SPECIAL REPORT : In Markets' Debris, A Humbled Asia Shows Uncertainty 
International Herald Tribune
November 3, 1997
Michael Richardson

Suddenly, there is no more triumphal talk from Asian political and business leaders about a global economy dominated by Asia in the 21st century, or of the supposedly superior Asian cultural values that would ensure such dominance.

Instead, the currency and stock-market meltdowns that spread in July from Thailand to other parts of Southeast Asia and then recently to Hong Kong, South Korea and Taiwan have caused a mood of nervousness and uncertainty across the region that was almost unthinkable just six months ago.

Summing up that mood on a recent visit to China, Tony Tan, deputy prime minister of Singapore and a former banker, said that even now it was still too early to tell how the turbulence would affect Southeast Asia's economies.

It could lead to a "short, sharp downturn like in 1985, when economies went down but recovered within six months to one year," he said. Or it might be "the prelude to a longer and more damaging recession that could last two or three years."

Clearly, growth will slow in many parts of eastern Asia as a result of higher interest rates — which were imposed to prevent currencies from going into free fall — loss of investor confidence, sagging consumer demand, stuttering business expansion, falling investment and government austerity measures to cut spending and increase revenue.

"Deflation, not inflation, is the real risk — and it is a much more potent and painful destroyer of earnings, assets and credit," Schroder Securities Asia Ltd. in Hong Kong warned in a report to investors.

If the full consequences of Asia's troubles have yet to be seen, the causes are generally clear — at least to most economists and other analysts. A few government leaders, notably Prime Minister Mahathir bin Mohamad of Malaysia, continue to blame external forces rather than their own policy failings.

Turbocharged growth in the region's developing and newly industrialized "tiger" economies for more than two decades was an irresistible magnet to foreign money.

Overseas and local banks competed to make loans to companies wanting to start activities or expand existing ones.

Huge amounts of investment went into stock markets and business ventures, luxury hotel and apartments, offices and golf courses, manufacturing and agribusiness.

But too much of this money was squandered on unproductive projects, mismanaged or siphoned off into corrupt pockets.

"Nobody has ever thrown so much money at a region for so little return before," said David Roche, managing director of Independent Strategy, a global investment research consultancy based in London. "We now know that having high savings and investment rates is not fine if they are wasted on golf course capitalism and do not generate exports and other productive returns."

Mr. Roche added that he had seen developing countries "drown from bureaucratic incompetence, corruption or tribalism, but never from an excess of capital inflows."

The economies worst affected by the financial turmoil — Thailand, Indonesia, the Philippines, Malaysia and South Korea — have certain common features.

They include yawning current account deficits, which are the broadest measure of the gap between a country's spending and income, high levels of external debt and relatively low foreign exchange reserves.

That is why Thailand, the Philippines and Indonesia have had to turn to the International Monetary Fund for standby loans.

Analysts said that a worsening banking crisis, underlined by the closure over the weekend of 16 banks in Indonesia, threatened to further undermine confidence and growth in the region.

Robert Zielinski, regional banking analyst at Jardine Fleming Securities Ltd., estimated that the total of bad loans in Southeast Asian banks would peak in 1998 at $73 billion, accounting for 14.7 percent of total loans outstanding.

That is equal to 13.3 percent of the combined gross domestic product of Thailand, Indonesia, Malaysia, the Philippines and Singapore, he said, "making this crisis relatively bigger than either those in Japan and the U.S. or previous banking crises in Southeast Asia." Gross domestic product is the total value of goods and services produced by an economy or group of economies, excluding income from foreign investment.

Mr. Zielinski said that the underlying causes of the problems in Southeast Asia's banking industry were excessive credit growth, a high dependence on foreign capital inflow, overexposure to property and stock markets, weakening export competitiveness and ill-conceived investment.

"Past crises were triggered by external factors related to the world economy and commodity prices," he said. "This time, the crisis is internally generated and therefore will be more expensive and harder to solve."

Simon Ogus, head of Asian economics in the Hong Kong office of SBC Warburg Dillon Read Securities, said that much of Southeast Asia faced a prolonged economic slump and that recovery would take two or three years.

In the meantime, he said, average annual growth of the region's major economies plus India would sag to 4.7 percent in 1998 and 5.7 percent in 1999 from 6.6 percent this year, after adjustment for inflation.

One bright spot in the SBC Warburg Dillon Read forecast is that China — the second-largest economy in Asia, after Japan — will continue to grow rapidly: at 9 percent in 1997, at 7 percent in 1998 and at 8.5 percent in 1999.

Mr. Ogus said that Thailand's once high-flying but now stalling economy, hit by a major property glut and widespread loan losses among finance companies and banks, would contract to 1 percent in 1998 and manage to creep back to only 2 percent growth in 1999.

He said that other badly affected Southeast Asian countries — Indonesia, Malaysia and the Philippines — would see annual growth slow from between 5 percent and 8 percent in the last couple of years to between 1.5 percent and 4 percent in 1998 and 1999.

Mr. Ogus also said that the tremors from Southeast Asia's economic earthquake, in the form of diminished trade, investment and business confidence and greater bank-loan losses, would help knock more than a percentage point off growth in Hong Kong, Taiwan and South Korea in 1998 and 1999.

Economists and bankers generally agree that South Korea, reeling from a wave of corporate bankruptcies and strains in the banking system, is the northeastern Asia economy most vulnerable to contagion from the southeast.

"The Korean economy is extremely unstable," said Desmond Supple, head of Asian currency research at BZW Securities. "Credit risk is now the central story in the region, and Korea is among the worst stories."

Debt owed by Korean companies to foreign banks rose 40 percent to $100 billion in the 18 months to the end of 1996. Two-thirds of it is due to be repaid in less than a year.

Still, other economists and bankers say they remain optimistic that East Asian countries can recover from such problems, as they have in the past.

Goldman Sachs's economic research group in Hong Kong said in a recent report that East Asia, excluding Japan, is capable of growing at 7.25 percent annually in the next 10 years, even though growth will drop in some countries in 1998.

Although the predicted regional growth rate is lower than the 8.25 percent of the last decade, it would be well above the average for industrialized nations.

"The factors that have sparked above-average increases in GDP in Asia for the last 20 years did not disappear" in the recent financial turmoil, said Don Hanna, a Goldman Sachs regional economist. "Open economies, high savings and flexible markets still characterize the region."

Peter Hames, a director of Aberdeen Asset Management Asia Ltd., said that he also thought the region "can, and indeed will, emerge fitter and stronger from its current problems — provided deregulation is speeded up, banks tighten their risk controls, excesses are corrected and companies start focusing more on shareholder returns."

Mr. Roche of Independent Strategy said that he was confident East Asia would return to high growth track if made more efficient use of capital.

"Governments must also run budget surpluses, have a tight monetary policy, clean up the financial system and regulate it properly and free up all domestic monopolies," Mr. Roche said. "It means an awful lot of vested interests are going to lose. But if the governments don't do it, this region will fade from global radar screens very quickly."

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