning to creat derivatives market. These days the introduction of financial derivatives such as Gold and Agro ETF in Nepali market has become a fad for upcoming and existing investors. Also, Nepal has one commodities exchange operating for the last two years and another one is readying to open up. If developed properly, such exchanges would be very beneficial for an agricultural nation like ours. But who regulates the exchanges and how safe are new financial instruments is still not clear. Thus at a time when Nepali financial market is expanding and getting modernized, the regulators need to ensure its soundness and stability as well. The recent challenge for Central Bank is to regulate the increasing numbers of banks and financial institutions and start the process of merger and acquisition of existing banks and financial institutions. The existing regulatory framework obviously is not enough as companies that are preparing for mergers are very few and even those that are preparing for merger are not moving ahead as fast as expected. Perhaps providing them some incentives to do so is the need of the day.

In an economy like Nepal when to market opens up, private investors get attracted as we have witnessed in the financial sector with the number of banks and financial institutions increasing rapidly. The same happened in Pakistan, Indonesia, Malaysia, and Thailand. The step to address this situation is consolidation, which ensures a safe exit of troubled banks and financial institutions without affecting the economy much. The government as well as other regulatory bodies should move this process forward. Financial crisis occurs if there are loopholes in the regulation. Insufficient and inefficient regulation is one of the major reasons for the recent turmoil in the global market.

Possible Threats

Though Nepal does not have any direct link with current international financial unrest, some indirect negative effects are imminent. For example, some merchandise export (carpets and garments), tourism, remittance, foreign direct investment, and foreign assistance are likely to be affected. The main exports of Nepal are carpets and garments where woolen carpets are exported mainly to Germany and readymade garments mainly to the US. With both economies slowing down, carpet and garment industries that are already in the downturn for some years might feel some further heat.

According to economist and former government chief sectary Dr. Bimal Koirala, reduction in purchasing power triggered by slow economic growth in US can create more unemployment in the US. Hence, whatever small quantity of Nepali goods is being exported will have some negative impact. But according to NRB’s research department, Nepal’s share of export in the international market is very small; therefore, turbulence in the global financial market will not have much impact in the export.

However, tourism, one of the sources of huge forigen exchange and largest employer outside agriculture will suffer. In terms of the number of tourists visiting Nepal, India ranks first followed by Western Europe and North America. Financial crisis and resultant recession in these countries might result in potential visitors canceling their plan to visit Nepal.

Nepal also receives large portion of foreign currency in the form of remittance. It might decrease due to the financial collapse in the USA and Europe where unemployment is growing. But according to NRB’s statistics, the remittance received from North American and European countries accounts for a very small proportion of total remittance receipts of the country. Nepal gets most of its remittances from Malaysia followed by Qatar, United Arab Emirates, Saudi Arabia and Israel where the impact of ongoing global financial crisis has not been so big as yet. Therefore, it is hoped that the recent financial meltdown will not have much impact in the remittances flow to Nepal.

How far and how long the financial crisis affects the world economy is still uncertain at this point. But it is for sure that the developing nations that need loan and grants from the developed countries will suffer due to reduction in foreign investments from developed world. The Nepali government’s plan to develop hydropower by attracting foreign investment may suffer due to the ongoing global financial unrest. Till now, only two power plants – Bhotesohi and Khimti – have foreign investment. The number of foreign companies that were planning to invest in hydropower might have changed their mind after the start of the current international financial crisis. As a result, in new projects Nepal might not be able to get as high bids as it could expect before the current financial crisis began. The budget for FY 2008/09 aims to mobilize an unprecedented amount of Rs. 65-66 billion as foreign assistance. This figure was estimated when there was no financial crisis in the global market. Now there is a growing threat that this amount may not be available.

Opportunity  

With the deteriorating economic health of North America and Europe, Nepali students and workers there are finding hard to sustain their lives. The job market has become very competitive and companies have cut-down on hiring. Nepal has to devise plans to bring these skilled wits back to the country and use them. The opinions of those who are currently studying or working in America or Europe (see box) suggest that prospective students of science, management and humanities might think twice before leaving for these countries. Therefore, government as well as private sector should be proactive to tap these great minds and create jobs for those aspiring to go abroad.

Falling Commodities Prices

The global credit crisis will also have a profound effect on commodities prices. The current financial stress has helped boost dollar value compared to other major currencies. Since the major commodities such as crude oil, steel, wheat, corn etc. are traded in dollar at the international market; dollar appreciation has decreased prices for these commodities. This is a positive sign for developing country like Nepal. But there is a caveat. Another reason for falling commodity prices is declining aggregate demand in US and Europe caused by fear of economic recession. The crude oil alone went down to $ 62.70 as of October 24 from its record highs of $147 in July. However, it might not be as simple as we think. The increase in dollar also means more Nepali money is needed to buy this international currency. Hence, rise in dollar may nullify the decrease in prices of commodities whose price is quoted in US dollars.

Role of Central Bank

Financial crisis in the global market first hits the share market as we have witnessed recently in the Indian market. Foreign institutional investors withdrew billions of rupees from the Indian share market that resulted in liquidity shortage. The Reserve Bank of India reduced the cash reserve ratio (CRR) from 9% to 6.5% to balance the situation. Similar scenario was replicated in most of the financial hubs of the world. American, Asian, Australian, and European central banks, all are reducing their benchmark interest rate to inject more liquidity in the market. But Nepal Rastra Bank has moved in the opposite direction as it increased CRR to 5.5 percent from earlier 5 percent of the total domestic deposits. This step might have baffled some people who have been following international finance. However, we need to understand that Nepal is not facing a liquidity crisis at the moment. Neither our share market nor banking sector is interlinked with the global financial crisis since the country does not have any foreign institutional investor that India and other parts of the world have. And we are still fighting inflation so it looks sensible on central bank’s part to absorb excess liquidity by increasing CRR.

Loans

But in controlling the lending, NRB has to be selective so that speculative investments are curtailed but not the productive investment. While margin lending (a name given in Nepal to loan against the security of company stocks) by commercial banks, development banks and finance companies is substantially controlled for about ten months now, the restrictions on speculative lending in real estate and housing sectors are not there. In recent years, banks and financial intuitions have grossly exposed their loan portfolio on housing and vehicles. According to NRB’s report, the lending on both segments has increased significantly in the past few years. As Dr. Bijaya K.C., Dean of South Asian Institute of Management (SAIM), points out, the financial crisis of the US has proved that banks should focus on management of their loans. KC further states that the current crisis has signaled for a need of more regulation and improved monitoring capacity on NRB. In general, building house through borrowed money from bank s and surviving on the rent received from the same house can trigger a vicious effect on the economy, says K.C.

