<Asian Economy> Is the worst over?
Source:S&P Personal Wealth via Business Week
Thursday November 05, 1998 (10:49 am EST)
Have Asian Economies Finally Bottomed Out?
by David Cohen, Standard & Poor's MMS
SINGAPORE, Nov. 05 (Standard & Poor's) - In the face of the market rallies that carried regional stock markets and currencies sharply higher in October, there was a slight, but perceptible, shift in focus from recent pervasive pessimism about the recessions throughout Emerging Asia, to looking toward a potential bottoming out. Regional economies remain depressed, with MMS projections for contractions in 1998 GDP of 15% for Indonesia, 7.5% in Thailand, 6.5% in South Korea, 5.1% in Malaysia, and 4.2% in Hong Kong reflecting the severity of their worst recessions in decades.
It is noteworthy, however, that these nations generally suffered their sharpest quarter-on-quarter contractions by Q1 of this year, and though the year-on-year figures they typically report will show few signs of improvement through year-end, the trajectory implicit in the MMS mainstream annual forecasts incorporates a levelling off in the quarter-on-quarter decline. Data suggest that Indonesia suffered contraction at worse than a 30% seasonally adjusted annual rate (SAAR) during Q1 and again during Q2 amid the May political turmoil, but moderated to closer to 5% SAAR of decline in Q3. Available monthly gauges, such as S.Korea industrial production and Thailand manufacturing production, show activity essentially levelling off after steep declines through early 1998 (though continuing to show year-to-year declines of 10%-15% - - ignoring the September bounce in Korea, which we might for now dismiss to special factors). Even imports, whose plunge on the order of 30-40% year-to-year in countries as Thailand, S.Korea and Indonesia are an indication of severe weakness in domestic demand, have shown a relatively flat USD level since Q1 (in the case of Indonesia, since Q2).
Given this pattern, MMS is prepared to call for a bottoming out in GDP in Q4, though year-to-year comparisons will likely remain negative until mid-1999. The resumption of quarter-to-quarter growth in Q1 will likely be sluggish, as we project 1999 annual growth of around 0.5% for Thailand, S.Korea and Malaysia, with Indonesia annual GDP actually contracting another 2% in 1999 from 1998, despite a modest upward trajectory beginning in Q1. This might be viewed as the "U" shaped recovery one hears reference to these days, as opposed to a more-robust "V" shaped rebound. The need to recapitalize many banking systems before they can restore the flow of credit, remains a drag on many economies, limiting prospects for a quick turnaround in depressed investment. At the same time, slowing growth in key export markets as the U.S., with no turnaround in sight in Japan, could restrain the pace of recovery.
Nevertheless, MMS forecasts that the U.S. will avoid an actual recession. Meanwhile, supportive of economic recovery has been a move toward significantly lower interest rates across the region, as the recent fx strengthening by local currencies allows central banks to relax policy, with the blessing of the IMF. In addition, having reversed its initial call for fiscal surpluses, the IMF is promoting fiscal stimulus, embracing budget deficits in 1998-9 for Indonesia (8.5% of GDP), Thailand (4%) and S.Korea (5%). Malaysia (planned deficit of 6%) is pursuing fiscal stimulus on its own accord.
Market sentiment toward the region has clearly improved with the latest rallies, which by restoring confidence can help bolster the economies. Despite unmistakable lingering pervasive wariness, the bottoming in the recessions appears at hand.
businessweek.com |
