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FEATURE
Markets point to a new Asian crisis
Nov 29
Peter Hartcher, Asia Pacific Editor
Net loss ... Asia's recovery is proving a false dawn with renewed recession looming.
If you had tried to predict the Asian crisis of 1997-98, you would have found no clues in the place where most economists looked - the economic growth statistics. They showed nothing but strength.
But you would have found a clear warning if you'd checked the sharemarket. Thailand's stock prices were down by 70 per cent before the crisis hit.
"If you have any faith in markets at all, you have to believe a big market fall is telling you something," says Jim Walker of Credit Lyonnais Securities Asia.
So, where should we look today to divine the region's immediate future? Once again, countries which were hit by the crisis are clocking strong economic growth figures of 5 per cent to 10 per cent. But their stockmarkets are down by 40 per cent to 50 per cent so far this year.
Goldman Sachs' vice-president for Asia, Ken Courtis, is in no doubt about where we should be looking. The growth figures record history; the markets are anticipating events by about six months.
His conclusion: "We are entering another period of white knuckles in Asia."
Three years after the torment began, following two years of recovery, the collective economy of South-East Asia is still smaller than it was before the crisis struck.
And the victims have been so slow to restructure that they are still staggering under impossible loads of dud bank loans.
These are world-class problems - the bad-debt burdens in Thailand, South Korea and Indonesia are bigger, proportionately, than the one imposed on Japan at the very worst of its banking crisis or the United States in its savings and loan debacle.
The foreign capital that gushed excitedly back into East Asia last year concealed the depth of the damage to its economies. Now that it is gushing out again, it is exposing starkly the battering below the waterline.
"The effect of the recent crisis," according to a newly published 16-country survey by Felipe Jesus of the Georgia Institute of Technology, "will be to lose at least one decade in the development race."
But no two crises are the same. And the impending one is promising to be shallower than the first - but also broader.
Today's victims are not just the same countries that were in the front rank of the crisis last time around. There are two new candidates as well.
Two economies that remained relatively immune to the last upheaval - Taiwan and the Philippines - are showing signs of deep distress today with their stockmarkets also down by 50 per cent or more.
"We won't do a rerun of 1997," says UBS Warburg regional economist Nicholas Bibby, "but it is time for reality to bite, and it's biting hard."
"When the Nasdaq [the US stockmarket index for technology firms] started to gyrate around March and April, people started questioning assumptions about Asian exports" destined for the information technology sector in America.
The Nasdaq was foreshadowing a slowdown in US demand for IT goods. Why does this matter?
First, because Asia depends heavily on the IT sector - more heavily than any other region of the emerging world. The IMF calculated that telecommunication, media and technology stocks account for a preponderant 54 per cent of the total capitalisation of Asian stockmarkets.
There are some enormous concentrations of output. Taiwan makes half the world's notebook computers. Every time the price of a 64K Dram computer chip slips by $US1, South Korea loses half a billion US dollars' worth of annual exports.
It matters also because the US buys more than half the region's output of these goods. And David Hale of Zurich Group points out that the 12-month growth rate of new orders for electronic components in the US has indeed fallen precipitously this year - from 38 per cent in May to 9 per cent in August.
So when the Nasdaq began its 40 per cent dive, foreign investors did the only thing investors could be expected to do - sell East Asian stocks. And as capital fled and stock prices fell, so did regional currencies.
Courtis traces the inevitable trajectory, the one that stockmarkets are already anticipating: "Profits in East Asia will fall, therefore investment will fall, therefore wages and consumption will fall. Currencies will fall further and these countries' debt problems will come back to the surface."
Even the most pessimistic of forecasters does not foresee another pitch into the same sort of international insolvency that threatened in 1997-98, the sort that requires IMF intervention.
The reason is that the balance of payments of most Asian countries is in a strong position. Rather, they see slowdown, stagnation, perhaps recession.
Incidentally, it is standard stuff for the victims of an acute crisis to suffer relapse three to four years later.
This was Latin America's fate: the worst corporate effects of its 1982 crisis emerged in 1986. And Mexico appeared to recover from its 1991 crisis only to slump into a serious relapse in 1994-95.
It is a common symptom because the crisis creates new weaknesses, chiefly overhangs of debt. Without quick and thorough restructuring, these weaknesses remain.
It is orthodox to say that Asia will, thankfully, at least enjoy the some support from its two biggest economies - Japan and China. It may be orthodox, but is it true?
Even after a decade of stagnation, Japan's economy, with an annual output of $US4.3 trillion, is still bigger than all the other Asian economies combined.
The consensus forecast for Japan's growth this year is about 2 per cent, quickening somewhat next year. The OECD this month issued its prediction of 2.4 per cent next year. This would be the strongest Japanese growth in five years. Is Japan's long-awaited recovery finally with us?
Unfortunately, in the same week that the OECD forecast a quickening, Japan's Economic Planning Agency said that a deceleration had begun. Major private-sector Japanese forecasters such as the Nomura Research Institute also see a slowing.
Yet Japan's Government has, in the past two years, spent an extraordinary amount - $US1.4 trillion - on emergency fiscal stimulus measures. This is equivalent to the total annual value of the French economy, itself one of the world's biggest half-dozen economies.
And still it has difficulty sustaining even 2 per cent growth.
Japan's structural problems are so vast and so entrenched that a meaningful, self-sustaining recovery remains elusive. Japan cannot be relied upon as a growth engine for Asia. Its stockmarket is down 30 per cent so far this year.
Only China seems to have solid prospects for growth in the year ahead. It is Asia's second economy, with annual output of $US1 trillion.
And although it is generally expected to slow somewhat from 8 per cent this year to 7 next, its strength is evident in its stockmarket - up more than 50 per cent so far this year - and its currency. Even in the black market, the renminbi is trading strongly.
The Chinese Government seems to have skilfully overcome the deflation that threatened to take hold over the past couple of years. In this, it has succeeded where Japan has failed. The Chinese city of Hong Kong and the ethnic Chinese city-State of Singapore are the other exceptions to the grim East Asian outlook.
Jim Walker of Credit Lyonnais Securities Asia, one of the few economists to foresee Thailand's 1997 crisis, suggests that the three best warning lamps for imminent trouble are the onset of economic slowdown, stockmarket decline and problems with export receipts.
East Asia has it all.
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