Senior charted accountant Tirtha Raj Upadhyay who also represents international auditing company KPMG, says that the US financial crisis proves how investing in unproductive sector can negatively impact the economy and Nepal should learn from this experience. Upadhaya says, the ongoing credit crisis in the US will not have direct effect on Nepali economy; however there is a lesson to be learned. “At present there is a huge competition among financial institutions on providing housing loan without proper examination of the borrower’s repayment capacity. If, by any chance, these borrowers can’t repay the loan, the US experience may be repeated across Nepali banks as well.”

Also Dr. Bimal Koirala, former chief sectary and economist, says that it is time for Nepal to control housing loan. “We should learn from the American crisis and Nepali banks should diversify investment and reexamine their management capacity,” suggests Dr. Koirala.

Since the current financial turbulence of the US was triggered by the excessive leveraging on housing sector only, so the analysts seem to have consensus that there is a need for banks and financial institutions of Nepal to limit their investment on such unproductive sector. However, though NRB may be able to control the banks, it is not able at all to control the finance cooperatives that have been lending heavily against the security of share certificates and real estate.

At the same time, NRB has to encourage investment in hydropower, infrastructure, manufacturing and services so as to help generate more employment and increase export capacity.

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Global Financial Crisis & Nepali Diaspora

The present global financial turmoil, characterized by a serial failure of big banks and financial institutions across the developed countries was triggered by the sub-prime mortgage crisis in the United States. The financial cancer diagnosed in the US has now spread around the world clogging the arteries of the world’s financial system.

However, for Nepal its effect has been very minimal as Nepali economy and banking sector are not exposed to the US led crisis. But how about Nepali students who are currently dwelling in the US or UK? How are they being affected by the current economic slowdown? Should the prospective students who are planning to study abroad be cautious? The remittance, which has become the life blood for Nepalese economy for so long, will it be affected? Should tourism and garment industry be cautious? Experts deny any negative effect of current crisis on Nepali economy, however, they are urging to be careful and learn from the mistakes of the US.  

After graduation I went to East Coast for 2 months training in SAP. Now, it's already been more than two months and I'm still searching for job in two disciplines, viz. Engineering and Computer Science. My fellows at the training centre are also confronting similar situation. The ongoing financial crisis of the US has made it almost impossible to find new jobs. People are loosing jobs, the financial sector is failing. This is just the beginning. If the government doesn't do anything to uplift the economy, things are going to get worse. More financial sectors will be failing, more people will be losing jobs, no new jobs will be created making it almost impossible to sustain. In terms of part time workers, since they are not given any benefits such as insurance, bonuses etc. and most of the time they work on hourly basis, it might not impact them that much. However, in general things would get worse if the government doesn't do anything. I am waiting to hear from company, hopefully, will get something soon.

- Dinesh Sah
Computer Science graduate, 2008
Currently residing in Washington DC

The past three months have been the worst time of my life. It was obviously due to this financial crisis that I could not find a job for three months. Everyday, for last two months, I filled up numerous applications but did not get any reply. I know why it happened - positions are open but the employers are not sure if they should hire anyone at the moment. So, you can imagine how terrible the situation is. And now it has become even worse. Since the Americans started to feel the heat of financial crisis, foreign students are more likely to be affected. I do not know exactly how high taxes and insurance will go but if anyone wants to get loans from the bank, let's say to buy a car, it is not easy as before. Even if someone has a job, it is very rare now that he/she will get a loan. Since two of the major banks went bankrupt, banks are being very careful while lending money.

This has also greatly affected part time workers. Jobs are not that easy to find now because businesses do not hire many people due to the uncertainty. I am quite sure that it must be very hard to find a job in financial sector since this sector has been affected the most. Everyone knows that America is a land of opportunity. You gain lot of things when you come here. However, because of the current circumstances, life is getting tougher for Nepali students. I would like to suggest prospective students to think very carefully and talk to people they know who are in America before making any decision. I also suggest them not to choose expensive college/university unless their parents are ready to pay for the entire school year. Also, please do not hurry, and wait until the presidential election. Because not just of Americans, even our ray of hope is laid upon the future president of the US.

- Anil Raj Shrestha
Production Scientist
Integrated DNA Technologies, Inc. Iowa, USA

Personally, I have not been extremely affected by the crisis except for my dwindling stocks portfolio. Even though I tried to steer clear of financial stocks, the financial sector meltdown has had domino effect on almost everything else. Other than that, I do not own a house or have my money or stocks invested in companies that have suffered. So, I cannot think of area that would affect me. Even other Nepalis that I know in America should not be that affected unless they were direct employees of these companies or had money invested in the companies’ accounts.

However, the job market has been terrible, and that would definitely affect recent graduates who are looking for jobs. In fact, I recently was at the Georgia Tech career fair representing Medtronic, and I noticed that lot of students who graduated in May 2008 are still struggling to find jobs and are willing to get any kind of job. Even graduates from school like Georgia Tech or even MIT, from what I hear, have been bearing the brunt of this ruthless market.  This has made companies extremely cautious on hiring new people, so either they are going through restructuring or just trying to pile more work on the existing workforce avoiding new hires.

Housing market has also been hurt. However, considering the fact that Nepalis in the US have not invested in real state beyond their capacity and are trying to get over their debt as quickly as they can, I doubt if many Nepalis had to go through foreclosures. In general terms, the stagnancy of the financial market should take most of the blame for the rise in oil prices, expensive groceries, people’s spending, and pretty much everything tied to our current meltdown. 

The market has become extremely competitive and it has become harder and harder for international students to find jobs. Even the company I am working for, Medtronic, which used to sponsor international students like me in the past has stopped doing so. The job market is so tough, that international students need to have a big competitive edge against the residents and US citizens, with whom they are fighting for the jobs. 

My suggestion to international students who plan to come to the US is to be fully prepared before coming here and work extremely hard to be one of the best students. 

Job experience either in the form of research, internship or coop has become a must among recruiters. So, the students need to start doing internships or involve in research right after the first year in college, so that their resume is well enhanced by the time they graduate. They would also need to get themselves involved in extra-curricular activities and show that they have leadership skills by being part of organizations or community projects. Also, just finishing the bachelor’s level hasn’t been ideal for international students in terms of getting jobs. So they need to plan to do Master’s from a renowned university. 

