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Asian economies: The power of purse
strings
By Jonathan Hopfner
Of all the economic dilemmas facing Asian
governments, few now seem as pressing as how to persuade
reluctant consumers to open up their pocketbooks. While
officials in the past tended to direct most of their
energies toward cultivating new export markets, luring
foreign investors to local bourses, or building up
foreign-exchange reserves, an increasing number are
realizing just how significant a contribution domestic
spending can make to overall expansion - a realization
that, in some cases, may have come too late.
In
no two countries is this lesson being more starkly
illustrated than South Korea and Thailand - consumers in
the former still struggling under a mountain of debt and
consumers in the latter just beginning to tighten their
purse strings after a borrowing and buying spree fueled
by a few heady years of stellar growth. How these
scenarios play out in both countries is likely to have
just as much impact on their respective economies as
external factors, such as oil prices and the performance
of major export markets such as China and the United
States. A flurry of policy initiatives in both nations
demonstrate the increasing emphasis their governments
have placed on nurturing domestic spending, but
questions remain as to whether the desired outcomes will
be achieved.
In South Korea, the situation seems
to be one of worrying imbalance. Perhaps weary of the
austerity brought on by the 1997 Asian financial crisis
and the International Monetary Fund bailout that
followed, Koreans responded to historically low interest
rates and credit-card giveaways by racking up a record
US$13 billion (15 trillion won) in debt by the end of
2003. The same year, nearly 4 million of the country's
48 million people were three or more months behind on
their debt payments. Credit-card companies were soon
forced to engage in massive writeoffs of defaulted debt,
leading, in the most highly publicized case, to the near
collapse of LG Card Co, rescued only this January after
its creditors agreed on a 5 trillion won ($4.2 billion)
bailout package.
The results of the consumer
credit bubble have been extremely troublesome, at least
in terms of domestic spending. According to the central
Bank of Korea, the economy grew by just over 3% last
year, with exports responsible for 98.2% of this growth
and domestic consumption a mere 1.8%, compared with
42.7% and 57.3%, respectively, in 2002.
Startling figures, to be sure, but some point
out there are indications that things are about to get
better: healthy exports in the first quarter of this
year pushed gross domestic product (GDP) growth up to
5.3%, which appears to have given lackluster consumer
confidence figures a superficial boost. The National
Statistics Office reported that consumer confidence rose
to a 19-month high of 99.9% in April - anything below
100 indicates that the pessimists outnumber the
optimists.
Unfortunately, it appears that while
they're increasingly hopeful, Koreans aren't ready for
any buying binges just yet. Private consumption is still
falling - by 0.3% in the first quarter. The Ministry of
Commerce also noted this month that combined sales at
retail department stores dropped by 1.7% in April and
are likely to plunge even further over the next month or
two.
The government's response to the situation
has been concerted - interest rates have been kept at
historic lows for nearly a year, taxes on high-end goods
such as cars and golf clubs were cut in March and, in
May, a program was launched to help restore the bad
credit of more than 3 million individual loan
defaulters.
Whether such moves will simply
encourage Koreans to borrow more money and launch the
credit-bubble cycle all over again is open for debate,
but what does seem clear is that the initiatives will do
little to shield consumers from shocks that are looking
increasingly probable. As the world's fourth-largest oil
importer, oil-price rises are particularly damaging for
South Korea, and a US interest-rate hike, coupled with
China's efforts to put the brakes on its breakneck
economic growth, would spell trouble for the South
Korean exporters that are apparently singlehandedly
propelling the country's growth. A month or two of
lackluster figures would wipe out much of the hesitant
optimism that just appears to be taking root among
Korean consumers. Therefore, over the short term, the
South Korean economy appears to be standing on very
shaky legs.
Thai officials, on the other hand, by
all accounts well aware of South Korea's recent
problems, at least have the benefit of a form of
hindsight to work with. The Thai economy, registering
growth of more than 6%, was one of the best performing
in Asia last year, and the stock market doubled in
value. No doubt this prosperity was based partially on a
relatively weak baht, China's appetite for Thai exports,
and foreign investor interest. But a consumer base
encouraged by low interest rates and
government-initiated social-spending programs are also
to thank.
The central Bank of Thailand, however,
is concerned that consumers have been encouraged a bit
too much for its liking. Mortgage loans soared nearly
15% last year, and independent agencies such as the
Thailand Development Research Institute have estimated
that average household debt has reached more than six
times average monthly income, double what it was a
decade ago. The response by Thailand's central bank has
been swifter and certainly harsher than that seen in
South Korea: in January the Bank of Thailand released a
master plan for the financial sector that will force
many small-scale consumer-credit firms to merge with
larger - and more heavily supervised - banks or become
extinct, and in March, it slapped new restrictions on
credit-card issuers, including rules on when and how
they're permitted to market their products to potential
customers.
Such restrictions may not completely
eliminate the risk of a South Korea-style debt bubble,
but they do demonstrate a willingness on the
government's part to take preemptive action - and a good
thing too, since last year, according to the University
of the Thai Chamber of Commerce (UTCC), consumer
spending accounted for nearly half of the country's
impressive GDP growth.
Of course, Thailand also
faces many of South Korea's problems - it too imports
oil and depends heavily on the US and Chinese markets -
as well as a few of its own, such as unrest in the
Muslim-dominated south. The stock market has taken a
beating this year, and the UTCC's most recent survey
shows that consumer confidence dropped in April to
101.6, a six-month low. The same survey, however, also
shows that consumer spending continues to rise.
This relatively positive picture may be in part
to the government's sunny rhetoric. Thai Prime Minister
Thaksin Shinawatra has been careful to point out that
the government will continue to subsidize oil prices and
monitor the prices of basic commodities such as rice to
ensure they don't rise excessively, and he continues to
insist growth will this year reach 7%. For now, at
least, the general public appears prepared to believe
him.
Whether addressed with policies or
pronouncements, the cases of Thailand and South Korea
indicate that governments across Asia would do best to
adopt a two-track approach toward economic growth,
monitoring domestic spending and consumer confidence
with the same diligence they've applied to foreign
exchange and encouraging exports, particularly given the
affluence of the region's swelling middle class.
External crises can arise and pass with astonishing
rapidity, but convincing consumers that it's once again
safe for them to part with their hard-earned - or
borrowed - cash seems a longer, and infinitely more
delicate, task.
Jonathan Hopfner is a
contributing writer to the KWR International Advisor.
(Posted with permission from KWR
International, Inc, a consulting firm specializing
in the delivery of research, communications and advisory
services.)
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