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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Henry Volquardsen who wrote (6541)	9/21/1998 10:42:00 AM
From: Worswick	Read Replies (1) \| Respond to of 9980

Henry hello... a timetable of the crisis in Asia. Poor John Templeton. For Private Use Only (C) Morgan Stanley Asia/Pacific: From Bad to Worse Tim Condon (Hong Kong) Key Points: Slower growth in Europe makes a bad situation in East Asia worse. For nearly all of Non-Japan Asia, 15% to 20% of exports are destined for Europe. India is an exception with 28% of exports going to Europe. For crisis economies, domestic demand collapses and remains weak for some years after the banking and balance of payments crises occur. The only hope for resuscitating economic activity is export growth. Slower export growth because of slower growth in Europe means the depressions in the crisis economies will be deeper. Korea and Thailand are most vulnerable to deteriorating sentiment. If foreign and investor sentiment turns against them, the attractiveness of Malaysia's alternative path would increase, in our view. Details: The title of the article by our European economists, Eric Chaney and Joachim Fels, "A Harsh Winter Ahead," (Global Economic Forum, Sept. 10) says it all. Morgan Stanley Dean Witter's team of economists covering Europe has slashed GDP forecasts for Europe and the UK. Central among the reasons for the downgrades is concern for export prospects given the dependence on emerging markets. Chief Economist Stephen Roach believes the first global recession since 1991 may be under way. What are the implications for East Asia, where the developing global financial crisis originated? To set the stage, the second-quarter GDP declines in Korea and Malaysia -- 6.6% and 6.8%, respectively -- and Indonesia's 16.5% plunge make clear that the crisis economies are suffering recessions so deep they may properly be called depressions. (Thailand, too, but quarterly GDP data are not available.) The collapse in GDP, high real interest rates and huge exchange rate devaluations have produced corporate distress that has cascaded into the country's banking systems. History is likely to judge East Asia's banking crises as the world's largest. We know from the history of big banking crises that domestic demand collapses and remains weak for some years after the crash. The only hope for resuscitating economic activity is export expansion. It is not reasonable to forecast a vigorous export-led recovery in the rest of Asia without strong domestic-led growth in Japan, and the view of our economist for Japan, Robert Feldman, is that this is very unlikely. Economic inter-dependence is high -- 40% to 60% of exports from the region are to the region -- so weak domestic demand leads to weak import demand, which leads to weak export demand. Absent strong export growth, the GDP growth pattern following balance of payments and banking crises is clear. There is a precipitous fall in GDP in the first year of the crisis -- 1998 for East Asia's crisis economies. Falling domestic demand keeps GDP growth close to zero in the second year, but by the third year the base for comparison is so low that a rebound in growth is seen. But weak domestic demand drags growth down again in the fourth year. Against this backdrop, slower growth in Europe makes a bad situation worse. For nearly all of Non-Japan Asia, 15% to 20% of exports are destined for Europe (Table 1). Table 1 Exports to Europe, 1997 (% of total exports) China 15.9 Hong Kong 16.4 India /a 28.3 Indonesia /a 16.9 Korea /a 14.7 Malaysia 15.1 Philippines /a 17.9 Singapore /a 14.8 Taiwan 15.1 Thailand /a 18.2 a/ 1996 Sources: IMF, CEIC, MSDW Research. Slower export growth because of slower growth in Europe means the depressions in the crisis economies will be deeper. Korea and Thailand are most vulnerable to deteriorating sentiment. Their large trade and current account surpluses are their most prominent positive economic fundamental. Foreign and investor sentiment could turn against them if narrowing trade and current account surpluses result in reserve outflows. If so, the attractiveness of Malaysia's alternative path would increase, in our view.

To: Henry Volquardsen who wrote (6541)	9/21/1998 1:28:00 PM
From: Jay Scott	Read Replies (2) \| Respond to of 9980

Henry, very well stated on both accounts. I agree that the structural problems with investing in emerging markets are not likely to be solved by slogans, and I admire your understanding of the root of those problems. Obviously in your position, that understanding is very much a requirement. Your comment about risk premium is well taken. Flippantly, I would rather see the banks making subprime auto loans with the money. Then they would at least realize that they are bearing the risk for that premium, not the taxpayers. I don't mean to trivialize the complexity of investing in emerging markets and the myriad of structural and cultural differences that it entails. However, I still have a great deal of indigestion about the Fed's policies. No, I don't think AG is consciously making deflationary policies, but on the other hand, he doesn't appear to see the devastation that a rich dollar has wrought overseas. As Jude Wanniski has argued (http://www.polyconomics.com) Greenspan only seems to trust the dollar gold price as an inflation indicator when it is going UP. Apparently he feels it loses its predictive value when the price is plummeting. When he lets the dollar get so out of hand, the debtors in those emrging market currencies (which are pegged to the dollar) go from bad to worse. The lending practices let the situation slip. Al let it get worse. He needs to cut rates to weaken the dollar. Then it's time for those Emerging Market mutual funds... JS