- Ananta Pandey
Product Engineer
Medtronic, Inc. Arizona, USA

The recent financial turmoil in the US is bound to have a lasting impact on the job market. The forecast that New York State alone could lose 40,000 jobs over the next two years should send chills down the spines of college students. College recruiting has been badly hammered this year, with a record number of companies deciding to freeze hiring until the economy stabilizes. As expected, jobs in financial markets are hard to come by now, as seniors in colleges across the country are coming to realize. To bring the case in point, Barclays Bank bought the core of the investment bank Lehman brothers for $250 million. Both Lehman and Barclays have made hiring commitments to thousands of college seniors. But with the credit squeeze, Barclays will not be able to honour all those hiring commitments. A number of my friends who were working for Bear Stearns and Lehman Brothers are now torn between finding a new job in New York and going back home to their parents because they cannot afford to live in New York anymore. S imilarly, students who were secure with their Lehman offers are jumping back to the recruiting scene.   

Troubling scenario for recent graduates is that with thousands of experienced workers laid off, and back in the job-hunt in New York itself, competition for scarce job positions has never been more fierce. The software industry has been much less affected by the recent crises but they are also adjusting their outlook for potential growth in the upcoming months. Microsoft alone has halved its annual hiring budget from $4 billion to $2 billion to adjust for the dip in its sales as a result of the battered economy. Other leading technology companies like Google, Apple, Medtronic and Cisco Systems are also following suit.   

Another important thing to keep in mind is that the financial crisis started with the financial sector. With record job losses this year, a slowing economy, a tighter credit market and a grim outlook, the job market in the remaining industries will surely feel the pinch. Experts are already predicting that the economic downturn will hit the consulting firms next. Monitor Group, based in Cambridge, MA laid off 1/3 of its employees to prepare for the tough times ahead. The automobile industry and the technology sector will be the next.   

With the current situation in mind, my advice for Nepali students who are currently in college or planning to go to college in the US would be to make graduate school their top priority. Granted, a lot of college students are unsure about what to pursue in graduate school or whether to pursue graduate school at all, there is little doubt that going to graduate school offers the best alternative to getting embroiled in the current crisis and successfully distinguishing oneself in the job market.   

- Anunaya Pandey
Software Development Engineer
Microsoft Corporation, Massachusetts, USA

Nepali students are continuing to flock to British institutions despite fee increases and stricter immigration policies. There has been a steady and sustained increase in the number of overseas students arriving over the last five years with the total number of international students up by almost 36% over the period. The growth rate of Nepali students has also increased over the last five years.

The global financial crisis, however, has started to hit the overseas students living in the UK. Amid a deepening financial crisis that has sapped institutional funds, universities and colleges are grappling with the growing fear that the financial crisis could cast a shadow over their future students’ recruitment. Many universities have started to discuss worst-case scenario contingency plans and appraise their financial position after the crisis. Inflation is now running at a 16-year high, i.e. cost of studying and living here is likely to be the leading concern for most.

While education institutions feel the brunt, it does not leave the overseas students in a good situation either. Not only will the majority of the existing 360,000 international students be affected by the financial crisis but those who are planning to come to the UK will also suffer badly.

With inflation rocketing, the annual rate of Consumer Price Index (CPI) last month climbed to 5.2%, food prices have hiked to an average of 10-15% and rents have soared (12-15%). All these factors combined make life more challenging for overseas students in the UK.

Recent unemployment data also paint a rather gloomy picture of the UK economy considering the official unemployment rate jumped from 5.3% to 5.5%. Consequently students (international or otherwise) are not left in a good situation. As majority of students tend to fund their studies and subsistence, closing businesses will hammer those relying on part time jobs. Many establishments where much of the UK student population tends to be employed (notably the retail establishments) are being directly impacted. However low-cost brands such Aldi are reporting increase in sales, thus a number of retailers are quite likely to increase their headcount. This of course represents opportunities for the ever burgeoning Nepali student population in the United Kingdom.

In sum life in the UK for Nepali students is going to be a challenging experience for the time being with tighter immigration policies and increases in fees.

Who knows what the future holds... in such a way it is always good to tighten your spending. Prospective students coming to the UK should do more research prior to their arrival and obtain as much information as possible from their university/college and arrange accommodation before their arrival if possible. This will certainly speed up how quickly you can settle in. There are many websites where you can search for flats and potential flat mates (e.g. http://www.gumtree.com/london/2548_1.html).

It is also recommended that they research potential employment opportunities pertinent to their field of study as many employers do offer internships, some of which are paid. A source of information and assistance can be your own contacts whether they are family, friends, or former employers. Using your own contacts is the best way to also network, that you may have. Hunkering down, increasing knowledge, strengthening and developing your skills sets is always a good option during an economic down turn. Once it starts heading ‘up’ again you’ll be ready to face the world with your new qualifications.

- Alankrita Bista
Lecturer
St Patrick’s International College, London, UK

The financial crisis has led to the dissolution of many traditional banks, hedge funds, investment banks and other financial institutions in the US making the rate of unemployment in the country rise steadily. Being a senior at college, this effect of the financial meltdown will directly affect my chances of getting a job after graduation even though I do not intend to work in finance and plan to join a non-profit. As the financial sector is more competitive than ever now, students have started diversifying their job searches increasing competition in almost every sector of the economy. Moreover for non-profits, the crisis in wall street has started depleting their limited sources of funding, making paid jobs scarce in the field.

As of now, I think the financial crisis will affect me in the short run only through the above mentioned spillover effects. However, my situation could be an anomaly as Tufts provides me with all the financial assistance I require to make my living in the US until May 2009. Some students, that are not on financial aid and pay for their living cost and schooling through hourly wages, could be facing problems either retaining jobs or finding new jobs. As the level of consumption in the economy is decreasing, small businesses like restaurants, cafes etc which usually hire students for part-time jobs, have started laying off workers to save costs.This means that some Nepali students could be struggling to save enough money for school and also could be having a hard time sustaining their life here. Even for students who are on financial aid, the chances that their aid package might decrease next year still looms.

Therefore, looking at the grave situation of the economy, I would advise prospective students from Nepal, who are planning to come to the states in the next couple of months, to come here only if they have some sort of permanent source of income like financial aid or family contribution that could fund their education and living cost in the country. In lack of this, I would advise students to wait at least a year to evaluate the situation of the American economy and come here only when they are certain that they would be able to get a job to afford their school and life in the US.

- Dhriti Bhatta
Class of 2009, Economics & Political Science
Tufts University , Massachusetts, USA

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Global Financial Crisis
Sectoral Effects on Nepali Businesses

From the ongoing financial crisis across the world causing recessionary threats, Nepal will be affected in a number of ways and they can be grouped in following categories:

1. Commodities market

According to Sashin Joshi, CEO of Nepal Industrial and Commercial (NIC) Bank, the direct effects are being felt in petro-based products (such as plastics and to some extent textile based on artificial rayon), metal-based products (such as iron, aluminium, copper, steel etc.) and vegetable ghee or edible oil. Due to the global recessionary trend, the prices of the raw material of these industries are going down in the international market. Since the Nepali manufacturers import these raw materials in bulk, those who had imported it a couple of months ago had paid a heavy price and they will not be able to compete with those who imported it very recently.

