East Asia: Set to ride the latest storm
(SCMP Nov 5)
Is East Asia overdoing the gloom? It would seem that almost
everywhere negative sentiment is high and still rising. The depths of
US economic problems and the unreality of earnings growth expectations
is sinking into the minds of audiences brainwashed for years by salesmen
posing as brokerage house economists. Northeast Asia seems crippled
by the electronics technology bust and by Japan's seemingly endless
banking and deflation crisis.
Southeast Asia, to judge from a global media desperate
to find maniacal Muslims under every palm tree, is in danger of being
rent by sectarian violence and becoming a recruiting ground for el-Qaida's
regiment of martyrs. Even China is beginning to lose some lustre as
officials admit that the global downturn will have some effect on their
(inflated) GDP growth numbers, and the authorities have to suspend badly
needed A shares issues in order to prop up inflated the Shanghai market's
The world is certainly full of more uncertainties than
usual. The evolution of the peculiar war in Afghanistan is particularly
difficult to predict, as is its impact on the depth and duration of
a US recession which itself was predictable well before September 11.
However, it is as well to look on the brighter side for Asia. Firstly,
ignore the talk of a "renewed Asian crisis". Some economies may be going
into recession and everyone has had to downgrade expectations. But the
underlying position is exactly the opposite of that in 1997. Then almost
every country was mired in huge trade deficits, inflation and the impact
of years of excessive domestic monetary growth and foreign borrowing.
Most were vulnerable to fixed exchange rates which - as in Argentina
today - had become unrealistic.
Now the problem is minimal monetary growth, huge trade
surpluses and stagnant prices. To these weaknesses have been added the
export downturn and a sharp contraction in travel and tourism, which
is especially damaging for southeast Asia. But just as exports were
one way out of the earlier crisis so domestic demand is the way out
of this one.
One of the encouraging things of the past few weeks has
been the acknowledgement in Asia that the region can no longer go on
relying on the west, and the US in particular, as its engine of growth.
Many countries have begun to act accordingly stimulating domestic demand
and publicly recognizing the need to develop regional trade. Even at
the political level there has been some re-orientation. Whatever countries
or individuals think about the US response to September 11, there is
a sense the region is more distant from the issues and the outcomes.
Of course it is affected but somehow less involved than Europe, let
alone North America. That much is also evident in the travel statistics.
Air travel has suffered everywhere but less within east Asia than between
it and other regions. The need to stop relying on the US market has
been around for some time, but it has needed the double whammy of tech
collapse and September 11 to drive it home.
Malaysia recently unveiled another budget aiming for
a huge fiscal deficit - 6% of GDP -- to follow a similar one this year.
This may seem foolhardy but Malaysia still has despite the electronics
bust a current account surplus of a monstrous 8% of GDP. Its public
debt is also quite low and savings rate is high. Pump priming is more
than justified. The same applies to Korea, whose economy is proving
much more resilient than might have been expected given its reliance
on exports of glutted industries from semiconductors to cars, and to
Thailand which, like Malaysia, has a useful mix of manufactured and
Let us hear no more lecturing from investment banks,
who mostly have dismal records of return on capital employed, telling
us that these countries have not reformed according to the supposedly
free-market prescriptions of Washington and Wall Street.
Interestingly, the lecturers ignore the market when the
going gets really tough. Note how after September 11 Wall Street and
the Fed got together to flood the market with money and deem short selling
unpatriotic. Sounds like Hongkong in 1998! Note the bailouts for US
airlines whilst the investment banks continue to pillory Korea's bailout
of semiconductor giant Hynix.
All is not perfect in this region. Some of Malaysia's
big corporate debt problems remain but with the demise of former finance
minister Daim Zainuddin the pace of cleaning has speeded up. Korea now
has some good banks. Thai property demand is booming as cheap money
hits the spot. Countries, those with low debts - now, most of Asia -
are clearly in a better position to rise out a global storm than those
deep in hock to others. Even Japan may at last be facing up to realities
- though don't expect quick results. Any sharp fall in the US dollar
will have a hugely positive impact on Asia ex-Japan. Repatriation of
capital could even spark a boom while North America and European markets
continued their bear phase.
A reversal of the 1997/99 pattern is not only possible.
