East Asia: Bracing for Economic 'Negative Growth'
Stratfor Summary
Leaner times ahead in East Asia will constrain the region's political
leaders, prompting them to adjust, forestall or even cancel planned projects.
Analysis
East Asian economies are preparing for an economic downturn in 2005 -- which
Stratfor predicted in the last East Asian Net Assessment. Forecasted events
are occurring: Oil broke $45 a barrel Aug. 10 because of ongoing supply
disruptions in Iraq and Russia. High oil prices are prompting fears in global
financial markets, especially in the energy-vulnerable Asian economies. Four
days later, the U.S. Federal Reserve raised interest rates by a quarter of a
percentage point to 1.5 percent.
Elevated oil prices, rising interest rates and declining Chinese consumption
mean the prospect of negative growth over the next several quarters has to
enter policymakers' political calculations. The upcoming regional economic
slump will constrain governments' options and projects.
Multilateral bodies and national governments are beginning to adjust economic
forecasts to correspond to the shifting global economic trends. In June, the
Asian Development Bank recalculated its regional growth estimates after
accounting for oil remaining above $40 per barrel. The bank predicted Asian
economies, excluding Japan, would suffer an annual gross domestic product
loss of 0.6 percent if high oil prices continue throughout 2004 and a loss of
0.8 percent if they continue throughout 2005. The bank also forecast the
region would be hit with a 1.1 percent decline in 2005 if oil reached $50. In
late July, Thailand cut its 2004 economic growth projection by 0.8 percent
because of high oil prices.
Rising U.S. interest rates will likely trigger East Asian banks to follow
suit to avoid capital flowing out of Asia to the United States. The most
important question is whether China, which has turned into a new regional
engine for growth, will raise rates. China's consumer price index rose 5.3
percent year-on-year in July, the National Bureau of Statistics reported Aug.
12. Beijing is trying to cool overheating economic sectors with selective
measures -- such as implementing lending curbs and raising bank reserve
requirements -- and so far has avoided raising rates for the first time in
nine years. But the U.S. Fed hike could prove to be enough pressure to force
China to raise its own rates.
Raising rates will be painful for China. The country's economy is built on
easy credit, and raising the price of money will cause many Chinese borrowers
to default on their debts. This will suddenly increase non-performing loan
portfolios ahead of planned state bank international initial public
offerings, possibly causing the banks to cut or forestall the offerings.
Although raising interest rates will cause several problems for Beijing, it
will help it skirt one political problem. According to sources in China, most
of Beijing's targeted lending restrictions have particularly hurt Shanghai
and the surrounding region. This is most likely a campaign by Communist Party
Chairman and President Hu Jintao and Prime Minister Wen Jiabao to erode
former Party chairman and President Jiang Zemin's power base, which is
centered in the region.
Singling out the central coastal region, although politically useful, is not
enough to solve the country's economic woes. After giving the booming
southern provinces of Guangdong and Fujian a relatively free pass -- for
which they are probably very thankful -- Hu and Wen now can start cooling
down their economies. Beijing can achieve its goal this way -- which is less
direct than taking the targeted measures -- and risk less political blowback
from the southern provinces.
The rest of the region will share China's economic problems. China's booming
economy accounted for approximately 30 percent of Japan's export growth, 35
percent of South Korea's and nearly 70 percent of Taiwan's in 2003. Slowing
Chinese consumption will undermine the region's export-dependent economies
and further contribute to lackluster growth. The realization that the next
two years will not be as prosperous as the last two years will constrain the
region's political leaders, prompting them to adjust, forestall or even
cancel planned projects.
Japan, for example, is on track to reach 4.5 percent economic growth in 2004
-- its largest in more than a decade. Prime Minister Junichiro Koizumi likely
felt he had some political capital to work with to finally reform the
country's postal system, which controls $3.15 trillion in savings and
insurance systems. Koizumi is attempting to privatize the institution to free
up the capital for more worthwhile investments than the government bonds with
abysmal returns -- which it habitually buys. Koizumi had a slim chance of
limited success in his battle with the entrenched bureaucratic and political
powers that are against the scheme. However, now that Japan's economic growth
is not likely to be as strong and long-lasting as was hoped, Koizumi will
have an even tougher time pushing reform.
Thai Prime Minister Thaksin Shinawatra also could have to rethink a pet
project. Thaksin recently announced plans to dole out $488 million in poverty
relief packages for rural villages. In addition, he proposed providing $1
billion so parliament's 400 members can spend as much as $24.5 million each
on their constituencies for direct economic assistance to local development
projects. The plan is part of Thaksin's efforts to achieve a sweeping victory
in Thailand's general elections slated for early 2005. Under pressure from
high oil prices and rising interest rates, the he might have to pare down his
proposals.
Other governments from Seoul to Jakarta also will have to figure
belt-tightening measures into their political calculations as leaner times
begin to erode their political capital. The coming downturn does not appear
to be nearly as devastating as the financial crisis that shocked the region
in 1997, and governments have plenty of lead time to prepare. However, this
is likely to offer policymakers little consolation. |