The most serious effect being felt is in steel mills. According to industry sources, there are 53 companies registered as manufacturers of steel products such as iron rods. Among them about 30 are in operation which have about Rs. 10 billion as fixed capital investment. Among them only about eight are operating well.

While some steel mills had paid up to US $ 1,400 for a ton of iron billets a few months ago, there also are others who imported it for $ 1,200, $ 700 or even $ 550.

Due to this, the market is going to see a lot of bloodshed with the price undercutting triggered by those who have imported the raw material at lower price. Therefore, it may not be surprising if a couple of industrial units in these sectors go bankrupt within this year itself, opines Bal Krishna Shrestha, the president of steel mills association and Managing Director of Hama Steel.

However, there is also another side to this. Particularly the steel industries had profited a lot in the last couple of years, point out some industry analysts. According to them, most of these industries had purchased the raw material in bulk when the prices in the international market were low and when the raw material prices went up they increased the price of their products yielding them a hefty profit. These manufacturers may use that profit to sustain themselves in the market now.

More interestingly, as the recent events have shown, the steel mills are not likely to go for a price undercutting. Yes some mills have reduced the price of their products by some Rs. 30 per kg and the association of the steel mills has approved this reduction. Thus they are likely to go for a uniform price, though it may be opposed by the consumers as cartel or syndicate.

Meanwhile, there is a piece of good news for the steel mills. According to recent information, the Indian government has already removed the 15 percent tax it used to impose on the billets exported to Nepal. Thus the raw material cost for the steel mills will be reduced to some extent so that the total negative impact on this industry will be less.

Another big industry based on imported raw material is the carpet industry. Anup Bahadur Malla, Director of Kangri Carpet, says the carpet industry has already become half of what it used to be a few years ago. The manufacturers have been complaining that their buyers abroad are demanding reduction in prices. This has put them in a difficulty as they had purchased the raw material when the prices were high. However, industry analysts point out that though the total export of carpets in 1999 was about 3 million sq. ft. it is already down now to about 1 million sq. ft. per annum and therefore the effect on the total economy of Nepal even if the carpet industry is affected by the ongoing global crisis will be very low.

Also in garments the effect of current financial crisis is expected to be insignificant as this industry too has already declined in recent years. Moreover, as the Nepali garments belong to the cheaper variety and consumed by lower income groups in the USA, it may be not affected much by the current financial meltdown.

2. Real Estate

The second sector going to be affected directly will be related with property including land speculation and construction of commercial and residential buildings. And the fear is that as the current global financial crisis had originated in the real estate sector in USA, similar fate may hit this sector in Nepal. Industry sources say, over the last one year, these sectors had doubled in business on the back of growing inflow of remittance and loans from banks and financial institutions.

If these Nepalis abroad will lose jobs and the remittance inflow slows down, the real estate sector is going to be badly affected.

Though the NRB data which are some six months old show that the total exposure of the commercial banks in these sectors is less than 10 percent of their total loan outstanding, the banking sector professionals say some banks have as high as 20 percent of their total loan outstanding sunk in this sector. Out of this, nearly 7 percent is in land speculation alone, say the bankers. Among these three sub-sectors, construction of commercial and residential buildings can be considered of lower risk as the individuals and construction entrepreneurs have exercised conservatism in taking loan.

According to the estimate of some bankers, about Rs. 60 or 70 billion is financed in this sector from banks and financial institutions and out of this 20 percent is from the finance companies and the development banks while the rest is from commercial banks. Out of the 20 percent, about two-third is from the development banks, they point out. This indicates that the exposure of the finance companies is small in this sector while that of the bigger banks (development banks and the commercial banks) is larger. Therefore, if this global financial crisis grips the housing sector of Nepal, the banks are going to be hurt for sure.

However, CEO of NCC Bank RR Bajracharya says as the dollar is gaining strength which encourages the Nepalis working abroad to send remittance to Nepal, the effect on this sector may not be so big.

3. Remittance

The third area where the global financial crisis will affect directly is the workers remittances. The most important sources of workers remittance for Nepal are Malaysia and the Middle East. While the Nepali workers in Malaysia are employed in factories and plantations those in the Middle East are in construction works and household work. Since all these areas are low paid and the employers may prefer to retrench the high paid people, experts estimate that the Nepalis in those countries are less likely to be retrenched. Moreover, as the construction industry in the Middle East is financed more by private equity fund and less by commercial or investment banks, that industry is less likely to be affected by this financial crisis, they say.

However, there already are reports of demand for Nepali labour reducing. This indicates that though the people already employed abroad may not lose their job, the number going abroad will reduce which will slow down the growth in the remittance inflow.

4. Automobiles & Consumer Durables

Also the automobile prices in Nepal are going up due to the international financial crisis. As Japanese Yen has appreciated, the Japanese cars are already more expensive by about 30 percent. The vehicle prices have started going up also in India, the major source of auto import into Nepal. Similarly, the US dollar too has appreciated which makes other cars expensive. While the recently announced budget had already made the motorbikes expensive by about Rs. 15,000, it will now go further higher, says Shekhar Golchha, Director of Golchha Organisation that deals in imported motorbikes.

Meanwhile, also the TV sales are not growing up due to power problems which make the TV viewing time virtually unavailable, adds Gochha.

5. Other industries

S ome analysts fear that as a fall out of the global financial crisis a number of Nepali industries will close down over a period of next two years. The reason they cite are reduction in demand (due to lower remittance and lower demand in foreign market), increase in unemployment in the country as the number of those going abroad will reduce (thus causing increased labour dispute within the country), continuing energy crisis and security problems. Though some big cement industries are planned to be set up, analysts say many of the planned cement units may not be implemented if the banks fear that the construction industry will stagnate.

However, the fallout of the financial crisis may help the hydropower sector, hope the analysts because the prices of the construction material are going down and the labour availability will increase. The combined effect of these two will be about 25 percent reduction in the construction costs, says Gyanendra Lal Pradhan, an energy entrepreneur. However, it is also pointed out that the power projects being financed from foreign investment (loan and equity) may get delayed.

