Counting the cost of the tsunami

Reconstruction: counting the cost of the tsunami - at - the best of the week's international financial media.

Over 100,000 people died in the wave that hit southeast Asia's coastal areas on Boxing day. Given the devastation, the cost to the region's industries is surprisingly low, says Simon Wilson.

How bad is itCurrent estimates suggest 150,000 have died. That's more than in any 20th-century tsunami, and makes the Indian Ocean earthquake a bigger killer than all but three or four earthquakes of the past hundred years. Moreover, Indonesian officials fear that their estimates of around 90,000 people killed in the northern Sumutra province of Aceh, close to the epicentre, may actually grossly understate the true picture. But this is not the worst natural disaster of recent decades. Bangladesh lost 500,000 people in the 1970 cyclone. And in Tangshan, China, an even greater number were killed by an earthquake in 1976.

What is unique about this disaster?

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What makes it particular difficult to deal with is not the numbers of the dead, but its huge geographical reach across at least ten countries, and the number of survivors affected by the devastation. Both the World Health Organisation and the UN have warned that, without an unprecedentedly large international relief effort, as many people could die from disease in the affected areas - from malaria and dengue fever, as well as typhoid and cholera - as from the tsunami itself.

What's the cost of the damage?

Not as high as you would think. Munich Re, the world's largest insurer, estimates total damages will amount to $14bn. That's much smaller than the $132bn losses caused by Japan's Kobe earthquake in 1995, which killed about 5,000 people - and is just half the cost of Florida's hurricanes in 2004. The reason financial losses in southeast Asia seem disproportionately small is the relative poverty of the regions affected. Across many of the affected areas, the property and businesses destroyed were of little economic value - so business losses and rebuilding costs are lower than they might have been in more developed nations.

How will it be paid for?

Due to the poverty of the areas concerned, few people had insurance. Munich Re points out that 2004 was the most costly year on record in terms of natural disasters, with insured losses of some $40bn arising from hurricanes in the US and Caribbean, and the highest number of typhoons for decades in Japan. But it expects its Asian disaster losses to amount to only £70m.

Rival Swiss Re is reckoning on losses of a mere £48m. This means that the majority of reconstruction will have to be paid for by governments (Thailand has committed $1.5bn and said it will refuse outside help) and foreign aid. So far, foreign governments have promised around $2.5bn in cash, with Japan ($500m), the US ($350m), Norway ($182m) and Britain ($96m) the biggest donors. In addition, private donations total around another half a billion dollars. The World Bank and Asian Development Bank have also promised $425m in diverted funds.

What does it mean for growth?

The devastated coastal communities that receive most of their income from fishing and tourism will be profoundly affected, but economists believe the tsunami will have little effect on overall economic growth as it mainly hit areas that were already economically disadvantaged. In Thailand and Indonesia, no big industries or port facilities were damaged, for example. In southeast Asia as a whole there is likely to be a slowdown in tourism income in the first quarter of this year (already airlines are reporting large-scale cancellations to some holiday destinations).

But the tourist industry has proved remarkably resilient in the face of other recent crises, such as the outbreak of Sars in 2003 and the terrorist bombing in Bali. In Thailand, where 6% of GDP is directly related to tourism, the government looks set to make reconstruction of its prestige tourist areas a top priority. Officials say that resorts such as Phuket should be fully recovered by as early as the middle of the year. In Indonesia, 10% of GDP is related to tourism, but the major hubs for it - Bali and Lombok - are unaffected. Sri Lanka will be harder hit as the tsunami has destroyed transport links from the capital Colombo to the tourist areas in the south, but apart from the tiny Maldives (where tourism accounts for 75% of GDP), no affected country is wholly, or even primarily, dependent on tourism, so although millions of livelihoods have been destroyed, the region's economies should cope relatively easily.

And for the markets?

Asian markets have moved higher since the disaster. This may seem unfeeling, but it is also entirely rational. The case for remaining optimistic on Asian markets is undiminished: the tsunami has not changed the fact that the region's increasingly stable financial positions, dynamic work forces and expanding middle classes provide an excellent environment for growth.