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Asia's Economic Troubles
Could Spread Across Globe
By BERNARD WYSOCKI JR.
Staff Reporter of THE WALL STREET JOURNAL
With lightning speed, a collapsing stock market in Hong Kong spread this
week across time zones and around the world, and then staged an equally
quick rebound. If nothing else, the episode demonstrated the remarkable
ties now linking global financial markets.
But in the months ahead, a bigger question is this: Will the real economic
problems that threaten to throttle growth in spending, employment and
investment in Southeast Asia spread just as fast?
In Southeast Asia, this year's
currency crises will slow economic
growth to an annual rate of 4% or
less from 8% or more, some
forecasters predict. The aftermath
of that abrupt slowdown will be
bankrupt companies, bad loans and
falling consumer spending. Some
Asia watchers think the worst is yet
to come.
For the U.S., the direct effects will
be slight. U.S. exports to Thailand,
the Philippines, Indonesia and
Malaysia -- the four countries most
affected by the turmoil -- were only
about 4% of last year's total.
Moreover, the troubles in the
Pacific come at a time when
America's immune system is the strongest that it has been in decades. The
economy is vibrant, inflation is dormant, interest rates are steady and the
budget deficit is nearing zero.
Yet in testifying to Congress on Wednesday, Federal Reserve Board
Chairman Alan Greenspan said the spillover from Southeast Asia, while
modest to date, "can be expected not to be negligible." Economists say
that spillover could shave a few tenths of a percentage point off U.S.
growth rates in the months ahead. To Mr. Greenspan and others, that
prospect isn't all bad. A little less exuberance might help keep the
economy from overheating.
Effect on Japan
In Japan, however, the effect could be much more severe. The Japanese
economy is in the dumps, the deficit is climbing, and the banks are still
mired in crisis.
"Japan is going to feel the force of what has happened" in Southeast Asia,
says Edward Guay, chief economist at Cigna Retirement & Investment
Services in Hartford, Conn. Agrees Rudiger Dornbusch, an economist at
the Massachusetts Institute of Technology: "Japan is the weak link."
Already, many private economists in Japan have forecast no growth, or
even a contraction, in the wake of the extremely poor April-June quarter.
An economic package unveiled last week by the dominant political party
was widely dismissed as insufficient, especially because it lacked a tax-cut
plan. The most recent sign that the economy is still wobbly was an
announcement last week that department-store sales fell in September for
a sixth straight month.
The weak economy has left Japan heavily dependent on exports for
growth. The country's trade surplus has increased every month since
March. And in the fiscal first half ended Sept. 30, every major Japanese
auto maker posted double-digit growth in exports from a year earlier, led
by Honda Motor Co.'s 54% surge.
But as falling currencies and rising interest rates cut off growth elsewhere in
Asia, Japan's problems may deepen because other Asian countries
account for about 44% of Japanese exports.
Asia in Reverse
"Asia has gone into reverse," says Kenneth Courtis, an economist at
Deutsche Bank AG. "The biggest engine of growth for the Japanese
economy has been knocked out of gear."
Meanwhile, problems elsewhere in Asia will exacerbate the slow-healing
"balance sheet" crisis at Japan's banks, which have been plagued by bad
loans and shrunken asset values. Thailand, Malaysia and Indonesia, all
hard-hit by the recent currency crisis, have absorbed waves of investment
from Japanese banks and companies over the past decade, and now they
are likely to pile more defaults onto Japan's already-troubled banking
system.
Europe, too, could suffer from a spillover. In Eastern Europe, some
countries could fall victim to speculative currency attacks like those in
Southeast Asia. In Western Europe, both France and Germany, struggling
to reignite their economies, could be hurt by a reduction in exports to Asia.
The Southeast Asian crisis comes at a delicate time, when most European
countries need strong growth to meet the guidelines for a single currency.
In just one sign of Europe's vulnerability, ABB Asea Brown Boveri AG,
the Swiss-Swedish infrastructure giant, reported disappointing earnings
recently and said postponement of a Malaysian dam project alone could
cost the company $100 million in the current quarter.
Moreover, Southeast Asia's troubles could spill over into Latin America,
too. Only recently, Latin American nations seemed immune. Some
investors saw them as safe-haven alternatives to emerging Asian markets.