6. Tourism

There is consensus among the analysts that the tourism industry which was seeing significant revival in recent months will be badly hit in the coming days due to the ongoing financial crisis as all the major tourist originating markets are already experiencing job losses. However, due to the appreciation of the US dollar, Nepal may still be viewed as a cheap destination and that may encourage some tourists to visit Nepal.

7. Nepali investment abroad

R ecently, some big Nepali businessmen have invested abroad and it is believed that 10 or 12 such investors have invested in the real estate in India and the Middle East. If the real estate there gets affected these businessmen may get hurt. The positive side about it is that the capital that had gone to India when the attraction there was higher will come back to Nepal.

8. Government Budget

Analysts say, due to this crisis the official development assistance from the developed countries will decline for all the developing and underdeveloped countries. Though the decline may not be so immediate, it will be felt after six months or one year. Therefore, the government’s budget deficit will widen, fear Prof. Dr. Bishwombher Pyakuryal.

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Chronology of Crisis

MARCH 2008

Collapse of Bear Stern and the JP Morgan Chase agreed to pay mere $2 a share for Bear – less than one-tenth the firm’s market price.

July 1

Bank of America Corporation completed its purchase of Countrywide Financial Corporation. it is a wholly owned subsidiary of Bank of America.

July 13

US mortgage lender IndyMac collapses   - the second-biggest bank in US history to fail.

September 14

Investment bank Lehman Brothers Holdings Inc files for bankruptcy protection; rival Merrill Lynch & Co Inc agrees to be taken over by Bank of America Corp.

U.S. Federal Reserve says for the first time it will accept stock in exchange for cash loans, while 10 of the world’s top banks agreed to establish a $70 billion emergency fund, with any one of them able to tap up to a third of that sum.

September 7

Mortgage lenders Fannie Mae and Freddie Mac - which account for nearly half of the outstanding mortgages in the US - are rescued by the US government in one of the largest bailouts in US history.

September 15

American International Group Inc reaches deal with New York state officials giving the insurer access to $20 billion of its own capital.

SEPtember 17

British bank Lloyds TSB Group Plc agrees to buy rival HBOS scooping up Britain’s biggest home loan lender in an all-share deal which values HBOS at over 12 billion pounds ($22.3 billion).\

SEPtember 18

The Fed expands its currency swap lines to $247 billion, increasing the line with the ECB to $110 billion and the line with the SNB to $27 billion, while opening new swap facilities with the Bank of Japan of $60 billion, the Bank of England of $40 billion, and the Bank of Canada of $10 billion.

The UK Financial Services Authority imposes a temporary ban on short-selling financial stocks, a move echoed in other centres.

SEPtember 19

Treasury Secretary Henry Paulson calls for the US government to spend hundreds of billions of dollars to take toxic mortgage assets off the books of financial companies to restore financial stability.

News of the bailout plan lifts shares, with the benchmark S&P 500 posting its best two-day rally in 21 years and Britain’s top FTSE 100 index notching up the biggest gain in its 24-year history.

SEPtember 20

The Bush Administration asks Congress for $700 billion to bail out firms burdened with bad mortgage debt. A US bankruptcy judge approves a revised version of British bank Barclays Plc’s purchase of the core US business of Lehman worth about $1.75 billion.\

SEPtember 21

Goldman Sachs Group Inc and Morgan Stanley are granted approval to become bank holding companies regulated by the Fed.

SEPtember 22

Nomura Holdings Inc says it will buy Lehman’s franchise in Asia Pacific, including Japan and Australia and 3,000 staff. It also acquires Lehman’s business in Europe.

Morgan Stanley agrees to sell an equity stake of as much as $8.5 billion to top Japanese bank Mitsubishi UFJ Financial Group Inc.

SEPtember 23

American International Group Inc signs “definitive” agreement for up to $85 billion in borrowings from the U.S. Federal Reserve, the main part of a rescue by the central bank that will see it take a 79.9 percent stake in the insurer.

SEPtember 24

Warren Buffett’s Berkshire Hathaway Inc says it will buy up to 9 percent of Goldman, which also announced plans to sell $2.5 billion in common stock.

CNN says the FBI is investigating Fannie Mae, Freddie Mac, Lehman Brothers and American International Group and their senior executives for potential mortgage fraud.

SEPtember 26

Washington Mutual is closed by the US government in the largest failure of a US bank. Its banking assets are sold to JPMorgan Chase & Co for $1.9 billion.

SEPtember 29

Britain announces the nationalisation of mortgage lender Bradford & Bingley Plc. Spain’s Banco Santander SA will buy its retail deposits and branch network.

Belgian, Dutch and Luxembourg governments agree to inject 11.2 billion euros ($16.4 billion) into Benelux banking and insurance company Fortis NV.

House of Representatives rejects the $700 billion rescue plan for the financial industry. Dow Jones posts its largest point decline ever while the S&P 500 has its worst day since 1987 with an 8.8 percent drop.

Wachovia Corp agrees to sell most of its assets to Citigroup Inc in a deal brokered by regulators.

SEPtember 30

World stocks fall to near three-year lows but fears of a major meltdown ease as European losses are muted.

EU regulators endorse a 6.4 billion euro public bailout of Belgian-French financial services group Dexia SA.

Ireland pledges more than double its GDP to guarantee all bank deposits.

Dexia becomes the latest European bank to be bailed out as the deepening credit crisis continues to shake the banking sector.

After all-night talks the Belgian, French, and Luxembourg governments said they would put in 6.4bn euros ($9bn; £5bn) to keep it afloat.

Separately, the Irish government says it will guarantee all deposits in the country’s main banks for two years.

October 3

The US House of Representatives passes a $700bn (£394bn) government pla n to rescue the US financial sector.

The 263-171 vote was the second in a week, following its shock rejection of an earlier version on Monday.

The UK’s City watchdog, the Financial Services Authority (FSA) raises the limit of the amount of deposits that are guaranteed should a bank go bust to £50,000.

October 6

Germany announces a 50bn euro ($68bn; £38.7bn) plan to save one of the country’s biggest banks

The deal to save Hypo Real Estate, reached with private banks, is worth 15bn euros more than the first rescue attempt, which fell apart a day earlier.

World stock markets react badly to the ongoing turmoil.

The German government says it will not pass new legislation to provide extra protection for savers.

However Denmark had already responded by giving a 100% guarantee on savings, while Sweden increased its protection levels.

Iceland announces part of a plan to hammer out a financial package to shore up its troubled banking sector. The country’s largest banks agree to sell off some of their foreign assets and bring them home.

October 7

The Icelandic government takes control of Landsbanki, the country’s second largest bank, which owns Icesave in the UK.

