Business
Worst of Asian crisis could
be over
Will the Asian crisis strike again?
No-one could have foreseen that a currency crisis in
Thailand in July 1997 would lead to a global economic
slowdown or financial crisis.
Now, 18 months later, there are some signs that the
worst may be over.
The International Monetary Fund (IMF), which has lent
billions to the region to help stabilise local economies,
says it expects growth in the region to resume in the
second half of 1999.
But a survey of some of the key countries shows that
the pace of recovery is decidedly mixed, with one big
variable hanging over the future of the whole region:
China.
And then there is Japan, still mired in its deepest
recession since World War II, and whose problems still
overshadow the region.
If Japan does not recover, the prospects for a positive
growth rate next year in Asia will be slim.
Indonesia
Indonesia suffered the
steepest decline of any
Asian economy in 1998,
falling a massive 15%. As a
result, poverty increased
dramatically, with an
estimated 50% of the
population below the poverty
line by the end of the year,
as the price of imported rice
shot up.
Indonesia's continuing
political crisis has meant it
has been difficult to resolve problems of economic and
political reform. Although Indonesia has relaxed rules on
foreign investment, little new capital is coming back into
the country.
Indeed, the ethnic Chinese business class, still troubled
by continuing violence, is trying to take capital out.
The banking sector is still insolvent, drying up credit, and
the country will still has difficulty paying its foreign
creditors.
Even official projections suggest that the economy will
continue to contract by around 3-4% in 1999, putting
further pressure on the poor. If the country can avoid
social unrest and hold peaceful elections in May, there
may be some chance of recovery later in the year.
Korea
Korea was by far the largest
of the region's economies
affected by the Asian flu. It is
the world's 11th largest
economy, and has an even
larger role in world trade.
It also has some of the
biggest companies in the
developing world, the
'chaebols' or conglomerates.
Just five companies
(Hyundai, Daewoo,
Samsung, LG and SK group) account for one-third of the
output of the entire economy, and half the exports. They
are among the largest companies in the world.
The reformist government has been trying to tame the
chaebols, but it has proved more difficult than anyone
imagined.
A year on, the chaebols plan to reduce their debts by
swapping their assets. In the 'Big Deal', Daewoo and
Samsung would swap cars for electronics, while Hyundai
and LG would swap chip-making plants.
The question of the chaebols has dominated the reform
process because they still get the lion's share of
available credit, while the small and medium sector has
been further squeezed out. The overhang of private debts
held by the chaebols continues to cripple the economy.
On the bright side, Korea's severe recession has given
the country a strong balance of payments and it has had
no difficulty in repaying its debts to the IMF.
Forecasters believe that, after shrinking by nearly 6%
this year, the Korean economy will continue to decline in
1999, probably by around 1%. Rising unemployment
without a social safety means that social unrest will also
be a problem next year.
China
China has been the exception in Asia. With its relatively
closed economy and stable but not freely traded
currency, it has so far avoided the worst effects of the
Asian crisis.
In 1997 it received a record $45bn in foreign investment,
one-third of the total for all developing countries.
But now there are signs that that inflow is slowing down,
making it difficult for China to meet its ambitious growth
target of 8%.
Reasons for the slowdown include the inability of other
Asian transnationals, damaged by the crisis, to invest in
China and the increased cost of investment compared to
other Asian countries.
China also has a problem with some of its foreign
borrowings, much of which has been channelled through
regionally-based international trust and investment
companies (ITICs).
One the biggest, Guangdong ITIC, went bankrupt in the
autumn. The government is trying to reign back others
which it fears have borrowed too much for speculative
projects like property development.
No devaluation
The fact that China has been determined not to devalue
its currency has hurt exports, which have been falling
since the summer.
Jing Baisaon of the State Foreign Trade Research
Institute predicted that the final year exports "cannot
exceed last years".
China's exports have been suffering from competition
from other Asian countries offering cheaper goods since
their currencies have been devalued.
The Chinese leadership has been determined to press
ahead with growth and modernisation despite the Asian
crisis.
Despite huge state investments, target growth of 8% will
be difficult to sustain next year, with 6% a more realistic
target.
The real fall-off in exports and foreign investment could
make even that unrealistic - making the problem of
coping with the millions of potentially unemployed in
urban centres more difficult.
Japan
The slow pace of the reform
process in Japan has
burdened the rest of Asia.
Japan is by the far the
largest economy in Asia and
one of the most important
trading partners for other
Asian countries.
Japan's economy did not
face the same external debt
problem of other the Asian
economies, but it had its own
home-grown debt crisis, with $650bn in bad bank debts
from the boom years of the early 1990s.
It has taken much of the year to agree a debt
restructuring plan. By the end of the year two big banks,
Long Term Credit, and Nippon Credit, had been put in
government receivership. But there were few signs that
the rescue plan was helping the economy, despite the
promise of up to $500bn in government aid.
Capital investment continued to plummet, consumer
confidence fell sharply and major companies declared
losses and lay-offs.
As the unprecedented recession - with output down
more than 3% this year - has gathered strength, two
government recovery plans have been announced. Gift
vouchers were promised for poor families to help boost
spending and interest rates were under 1%, but
domestic growth was still expected to be flat in 1999.
Only the prospect of growing exports to the USA would
keep GDP above zero - but that could be threatened by
the end of the US boom.
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