But even though some of their stock markets now have snapped back,
jittery investors may demand more reward for their risks, raising the
prospect of higher interest rates and lower growth, especially in Argentina
and Brazil.
Latin America's fiscal and monetary reforms following the Mexico crisis
could help insulate these economies from Southeast Asian fallout.
However, the dependence on short-term foreign capital continues,
especially in Brazil. Meantime, there's uncertainty over the privatization
programs planned by the administration of Argentine President Carlos
Menem.
Perhaps a lesser worry is this: As Southeast Asian countries carry out
what amounts to competitive devaluations of their currencies, they could
undercut Latin American companies in world markets.
Some analysts believe slower growth is a near certainty. Bruce Steinberg,
chief economist at Merrill Lynch & Co., said this week that 1998 Latin
American economic growth could fall by one-to-two percentage points
below consensus estimates.
Direct Investment at Risk
In the entire developing world, perhaps the biggest risk is a decline in
investment -- not just in stocks and bonds but in foreign direct investment
-- in factories, roads, joint ventures and the like. Direct investment has
been the other big boom of the 1990s for emerging markets.
From an average of just $11.9 billion in the mid-1980s, net foreign direct
investment in developing Asian, Latin American and East European
countries soared to $48.8 billion in 1993 and topped $100 billion last
year, according to the International Monetary Fund. Direct investment
dwarfed the $43.2 billion of net portfolio investment to emerging markets
last year. The investment boom has been both an important cause, and an
effect, of steady economic growth in this decade.
Now, falling currencies, collapsing stock markets and Japanese bank
problems could combine to make investment funds scarcer. China is
already seeing foreign investment slow to a trickle.
"Asia alone, excluding Japan, has a demand of over $3 trillion for
infrastructure over the next decade. Some of those projects are already
postponed if not canceled," says Paul Laudicina, vice president of A.T.
Kearney Inc., Chicago management consultants. "The real question is, to
what extent will the decline in these infrastructure investments create
bottlenecks to growth, in transport, and ports and clean water and so
forth?"
Equally worrisome is the legacy of investments already made, by
multinationals and by regional powerhouses such as Samsung Group, the
Korean conglomerate. Flush with profits in the 1990s, they built chemical
plants and oil refineries, began huge shopping malls and ordered record
numbers of airliners, around Southeast Asia as well as around the world.
A Glut of Airliners
Earlier this year, even before the Southeast Asia crisis hit, David Turnbull,
managing director of Cathay Pacific Airways of Hong Kong, warned of a
growing global glut of planes. Today, as tourism to Hong Kong slumps,
the overcapacity problem may be a step closer to reality.
If the world gradually finds itself with too many factories chasing too few
customers, many industries could face painful shakeouts. Meanwhile, price
pressures and falling profits could hurt American companies, such as the
auto makers, in global, capital-intensive industries. In the auto industry, an
emerging glut of global capacity has already begun to worry executives in
Detroit and in Europe. And much of that capacity is being added in Asia.
Of all the major economies, the one with the most exposure to Southeast
Asia is Japan, which is already suffering through a seven-year hangover of
asset deflation, a legacy of the bubble economy of the 1980s. Throughout
the postwar period, Japan has relied on credit and on exports to drive its
economy. Today, the recipe is much the same: The weak economy has left
Japan dependent on exports for growth.
Moreover, the value of the Japanese stock market has an outsized impact
on Japanese banks and other institutions because cross-holdings of shares
are such an important part of the valuation. So, declines in the Nikkei
averages can further undermine the tortuous process of resuscitating the
banking system and reviving credit and loan growth in Japan, the world's
second-biggest economy.
At the very least, this week's events have caused Japanese businesspeople
to temporarily freeze in their tracks. "Right now, the influence [of the
market declines] is very heavily emotional. In Japan, the reaction is silence.
Nobody wants to move," says Akira Yokouchi, president of Nissho Iwai
American Corp., a giant Japanese trading company.
Ultimate Worry About Japan
Now, U.S. policy makers fret that the Japanese government won't be
willing to take bold fiscal and regulatory actions that could address their
economy's problems. Some veteran observers worry that the crisis could
set off a downward spiral in the Japanese economy.
