BANGKOK - When Philippine President Gloria Macapagal-Arroyo announced this
month that multilateral lending agencies were readying a US$10 billion rescue
package for Southeast Asia to cushion the region from the impact of US and
European financial turmoil, many feared the region was bracing for a replay of
its disastrous 1997-98 crisis.
The World Bank and International Monetary Fund (IMF) both deflected Arroyo's
claim, which she later said was made at a moment of "over-excitement". But the
conflicting signals raised market questions about the World Bank and IMF
in-house assessments of the region's economic and financial ability to
cope with the global recession emanating from the West.
Judging by the region's comparatively de-leveraged corporations, cash-rich
governments and rehabilitated banks, those concerns, at least on paper, seem
misplaced. International credit rating agencies have said that the region's
banks are only marginally exposed to the toxic subprime mortgage-backed
securities that have devastated US and European bank balance sheets.
Meanwhile, the region's corporations have massively de-leveraged from their
borrowing binges of the 1990s, while governments have stockpiled record levels
of foreign reserves. Private credit as a percentage of gross domestic product
(GDP) has since 2001 trended downward significantly in all major Southeast
Asian economies, barring Indonesia.
Nonetheless, foreign funds have fled fast and furious from the region's
emerging markets, repatriating cash to cover positions in home markets left
exposed by seized up credit facilities and driving down drastically the
region's share prices and currencies. Driven by foreign selling, the
Indonesian, Thai and the Philippines stock markets are down more than 50%, 46%
and 45% respectively so far this year. Asian stocks are hitting four-year lows
on concerns that emerging markets will not be able to propel the global economy
forward.
Despite the US government's $700 billion bailout package for financial
institutions, and mounting market worries that the US may try to monetize away
its staggering debt load, nearly all regional currencies are down against the
dollar this year. Singapore's trade-geared economy is already in recession, and
Indonesia halted trading on its sold-down stock market for three days this
month in a largely failed interventionist bid to restore confidence.
The negative sentiment has been driven largely by the fact that economic growth
in the region's most open economies, including powerhouses such as Singapore
and Malaysia, where recently over 20% of GDP for both countries was derived
from US-destined exports, are still highly geared to Western demand.
Credit Suisse, an investment bank, estimated last year through regression
analysis that for every 10% drop in US import demand, GDP growth in Singapore
would fall 0.9%, in Malaysia 0.8% and in the Philippines 0.8%. Thailand,
Indonesia and Vietnam, in order of magnitude, would be less exposed, according
to the same analysis. While the region has recently diversified its export
base, including through a surge of shipments to China, much of that growth has
come in intermediate goods that China processes for export to the US and
Europe.
Tracking those trends, UBS, another investment bank, earlier this month revised
down across the board its previous 2009 economic growth forecasts for regional
countries. That included shaving Singapore's GDP growth prediction to 1.5% from
4.8%, Malaysia's to 3% from 4.8%, the Philippines to 3.5% from 4.5%, Thailand's
to 4% from 4.7%, and Indonesia's to 4.7% from 5.6%. The only country Asia-wide
for which UBS predicted growth would pick up pace was India.
As global markets whipsaw between record daily gains and losses, Southeast Asia
has been less insulated from the US-led and European-followed turmoil than many
analysts and investors anticipated. Several economic analysts predicted last
year that the region's comparatively de-leveraged financial sectors and faster
growing economies would "decouple" from an expected slowdown in US economic
growth.
Medium-term hope
From a financial market perspective, the decoupling case scenario clearly
hasn't played out so far. Yet some regional economists and analysts still
believe the recent rapid sell-off of regional stocks and currencies has been
more panic-driven and not reflective of the region's comparatively strong
underlying economic and financial fundamentals.
One economist with a multinational bank predicts that over the medium term,
once extreme risk aversion abates, capital will return "since it is the only
region without the fundamental financial market dislocations seen in the West".
He predicts returns in the region should be higher for years to come,
considering the US will have to go through a "multi-year de-leveraging process"
to clean up its financial mess, a belt-tightening that will "inevitably lead to
lower growth and returns".
To be sure, Asian demand is currently not big enough to support global growth
and the world economy is doomed to slide into recession. Still, the recent
rapid dispersion of economic activity across the globe, including to
fast-growing emerging markets like Southeast Asia, which have become more
prominent as demand centers in their own right, provides the world economy with
a buffer that some economists believe will ultimately allow for a faster global
rebound than would have happened in a crisis of this magnitude had it hit 15
years ago.
In terms of financial vulnerabilities in emerging markets, all of Southeast
Asia looks fairly stable, particularly when compared with debt-binged South
Korea, cash-strapped Pakistan and several highly leveraged Eastern European
countries. Economists says the only countries popping up as potential spots of
weakness are Indonesia, which compared with regional peers has seen a ramping
in private credit and nominal investment, and Vietnam, which is highly reliant
on foreign direct investment inflows that are expected to diminish.
Analysts say Thailand looks the best placed financially, as Thai banks had
limited exposure to the offshore instruments that bundled now troubled US
subprime mortgage loans. Nearly three years of domestic political problems have
weighed against consumer and investor confidence and restrained the fast credit
extension seen in places like South Korea.
However, it's not clear how much longer political turbulence will serve as an
economic advantage. Judging by public debt profiles, most Southeast Asian
governments have the fiscal room to help ease the blow of a global recession
through countercyclical pump-priming. All of the region's major economies are
expected to have whittled down their public debt levels below 45% of GDP by
2009, with Thailand's expected to fall to a regional low of 25%, according to
UBS estimates compiled from central government statistics.
Yet politics are expected in several countries to dampen how fast regional
governments can push through and implement economic growth-enhancing fiscal
spending packages. In Thailand and Malaysia, where political opposition groups
are bidding to topple the incumbent administrations, bureaucratic resistance
and sharp political criticism are expected to hamper both governments' ability
to enact and actually spend supplementary budgets.
Thailand's economic management has been virtually paralyzed by an
anti-government protest group, known as the People's Alliance for Democracy,
which has occupied Government House since August 26. Rising anti-government
sentiment, particularly inside state-owned enterprises, through which fiscal
spending would largely need to be funneled, has also complicated matters. In
recent weeks, a state-owned Thai Airways pilot refused to fly if ruling
coalition politicians were on board and a public telephone company's employees
protested against a prime ministerial visit to its offices.
In Malaysia, labor groups led by the political opposition this week lambasted
government plans to inject $1.4 billion in public funds to shore up the local
bourse, claiming the infusion would disproportionately benefit politically
connected companies. Indonesia, too, could face constraints in spending as the
country enters a highly politicized election season and the incumbent
government runs for re-election on an anti-corruption ticket.
To be sure, ramped up fiscal spending anywhere takes time to trickle down and
have the desired stimulatory economic effect. Over that short term, global
investors are likely to remain risk averse and keep their funds parked at home
as the US and Europe take stock of the extent of their financial woes. But when
the global economy inevitably starts to bounce back, the first signs of
resilience could very well emerge from Southeast Asia, one of the global
economy's few highly de-leveraged regions and one that learned over a decade
ago the hard way the lessons the US and Europe now face.
Shawn W Crispin is Asia Times Online's Southeast Asia Editor. He may be
reached at swcrispin@atimes.com.
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