GLOBAL CRISIS: Asia's nascent recovery ft/ 24 oct 98
The current global crisis started with the Asian tiger economies. Some investors are now looking back there for the first signs of recovery. But although these economies have made big strides in recent months, they are only in the very first stages of revival.
The stabilisation of the three Asian countries most affected by the crisis (Thailand, South Korea, and Indonesia) has been striking. The Thai baht and Korean won have been stable for some time, and the Indonesian rupiah has staged a remarkable bounce-back. Meanwhile, the Thai stock market has risen by almost 50 per cent since the end of August, with the Korean market up 23 per cent over the same period. Foreign investment is trickling back in, and some analysts are suggesting that Korea and Thailand may see positive output growth next year.
The improvement in market sentiment was triggered by a combination of factors. There has been growing confidence in the policies of some of the crisis-hit countries, with the exception of Malaysia. The emergence of current account surpluses, and the stabilisation of currencies, has allowed interest rates across the region to fall.
But without doubt, the most important development in recent weeks was the fall of the dollar against the yen, combined with the cuts in US interest rates. This has reduced the pressure on currencies still pegged to the US dollar, such as the Hong Kong dollar and Brazilian Real, and been a big help to emerging-market sentiment. It has reinforced the downward trend in Asian interest rates and improved the region's competitiveness against the Japanese yen. There will also be benefits from the lower costs of servicing US dollar-denominated debt.
But, although the financial market stabilisation and the improvements in policy are unarguably good news, Asia is very far from a full-blown recovery.
Sluggish performance
First, exports are not proving as strong an engine of growth as many had predicted. Exports from Korea, Indonesia and Thailand are still flat in US dollar terms, despite their currency depreciations. The global economic slowdown is one of the reasons for the sluggish performance; more intense price competition, and a lack of access to working capital and trade finance, have also been important constraints.
Second, the crisis-hit Asian economies are only just beginning the process of restructuring their banks and companies. These reforms will be painful, and backsliding is still possible.
Third, there is a huge debt overhang. Over-indebted companies will not want to make new investments; yet, eventually, this is what will be needed for growth to return. Schemes to restructure corporate debt are in place, but there are doubts over whether companies will use them.
IMF medicine
Fourth, the Asian crisis economies, together with most other emerging markets, are finding themselves almost entirely cut off from sources of international finance. It is impossible to know how long this situation will persist, but concerns about a flight from risk are serious enough to worry Alan Greenspan, chairman of the US Federal Reserve.
A recovery could come more quickly if investors distinguish between emerging market economies. In Asia, this is crucial. Korea and Thailand, having accepted their IMF medicine, are furthest along the road to recovery. In Indonesia, the macro-economic picture is much improved, but this masks serious delays in the reform process.
Malaysia is in a category of its own. Its decision to impose capital controls at least gave it the opportunity to carry out reforms without market pressures, but so far it has failed to use this breathing space, concentrating instead on gestures like yesterday's populist budget.
Looking further afield, events in Japan and China will be critical to how quickly Asia recovers. Japan is starting to implement its bank recapitalisation plan, but this risks becoming an unconditional hand-out of money which will do little to resolve the system's fundamental problems.
China, meanwhile, appears to be weathering the storm well, with output growth in the third quarter of 7.6 per cent. But both exports and domestic demand are very weak, leaving public spending the only real source of growth. And the financial system is looking increasingly shaky, following the collapse of Gitic, the state-backed investment company. The pressure for devaluation may have eased, but a period of weakening growth is a real, and worrying, prospect.
The combination of financial stability and sensible economic policy are essential conditions for reform. But Asia's problems are complex, and the achievement of sustainable recovery will be a long haul. It may still be too early to rush back to the tigers. |