October 8

UK government announces details of a rescue package for the banking system worth at least £50bn ($88bn). BBC Business Editor Robert Peston says the deal amounts to a semi-nationalisation. The government is also offering up to £200bn ($350bn) in short-term lending support.

The US Federal Reserve, European Central Bank (ECB), Bank of England, and the central banks of Canada, Sweden and Switzerland make emergency interest rate cuts of half a percentage point. The Fed cut its base lending rate to 1.5%, the ECB to 3.75%, and the Bank of England to 4.5%.

October 11

Finance ministers from leading industrialised nations pledge action to tackle the financial crisis. The G7 nations issue a five-point plan of “decisive action” to unfreeze credit markets, after a meeting in Washington.

October 13

The UK government announces plans to pump billions of pounds of taxpayers’ money into three UK banks in one of the UK’s biggest nationalisations. Royal Bank of Scotland (RBS), Lloyds TSB and HBOS will have a total of £37bn injected into them.

October 14

The US government unveils a $250bn plan to purchase stakes in a wide variety of banks in an effort to restore confidence in the sector. President George W Bush says the move will help to return stability to the US banking sector and ultimately help preserve free markets.

October 19

South Korea announces a $130bn financial rescue package to stabilise its markets - by offering a state guarantee on banks’ foreign debts and promising to inject capital into struggling financial firms if necessary.

The Dutch government injects 10bn euros ($13.4bn; £7.7bn) into the banking and insurance company ING. The government had earlier announced the establishment of a 20bn euro fund to protect the financial sector from the credit crisis.

October 20

Sweden ’s government sets out its own bank rescue plan, with credit guarantees to banks and mortgage lenders up to a level of 1.5 trillion kroner (£117.2bn; $205bn). The government says it will also set aside 15bn kroner as a bank stabilisation fund.

The chairman, director general and chief financial officer of the French savings bank Caisse d’Epargne resign following the bank’s 600m-euro loss announced on 17 October. The bank said its problems would not affect its planned merger with Banque Populaire.

India ’s central bank unexpectedly cut its short-term lending rates in response to continued pressure from the global financial crisis. The Reserve Bank of India cut the repo rate by a full percentage point to 8%. n

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Global Financial Crisis in Nepali Perspective

By Dr. Ramesh Kumar Bhandari

In most cases we observe that what we achieve is far different than what we had planned or expected. This unpredictability of future is due to uncertainties associated with the steps that we undertake in the process or various external factors that influence the processes to achieve our planned objectives. We may define risks as uncertainties resulting in adverse outcome - adverse in relation to planned objectives or expectations. Financial risks are uncertainties resulting in adverse variation of profitability or outright losses. The past few weeks witnessed momentous and almost unimaginable developments in the financial sector all across the world. The collapse of Lehmann Brothers investment bank sparked new fears for customers and banking employees worldwide, as the global credit crunch continues to bite. Stock markets in Europe, Asia and the United States have experienced sharp falls. Bank stocks in Europe have been hit hard, prompting concerns from customers for the security of their investments.

American regulators had learned the dangers of moral hazard the hard way during the saving and loans crisis of the late 1980s. Similarly, the sector blew up again in 1988 and it cost the US government an estimated $124 billion to clean up the financial mess. However, several good lessons came out of this expensive experience. Hundreds of insolvent thrifts were liquidated. The rest were put under the Federal Deposit Insurance Corporation. And a new law, the Financial Institutions Reforms, Recovery and Enforcement Act (FIRREA) of 1989, was introduced so that prompt corrective actions could be taken by supervisors over suspicions that an institution was weak or badly run. More importantly, the market realized that even guaranteed institutions can fail and that the organizational failure of such kind can create horrors of unimaginable proportions.

Relevant in this connection is the case of Bank of Credit and Commerce International (BCCI), which was closed by the authorities in July 1991. This case shows what happens when supervisors withhold vital information about their dealings with the bank and allow it to continue to take deposits, even after it is found technically insolvent. Debates over how much Bank of England supervisors knew about BCCI continued for well over a decade. A court case began in London in January 2004 in which BCCI beneficiaries sued the Bank of England for willfully destroying value in the BCCI. Depositors back in 1990 might have been more suspicious of BCCI if they had not assumed that BCCI was under a strong global regulatory umbrella. BCCI was registered in Luxembourg, with subsidiaries in London, the Middle East and elsewhere. The usual bargain between the regulators and the bank broke down because there was no lead regulator in this case. The BCCI case raises the question: Are banks and financial institutions special? Should depositors and other creditors take comfort from the fact that a bank is supervised, and if so, should the supervisor share responsibility if a bank or financial institution fails?

The current financial turmoil is rooted to the sub-prime crisis. Mortgage brokers enticed by the lure of big commissions, talked buyers with poor credit into accepting housing mortgages with little or no down payment and without credit checks. That happened during the boom years when the asset prices were going up. The banks and financial institutions often repackaged these debts with other high-risk debts creating financial instruments called CDOs or collateralized debt obligations which they further sold to world-wide investors through institutions called hedge funds. The serious sub-prime mortgage crisis began in June of 2007 when two hedge funds created by investment bank Bear Stearns collapsed. Bear Stearns was bought up at a fire-sale price by JP Morgan Chase in March 2008. Later, mortgage finance twins Freddie Mac and Fannie Mae faced similar crisis and they were bailed out by the US Federal Reserve. Almost simultaneously with Fannie and Freddie, the storm gripped insurance giant AIG, investment bank Lehman Brothers, brokerage company Merrill Lynch as well as banking giants Goldman Sachs and many others.

Shortly after Lehman Brothers filed for bankruptcy, Merrill Lynch was bought by Bank of America for $50 billion, far below its value. American International Group (AIG) was pulling out the entire stops to stay alive. Finally US Federal Reserve set up a US $ 85 billion credit facility for AIG in exchange for warrants for nearly 80 percent equity stake in AIG. Goldman Sachs and Morgan Stanley were forced to become bank holding companies, demoting themselves from the status of investment banks. And there are also other banks and mortgage houses in the USA readying to go under liquidation.

These have made the recent period the worst in the American financial system since the Great Depression. The guessing game under way in the western countries is: Who is next? The announcement of a massive $700 billion bailout plan by the US treasury and the Federal Reserve was the latest in a series of containment measures, and that buoyed markets all over the world, but only temporarily. It was preceded by a number of ladder that are from letting non-banks access the federal discount window, which is usually restricted to deposit taking banks, through a ban on short sales of financial stocks to nationalizing the country’s largest insurance firm.

