Falling prices in the world’s second largest economy only give Japanese consumers more reason to put money into saving accounts.
Posted on: Sunday, January 28, 2001
Asia braces for Financial Crisis Part II
Advertiser News Services
TOKYO - Across Asia, the headlines are alarmingly familiar: plunging stock markets, sluggish exports and the return of bad loans plaguing the region’s banks. Local currencies are crumpling.
As a new millennium dawns over Asia, the region seems poised to produce an unsettling sequel to that singularly bad movie of 1997: Asia Financial Crisis Part II. In economies from Japan to Indonesia, unemployment is set to rise in the new year, as exports to the United States and Europe weaken. Political instability is on the rise.
Yet economists say a rerun of the 1997 Asian crisis - which started with the collapse of the Thai baht, rattled financial markets from Jakarta to Tokyo and then ricocheted through Wall Street and the Farm Belt - looks unlikely right now.
That’s because a two-year spending spree by American consumers gave Asian nations a chunk of cash for their national checking accounts. Thanks to surging exports, countries such as South Korea, Thailand and Malaysia, once on the brink of bankruptcy, have huge foreign reserves and the wherewithal to fight a short-term global downturn.
Even so, the outlook is hardly cheery, because the same export boom that helped Asia rebound so quickly encouraged governments to mark time rather than fix their economies. In many respects Asia is suffering from a continuation of the old crisis, and there doesn’t appear to be any quick fix.
"The Asian nations looked like they got out of trouble, but to some extent it was an illusion driven by the export boom," said Ron Bevacqua, chief economist for Commerz Securities in Tokyo. "The only thing that really got Asia out of its crisis was its massive exports to the United States and Europe."
"There has been a lack of sustained momentum" to reform Asia’s economies, making the region vulnerable once again, said Bill Belchere, chief Asian strategist with Merrill Lynch based in Singapore. "The export tide is ebbing, and you’re going to see a lot of the debris left on the beach."
The slowing U.S. economy also will have an effect. "The impact will be greater in those countries with a higher orientation toward exports, especially electronics, to the U.S. But overall, I don’t expect the Asian recovery to be derailed," said International Monetary Fund chief Horst Koehler.
"I’d consider such a slowdown more as a normalization than a cause for doom and gloom, and justifying neither panic nor frantic actions," Koehler said.
Today’s problems have a lot to do with the debris from 1997. During the second half of that year, Asian currencies, led by the baht and the Indonesian rupiah, collapsed, and markets imploded from Jakarta to Seoul. The IMF lent billions to Thailand, Indonesia and South Korea after their central banks ran out of dollars trying to defend local currencies from speculators.
In exchange for financial assistance from the world’s lender of last resort, governments agreed to undertake deep and difficult reforms. They would shutter failed financial institutions, reduce real estate lending and start imposing Western-style measures of profitability and risk on new loans. In the past banks often lent on the basis of friendship and political clout.
In some nations, the first stages of reform took hold. But as they faced the most painful choices, such as shutting huge conglomerates or closing loss-making factories, the U.S. economy reached Mach speed. Investment in America’s technology industry spurred demand for the computer products that Asians built. A surge in U.S. consumer spending boosted sales of Korean-made appliances, Indonesian textiles and Thai-produced auto parts. As U.S. equity markets soared, investors began pouring money into Asian stock markets, helping many of those bourses recover.
The export boom alone permitted East Asia’s current accounts, the broadest measure of the trade balance, to swing from huge deficits into an estimated $100 billion surplus, earning these nations sufficient foreign reserves to pay off creditors. But it also killed the incentive to reform.
With painful financial reforms left only half-finished, many nations were left "with inefficient management, misallocation of resources and overcapacity in many industrial sectors," Bevacqua said.
Today they may be paying the price, because the export boom proved relatively short-lived. As the American economy throttles back, Asian economies will retrench as well, analysts say, growing at about 5 percent instead of the vibrant 7.5 annual rate achieved in 2000. For countries accustomed to high-speed growth, that slowdown is much more painful than it may sound.
China appears to be escaping the downturn and expects 8 percent growth over the next few years.
"You take away the exports that have been the motor of Asia’s recovery and there isn’t another motor. The other motor is off in the shop being fixed," said Geoffrey Barker, chief Asian economist for Hong Kong & Shanghai Banking Corp. in Hong Kong.
Exports to Europe and the United States - as well as Asia’s traditional high savings rates - have been the keys to Asia’s economic prosperity. In the last half of this year, however, "the terms of trade have turned dramatically against Asia," said Kenneth Courtis, vice chairman of Goldman, Sachs Asia.
Import prices for essentials have soared while export items such as memory chips have plummeted.
"So what may seem like a soft landing in America may hit Asia pretty hard," Courtis said. "What does that mean for Asia? Earnings will fall, investment will fall, capacity cutbacks will follow and consumers will pull in their horns."
And as the economies slow, the importance of addressing old problems increases.
What is evident throughout the region, Merrill Lynch’s Belchere said, is that "a whole model of economic relations needs to change, and that’s going to take decades, not months or quarters. You are trying to change an old, comfortable structure, and there is always going to be opposition."
Most analysts think reform will come. But it promises to be painful and slow. Just look at Japan.
In the world’s second largest economy, an $80 billion public bailout of failing banks hasn’t stopped an additional cascade of bad loans, now estimated at more than $450 billion, from suddenly appearing on bank balance sheets, 10 years after the "bubble economy" collapsed.
Bankruptcies continue to climb, consumer confidence is waning and, despite massive government spending on public works to prop up the economy, capital investment by private firms is beginning to turn down. Japan’s exports fell 13.6 percent in November from the previous month, the fifth consecutive monthly decline in exports.
Falling consumer prices only give Japan’s flinty consumers more reason to sock their money into saving accounts: Why buy today what will be cheaper next month? These same falling prices makes it harder for companies to pay back debt, since the real value of their debt rises while earnings decline.
Japan’s experience just shows how hard reform is.
"In virtually every country, I’d argue that the forecasts for economic growth are simply too optimistic," said Barker of Hong Kong & Shanghai Banking Corp.
|
