Asian Economy Faces Slower-Than-Expected Rebound

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Last updated at: (Beijing Time) Sunday, December 16, 2001

Asian Economy Faces Slower-Than-Expected Rebound

After a surprisingly strong recovery in 1999 and 2000 from the 1997 financial crisis, has now come a slowdown in developing Asia's economy.

After a surprisingly strong recovery in 1999 and 2000 from the 1997 financial crisis, has now come a slowdown in developing Asia's economy.

The sharper-than-expected downturn, which came amidst a deteriorating global economy, has been worsened by the September 11 terrorist attacks on the United States and the subsequent U.S.-led military operations in Afghanistan.

The synchronized slowdown in the three major world economies ofthe United States, Japan and Europe has been brutal to developing Asia as they absorb nearly 50 percent of total exports from the region, where most economies rely heavily on exports, particularlyon the exports of electronics, for growth.

Asia is especially exposed to the U.S. market, which last year accounted for about 25 percent of the region's aggregate exports. At the same time, U.S. demand for tech products contributed to approximately 40 percent of the region's GDP growth, Morgan Stanlyestimates.

In the first three quarters of this year, exports of the five countries hit hardest by the slowdown -- Indonesia, Malaysia, the Philippines, South Korea and Thailand -- declined by an average 8.8 percent.

The economies of Singapore and Taiwan have already been pushed into recession after contracting in the second and third quarters of the year. Hong Kong and Malaysia are teetering on the edge of recession after their economies shrank 0.3 percent and 1.3 percentin the third quarter, respectively.

While the slowdown has cut across all sectors, it is most evident in manufacturing. South Korea's manufacturing sector grew by only 1.5 percent in the first three quarters, while those of Malaysia and Singapore contracted by 4 percent and 9 percent, respectively.

In 2001, many regional stock markets have mirrored developmentsin the United States, rallying in March and April, and generally falling thereafter, with particularly steep losses amid heightenedvolatility since mid-September.

Poor market performance has led to portfolio investment outflows. Direct investment is expected to suffer as company earnings fall, stock prices slide and risk rises. Following the September 11 attacks, the Institute of International Finance scaled back its forecast for direct equity investment into Asia next year to 48.7 billion U.S. dollars from the 58.5 billion.

In the face of slowing growth, firms in many economies have been compelled to lay off labor. The pace of financial and corporate reforms and poverty reduction have also slowed in some countries, providing yet another setback to the region.

The Asian Development Bank (ADB) forecast in November that the average GDP growth of developing Asia will fall to 3.4 percent in 2001 from 7 percent in 2000.

In the Asian gloom, China and India are the only bright spots. The ADB expected the two countries will grow by 7.3 percent and 5.6 percent, respectively, this year because of strong domestic demand.

The emerging consensus is that developing Asia won't hit bottomuntil the middle of next year when a moderate pickup in the globaleconomy is expected and then rebound to 4.5 percent.

In response to the economic slowdown, particularly after the September 11 attacks, many countries in the region have introducedstimulus measures, including spending packages and tax and interest rate cuts.

Coming so soon after the 1997 crisis, both the sharper-than-expected slowdown this year and the slower-than-expected rebound next year raise concerns about the robustness of the region's recovery from the crisis. There have even been fears that the region may experience a second round of the Asian crisis.

The current slowdown provides another compelling reason for Asian economies to intensify their reform efforts and pay more attention to nurturing domestic markets.

Many economists have warned countries in the region against resorting to fiscal stimulus measures without pursuing simultaneous structural reforms, as this will ultimately increase public debt, which will in turn constrain further expansionary measures.

At present, the public debt ratio to GDP is running at about 90percent in Indonesia, about 70 percent in the Philippines and over50 percent in Thailand, leaving the governments little room to maneuver.

Governments also need political will to push banks to clean up the bad debts that continue to clog the financial system, some argued. Unless banks are able to extend credit, the small and medium enterprises that must be the backbone of domestic economiescan't grow, they said.

The aggregate nonperforming loan (NPL) ratios of the banking sector, including those still held by asset management companies, continue to be much higher than those in bank balance sheets alone.

Therefore, any easing up on reforms by Asian countries would sow the seeds of future trouble and limit them to benefit from theeventual recovery, warned Homi Kharas, the World Bank's chief economist for East Asia and the Pacific.

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