Practically, the US treasury’s plan is for reducing risk and improving market liquidity and investor confidence. It should assist financial institutions to raise the debt they need to refund the estimated $500 billion of debt that will be due through the end of 2009. Risk reduction should promote and give a way out to mergers of weaker institutions with stronger institutions and reduce the risks and costs. However, the federal rescue came too late, because the government should have provided a motivation package by beginning of 2008, which would have kicked in this year, and prohibited the downhill spiral of the credit crisis slowing the economy, causing job losses and more home defaults. In the mean-time, to rescue their economies from the present global financial meltdown, central banks of many countries have started to cut the CRR by more than 50 basis points to release more money in the economy and to make financial market more liquid.

The ongoing global financial crisis shows that marking a banks’ loan book to market may be a useful exercise to ascertain its profitability. However, communicating that mark-to-market valuation to the general public will risk an overreaction. A public valuation of a deteriorating loan book at the bottom of a business cycle might not be life threatening for the bank provided its depositors, shareholders and other creditors are not immediately alerted and invited to panic. This is the dilemma underlying the debate over how much a bank should disclose. Obviously, bad banks, which have made loans imprudently and have little prospect of restoring to profitability should not continue to take trustful depositors’ money. However, a bank which is going through a temporary malfunction in the cycle, which has good prospects of returning to profit should not be logically punished by a run on its deposits. Moreover, a bank that is punished too sharply by a mark-to-market valuation would probably have to react by calling in loans, or at least by curbing its lending capacity. This would have a knock-on effect on its borrowers that could intensify the harshness of a business downturn.

The trend in banking supervision is to let disclosure, and market reaction to that disclosure, govern banks’ behavior more and more. Certainly, that is one of the pillars of Basel II, a risk-based capital framework for banks, which has come into force since the end of 2006 and it was believed to be one of the best systems to manage the risk in the banking system. However, recent event of the global financial crises have indicated that Basel II framework is not a final solution to control and manage the risk. In this issue, critics of the Basel II framework (and there are many) argue that raising or lowering the amount of regulatory capital in a bank is not the right response to calculations of its exposure to risk. When confidence in a bank is shaken and there is a run on its depositor’s hard earned deposits, its capital can quickly disappear. More than capital it needs access to liquidity at a time of stress. Access to liquidity and excess capital do not always amount to the same thing.

Some economists and financial analysts wonder if the Nepali banks, financial institutions and capital market are really safe and how much will this global financial crisis impact Nepal’s financial sector? Nepal’s financial sector and capital market are not as open as India’s or of other developing and developed countries. Moreover, stock market prices of Nepal are also not fundamentally guided and they are currently moving in the direction of correction phase, showing lately a bearish trend. Similarly, present reserve level may help the Nepali banks and other financial institutions from a meltdown. However, the analysis of US and global financial meltdown has indicated that Nepal’s banking and financial sector may not be fully safe. If the global financial crises continue for longer period, Nepal might get less foreign grants and assistance, which would affect the development projects and ultimately effect the employment and GDP growth. Additionally, Nepali financial sector has to learn the lesson from the recent American and global crisis gripping the banking and financial market. The under-capitalization of financial meltdown in the US and other developed markets could become a trouble within our own financial system too. The recent data from Nepal Rastra Bank shows that the number of banks and finance companies are growing up rapidly. Similarly, their business performance of the past few years shows that return on equity has been growing. However, a look at their proportion of business portfolio in the financial market of the past few years’ shows that the bigger chunk of the fund of most of the banks and financial institutions is being invested in the consumer durables and real estate. Giving a loan for consumer durables does not cause a multiplier effect in the economy. It only pushes more to import from aboard, which will ultimately reduce our foreign currency reserves. On the other hand, because of heavy lending in the real estate, the land and housing prices in Kathmandu valley has been soaring up. Informed sources show that most of the buyers of the land are real state developers, land brokers and individual land speculators funded by the banks, finance companies and co-operatives.

Let’s observe the income level of the middle class people in Nepal. Do they have enough income to afford (or pay back EMI of loan for) plots of land that cost one million or more rupees per ana when one ana is equal to 85.56 sq. ft. and the minimum requirement is 3-4 ana to build a small house? Also to be considered in this connection is that because of the soaring inflation most of the households are not able to increase savings as they have to spend more and more for daily needs like foods and fuel. In this juncture, most of the individuals may not be capable to buy home or land. If they buy it with a bank loan, they may not be able to pay back their EMI in future.

Many people think that the land and housing prices may go up forever as the country is now in the phase of peace. But that is not convincing because after the new constitution is promulgated dividing the country into federated states, there will be less government spending in the Kathmandu valley. Therefore, it is feared that Nepal’s financial market may face similar fate that is being experienced in the US. In such a situation, Nepali government may not be able to rescue the banking and financial institutions.

Still there is no need to panic. However, the people have to be careful and diversify in other investments – businesses or assets. Similarly, for the small financial institutions it will be much better to go for consolidation and merger. Let’s also not forget that the country’s development depends on continued investment, and there are plenty of sectors where investment can still be made in Nepal - hydropower, tourism, manufacturing, infrastructure and information technology. For that long-term and short-term funding from the banking and financial system will be crucial. And such investment will in due course create more and more employment opportunities within the country.

(Dr. Ramesh Kumar Bhandari has completed his PhD in Financial Management for his research on the Banks, Insurance, Finance Companies and Capital Market of Nepal)

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Global Financial Crisis and its Effects in Nepal

By Rajib Pokhrel

For the past ten years there has been massive flow of funds from China to the USA. The reason is that China (along with other Asian nations) saves a larger share of its output while the USA has been spending more than it saves.

Thus China sends its excess savings to the US. For many years this has been a win-win situation for both countries. Chinese funding of America’s deficit has helped America to import Chinese goods which in turn has helped China to keep its millions of workers employed for producing the exportable goods. Also for the US, it was good to import Chinese saving which was available at a very low cost.

This is made possible by currency intervention by the Chinese government. In order to stop the Chinese currency from appreciating against the dollar so that the Chinese exports remain cheap in the US, the Chinese government has purchased dollars and kept them in the form of US treasury securities. This currency intervention by China along with other countries with large US dollar surplus has helped in funding the large share of US external deficit.

But this massive flow of capital from China and other Asian countries to the US started to slowly have its unexpected effects. The flow of excess liquidity to the US at low interest rates forced the US investors to look for new avenues of investments to achieve high returns. For the past couple of years the equity market has not been as lucrative due to the scandals of Enron and WorldCom, the unwinding of technology stock bubble and the likes. So the investors looked to investing in property.