"Bank lending will collapse, and business failures are apt to skyrocket,"
says Carl Weinberg, chief economist at High Frequency Economics Ltd.,
in New York. "We expect Japan's economy to be thrown into severe
recession."
Any such recession would reduce trade and investment between Japan
and the rest of Asia, blighting economic growth in the entire area. Others
fret about the unlikely possibility that Japanese institutional investors will
have to liquidate some portion of their huge U.S. Treasury holdings -- a
development that would tend to drive up U.S. interest rates.
On the other hand, some experts think the spillover effect is exaggerated.
One is William Cline, deputy managing director and chief economist at the
Institute of International Finance Inc., a Washington organization
supported by major financial institutions. Mr. Cline says the impact of even
a severe decline in Japanese exports to Southeast Asia would be
moderate. If they declined 15% -- by $25 billion -- he calculates,
Japanese gross domestic product could be reduced about two-thirds of a
percentage point. "It would be unwelcome," he concedes, but hardly
catastrophic.
He adds: "On the financial side, OK, Japanese banks are involved in
Thailand, but they don't have the entire banking portfolio there. The impact
of these events on even the Japanese is nowhere near the impact of the
1980s debt crisis [in Latin America]."
Psychology is likely to prove important; investor sentiment has rarely
seemed so fickle. As the world's stock markets gyrated this week, many
investors were whipsawed by conflicting emotions.
Earlier Overconfidence
But to a large degree, it was the overconfidence of businesses, investors
and banks in making huge investments in Southeast Asia that sowed the
seeds of the economic mess in Thailand, Malaysia and, to a lesser extent,
other developing countries in the region.
In Malaysia, Prime Minister Mahathir Mohamad's "Look East" policy
consisted largely of emulating the export-led growth of postwar Japan.
Billions of dollars of Japanese investment poured in. Exports soared.
Living standards rose. As a symbol of its newfound economic strength,
Malaysia built the world's longest building and also the highest -- twin
towers in central Kuala Lumpur -- and launched a series of high-profile
projects, including a planned cybercity linked by a $2 billion fiber-optic
cable.
As consultants saw countries such as China start to compete, they were
trying to help Malaysia bootstrap its way into high-tech. It was a race
against time, in a sense, and the Malaysians lost, at least for now. They fell
behind the curve in the race to move up and were threatened from below
by lower-wage countries.
Even back in 1993, when China had devalued its currency, the nations of
Southeast Asia found themselves increasingly uncompetitive, yet unwilling
to devalue their currencies. Chinese goods became more competitive.
Japanese companies, themselves feeling the devaluation of the yen, either
returned production to Japan or wished they had. As the sprawling
megaprojects proliferated throughout Southeast Asia, the risks grew. And
only in the big devaluations, beginning in July, has the region begun to hold
some promise of renewing its export growth.
Slight Effect on U.S.
Even though the U.S. is likely to suffer relatively little damage in the
turmoil, it is more heavily linked to the global economy than it was even a
decade ago. U.S. exports today account for about 12% of America's
GDP, up from less than 8% a decade ago. And although U.S. exports to
Asia, including Japan, have nudged past those to Canada and Mexico
combined -- to 32% of the total -- Mexico and Canada still absorb 31%
of U.S. exports.
Mr. Steinberg of Merrill Lynch expects the turmoil to "reduce U.S.
gross-domestic-product growth by half a percentage point to 2.5% in
1998." He says a worst case is that growth will be reduced by a full
percentage point, to about 2%. Government economists make similar
estimates.
Nevertheless, a sizable amount of world growth has been stimulated by
Asia, and its loss would be felt. "Asia has been essentially the fast-growing
region which has helped to sustain growth in the rest of the world," says
Peter Kenen, a Princeton economist. "There has been a lot of optimism
about future profitability that has rested on the supposition that Asia was
going to grow much faster than the older industrialized world."
If that is no longer the case, the spreading slowdown will touch every
region, including the U.S. Says Cigna's Mr. Guay, "We shouldn't create
the illusion that we, in the U.S., are somehow insulated."
--Bill Spindle contributed to this article. |