It may sense in a globalised world. Of course, Northeast Asia has its
laggards. Hongkong still has its neck caught in the peg. Taiwan has
a complex of problems headed by the electronics downturn. The gloss
will probably be off the China story next year as foreign investment
falls and the latest wave of investors frets about excess capacity and
non-existent profits. But who can say China is expensive to foreigners
when H shares trade on single digit multiples and the currency, if floated,
seems more likely to go up than down?
In China as in southeast Asia, corporate earnings are
driven more by domestic than export demand, and by borrowing costs.
So there are better prospects than in the west that overall corporate
earnings will not be too badly hit by the global downturn. The political
picture is also much less worrisome than one might expect despite the
efforts of western crusaders to drag the region into the war against
Bin Laden. The Muslim fringe has been making a lot of noise in front
of the US embassy in Jakarta for the benefit of a CNN which seems bereft
of news judgments. But almost anyone can organise a demo of 500 people
in Jakarta, with or without flag burning and exhibitions of "rage".
That is not to say there is not a lot of unease in the
region about the Afghanistan war, but that is an issue which transcends
Islamic countries. As it is, President Megawati Sukarnoputri seems secure
enough, with Muslim groups too divided to bring her down. If the war
drags on for a long time or broadens into attacks on other harbourers
of terrorism, it might be a threat to the domestic balance in Indonesia.
But for the moment the biggest problem for Indonesia is the same as
it was under President Wahid: implementing decisions. Megawati has a
higher quality cabinet than her predecessor, more support in parliament,
less erratic ways of expounding policy. But implementation, whether
of sales of assets or prosecution of Suharto-era crooks is as feeble
as ever.That is discouraging, but Indonesia's condition has not significantly
worsened and it likely to stumble on, presenting opportunities for bold
investors without resolving the problems of the past.
Malaysian political stability appears to have improved
- at least if the position of Dr Mahathir is the litmus test. The Prime
Minister was on a recovery track before September 11, throwing out some
unpopular ministers and policies. Now events have made non-Muslims more
supportive of him than ever - as state elections in Sarawak, where Muslims
are a minority, have showed. Many Malays who had been supporting the
Islamist opposition, Pas, out of frustration with Mahathir's authoritarian
attitudes and UMNO's money politics, have been drifting back to UMNO.
The multi-ethnic Keadilan headed by the wife of jailed former deputy
prime minister Anwar Ibrahim is beset with factionalism.
In the longer run, the rift between the Mahathir and
Anwar camps must be healed if the moderate, modernist centre is to continue
to dominate Malay politics. Likewise, a war which raises Muslim identity
cannot be good for group relations within Malaysia, where non-Muslims
may be more concerned with economic than identity issues. But for now
Mahathir can enjoy domestic and international favour. His former hard
line against alleged Islamic extremists helps with the west as well
as at home. Anti-US rhetoric is strong in the Malay press, but there
is no queue for martyrdom, or even willingness to sacrifice the economy.
At the same time Mahathir has been able to criticize the bombing campaign,
so bolstering his moderate Muslim and third world credentials.
Malaysia has kept control of events. The Philippines
has been less fortunate, seeing its Muslim problem internationalized
on the dubious grounds that the Abu Sayyaf kidnap gang is a serious
component of the el-Qaida network. US advisers have thus arrived to
help end a small war which has been going on since 1972. The bigger
problems in the Philippines are kidnaps of businessmen in Manila, which
deter investment and show up the weakness of government institutions.
President Arroyo is tough and hard-working but she has a huge problem
on her hands and the Abu Sayyaf is a sideshow distracting her from the
bigger national issues. The western tendency to blow up localised problems
with Muslims into some grand conspiracy is certainly a deterrent to
investment in southeast Asia. But the key to the region's medium term
future is not so much in making it attractive to foreign investors,
a place from which to satisfy the consumer wants of the west.
It needs to be more self-reliant, within the overall context
of open markets. East Asia has money and greater political stability
than is often realised. The US is a friend and the supplier of a strategic
umbrella. But its political influence has passed the high water mark
and for its own good it can no longer be an economic crutch for others.
The question: do east Asian countries have the self-confidence to act
accordingly? If so, today should hold few terrors. Asian self-confidence
will help itself and shorten the US recession. It would also help US
foreign policy-makers who need to know what others actually think, not
what they think the US would like to hear. Ends