Yearender: Asian Economy: Beneath Strong Recovery Lies Weakness

The year 2000 has seen a surprisingly strong economic recovery in Asia, but behind the robust growth looms weakness that needs to be urgently addressed to secure a sustained steady expansion.

Since the beginning of the year, the regional economy, driven by strong export growth and revived domestic demand, has recovered fast. Flexible exchange rates, in most economies, low short-term debt levels, and strong reserve positions have helped the region achieve greater macroeconomic stability.

The best performer is Hong Kong, China, which posted GDP (gross domestic product) growth of 11.7 percent in the first nine months, followed by South Korea with 10.5 percent, Singapore with 9.5 percent, and Malaysia with 9.3 percent.

Asia's economic performance was so impressive that forecasters repeatedly revised upwards their forecasts for the region for the whole year. In November, the Asian Development Bank (ADB) raised its forecast for Asia to 7 percent from a previously upgraded projection of 6.9 percent.

However, the strong growth has exposed one major vulnerability of Asia -- heavy dependence on exports, dominated by electronics products.

So far, the United States is the single largest market for exports from principal economies in Asia and accounts for half of the global expenditure on information technology (IT).

On average, about one-fourth of the total exports of Asia's major economies go to the United States, a large portion of which are IT and electronics related products. In Malaysia, the Philippines and Singapore, the proportion of electronics exports in total exports go as high as about 60 percent, data from the ADB show.

Although intraregional trade rose from 43.6 percent in 1998 to 45 percent in 1999 and could have increased further in 2000, some analysts say that part of it goes into supply chains that are ultimately feeding demand from America and Europe.

As a result, analysts say, a slowdown in the U.S. economy, which has already begun, and an expected diminish of demand for electronics products on the world market will undoubtedly hurt the Asian economy.

"Given the considerable weight of electronics in the region's exports and manufacturing base, if uncompensated by growth in demand elsewhere, there could be adverse implications for the electronic industry and a new round of corporate and financial sector difficulties," the United Nations Economic and Social Commission for Asia and the Pacific warned recently.

It is better to be reminded that exports, as an "engine" of the Asian economy for years, started to fall in 1996 when the world electronics products market saw a cyclical downturn, and caused a sharp rise in current account deficits in Southeast Asia, which contributed to the outbreak of the regional financial crisis in 1997.

Another major weak spot is the slow pace of bank and corporate restructuring in the countries hardest hit by the financial crisis. Although progress has been made in cleaning up banks and restructuring corporate debt in Indonesia, Malaysia, the Philippines, South Korea, and Thailand, restructuring still has a long way to go.

In most countries, the non-performing loan (NPL) ratios are falling, ranging from 10 percent to 30 percent. But banks are still plagued by inadequate capitalization and a large share of NPLs are reluctant to lend. Credit growth remains weak in general.

Although a substantial proportion of corporate debt that was referred for voluntary resolution in Malaysia, South Korea and Thailand has been restructured, many firms remain heavily indebted and are unable to service their debt obligations. It was reported that debt still outstrips equity by a two-to-one margin on the balance sheets of many large South Korean conglomerates.

Moreover, reforms and structuring have met resistance from powerful vested interests in some countries.

The slow pace of bank and corporate restructuring, together with volatility in financial markets, and, in some countries, political uncertainties and perceived political risks, dampened investor expectations and eroded confidence.

In the first nine months of this year, the Philippines saw a net foreign portfolio outflow of 338 million US dollars. Foreign investors have reportedly sold off a net 700 million dollars in Thai stocks this year.

The International Monetary Fund forecast in September that net direct foreign investments to the five crisis countries this year would be only 9.1 billion dollars, much less than the 13.1 billion dollars in the previous year.

On the economic performance of Asia this year, many economists share the view that the underlying weaknesses need to be urgently addressed and reforms and restructuring completed if Asia is to sustain steady growth and reduce vulnerability to external shocks.

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