As the interest rate was low in USA and the US economy was growing, it was obvious that the real estate prices went up in the USA. As the prices of the houses rose, the people started to expect the prices to rise further. Hence they started to pay more prices for the houses which were unrelated to the expected return from renting out the homes. Instead people paid prices related to their expectation that the prices would rise further. In other words, there was speculative price rise which generated the speculative bubble. This bubble was bound to burst but nobody knew how and when it would.

As all this was happening, inflation in the US was rising mainly due to the excess liquidity in the market. So the Federal Reserve had to increase the interest rate to control the inflation. This rise in interest rate worked as a catalyst to burst the bubble in the property market. After the Federal Reserve raised its rate, the banks were also forced to increase their interest rate and this troubled the market. Initially the borrowers were enticed to take on the mortgages at a teaser rate, though it was for a few months only to level with the actual market rate later. While the interest rate was low and the prices of the real estate were going up everything was smooth. As the interest rate started to rise and the prices of real estate stopped to increase then the borrowers started to default on their payments. That caused the bubble to burst.

This default in payments started to have its chain effects, hence more defaults in payments and slowly the banks began to have liquidity crunch and we all know reputed investment banks like Lehman Brothers had to file for bankruptcy and mortgage companies like Freddie Mac and Fannie Mae had to be rescued. This generated the atmosphere of panic among the depositors who feared losing their hard earned savings. Hence the governments of various countries had to come forward with rescue packages of billions of dollars and even go a step further guaranteeing the safety of the depositor’s money in the banks.

This global financial crisis will prolong for few months to come. This is going to send USA in recession which in turn will slow down the growth of many Asian countries including China and India. This crisis may not have an immediate and direct effect in our country as our very small economy does not play important role in the global economy. But we have to learn a lesson from this as we are also seeing the same sort of growth in our property market especially inside the Kathmandu valley. As there are lots of new banks and financial institutions propping up in the market and they along with the old banks that are having hardship in investing in other projects, they all are jumping into investing in real estates. Thus a speculative bubble is developing in the housing and real estate sector. Prices of land and houses have doubled and even tripled in some places over the last couple of years without any valid reasons. If we all are not careful in investing in this sector then we could also face the same fate as did the banks in USA. Therefore, all the banks and financial institutions along with Nepal Rastra Bank should seriously start rethinking on our investment strategies.

The writer is Managing Director of Premier Finance Company Ltd.

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Global / Regional Crisis Learning / Effects for Nepal

By Anil Shah

For us in Nepal there is a lot to be learned from the current global crisis, the main of which is the downside of ‘unhealthy’ competition and singular focus on enhancing the bottom-line.

Banking is a long term industry and all decisions that bankers make today have to be looked into on a long-term perspective, because decisions that deliver profits in the short term could in fact cause much greater damage and losses in the long term. This is exactly what has happened. In an over heated run to deliver short-term results, many financial institutions across the globe did not correctly evaluate the underlying risks on certain types of transactions and the possible long-term negative impact that these could have on their institutions.

Therefore, while many of those who made these decisions in the past got big bonuses for the short-term results they delivered, today these institutions are having to bear the downside of these myopic actions. And since the world is truly a very small place today, the contamination effects of these decisions are being felt around the globe.

This is one case where we in Nepal have benefited from being a relatively isolated economy, with our financial sector not yet large or developed enough to be ‘playing’ in the global market. Nepali financial institutions are relatively less affected by the ongoing crisis for the simple reason that our exposure in the products and markets which are facing the crisis is very limited, if any. Deposits of the banking industry at large are spread over many banks, across an array of institutions or regions around the globe, whereby reducing the risk of concentration on any institution or region.

For the financial institutions of Nepal, our own local or national challenges and issues are far greater than any risks posed by this global crisis.

When we look at the economy as a whole then the effect could be slightly more, depending on the extent of the impact the crisis has on the Indian economy as well as the economies of our main donor nations. With regard to the Indian economy, the close link and ties of our two economies causes any upturn or downturn in the India to be felt here as well.

Right through the decade of insecurity and instability our economy to a large extent was protected from large scale downturns due to the vibrancy of the Indian economy. Now we feel the other end of this equation, with the more globally integrated Indian economy feeling the effects of the global crisis, which will have trickle down effect on the Nepali economy. In fact, over the past many years we have kept hearing of large scale capital flight out of Nepal, especially to India, where people were investing in mutual funds, stocks, real Estate and other investment instruments in their quest for greater returns. This crisis will most definitely have had an impact on these investments. And maybe the silver lining on all this will be that with their fingers burnt, some of the capital will come back home.

On the other hand with respect to donor nations, with their own economies badly affected by the crisis, the quantum of aid or soft loans that they may be willing to put forth to Nepal may be limited. As a large portion of our national budget is dependent on such sources of funds, curtailing of these amounts by donor nations, agencies and institutions could negatively effect the implementation of the projects and plans as stipulated in the budget.

Therefore whilst in the financial sector the direct impact of the crisis will be limited, the impact on the economy as a whole may be more.

We can all learn from the way our banking industry has managed itself. By diversifying our investments and reducing concentration on any one institution or region, banks in Nepal today are well insulated from the crisis. Most of us have taken a long-term view and not run after only short-term gain, whereby protecting ourselves. On a national level we need to see how we can make our economy less India-dependent, and by this I do not mean lessening our trade or economic ties with India, for we must in fact ensure even greater growth in this respect, but we also have to look to other export, import and investment partners so that the shocks of just one economy do not resonate so strongly through our economy.

As for individuals who may have taken capital out chasing greater returns, I think the time has come to come back to the safety on one’s own home, before the quest for higher returns wipes out the principal itself.

We as a society have become too used to blaming others for what befalls upon us. We have to stop and reverse this trend. In the current context each of us needs to be aware of the investments we make and, when we make them, to look at both sides of the coin. So whether it is real estate, the stock market or taking capital out, we need to look at the risks involved with these investments along with the possible gains we can make from it. It is useless laughing all the way to the bank when one makes ten-fold gains on risky ventures and then blaming the world when one loses the shirt on one’s back and is thrown out on the pavement when the investments turn sour.

What I said before for the institutions, applies for us as a whole in Nepal. The issues that face us locally or nationally are as great if not greater than those that have arisen out of this global crisis. We all need to be aware that we as a nation are going through historic changes, revolutionary changes, and unfortunately I find too many people trying to make a quick buck, whether it is in real estate or the stock market. That is fine as long as they realise what the down side of such ventures could be.

As for the impact of this crisis on our economy, I think the most affected will be the steel, vegetable ghee, plastic and metal industries. In the past these industries have also benefited from favourable price movements. Now the question is where and how have they invested these past windfall gains and to what extent will they be able to draw on past profits to get through the current crisis.

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