Rough road ahead - International Pages - Statistical Data Included

Business Asia, Dec, 2000 by Roger Balch

For years now, observers have been waiting for Asia to return to its pre-1997 levels of economic growth. Sadly, they may have to wait a while longer.

THE ASIAN economy, excluding Japan, will grow by 5.7 per cent in 2001, (and Japan by 1.5 per cent) according to investment bank Goldman Sachs, but this is one per cent lower than in 2000 and not enough to eradicate the aftermath of the 1997 Asian financial crisis.

Although the Chinese economy is expected to expand by at least seven per cent in 2001 (and could exceed eight per cent), this vigorous performance by the region's second-most important economy is offset by Japan's sluggishness and the misfiring of other countries in the region.

Not surprisingly, 2000 ended with a widespread downgrading of growth forecasts for virtually the entire Asia Pacific.

In 2001, the once mighty Japanese economy will rack up 10 years of stagnation. Massive pump priming by the Government has failed to revive the economy. On the contrary, Government spending programs have only succeeded in ramping up national debt, which now stands at more than US $5 trillion ($9.3 trillion) - some 110 per cent of GDP and the highest amongst industrialised nations.

In response to this, a wary Japanese public are tightening their purse strings, well aware that should the government wish to reduce its debt overhang, it will have to increase taxes. Consumers have not forgotten the disastrous hike in the national consumption tax a few years ago.

Japan's economic growth is expected to fall from two per cent in 2000 to around 1.5 per cent in 2001, hardly the stuff of which Asian economic dreams are made. And figures showing that October's industrial output grew at a sharply lower than expected rate indicate the Japanese economy is already showing signs of a slowdown.

For China, after three years of deflation and declining growth, the outlook is now rosier. It is possible that GDP growth for 2000 could be higher than eight per cent for the first time since 1997. Contracted foreign direct investment to the end of October 2000 is 37 per cent higher than the same period for 1999. Exports too are surging, with a year-on-year increase of 32 per cent.

However, the Chinese recovery could be derailed by two factors. The first is the continuing economic malaise in the rural regions, which are home to 66 per cent of the population. The second is the reliance upon the government rather than the private sector for domestic investment. On top of all this, there is expected to be a weakening of demand in the US, its key export market. And Hong Kong's growth is forecast by the IMF to fall from eight per cent in 2000 to 4.8 per cent in 2001.

Elsewhere, the IMF recently downgraded its 2000 economic growth forecast for the four "little dragons" of South Korea, Taiwan, Hong Kong, and Singapore, from 6.5 per cent to 6.2 per cent. Growth for 2001 is forecast to be six per cent.

South Korea's problems appear to be the most pressing. Its 1998 recession was exacerbated by the debt-ridden chaebols (the all-powerful family-run business conglomerates). Three years later, they have still not mended their ways and are struggling to eliminate massive debts whilst their owners continue to treat shareholders with disdain. The net result is that the chaebols' stranglehold on the South Korean economy continues to undermine investors' confidence, a confidence further threatened by signs of economic slowdown and financial instability.

Although South Korea's economy motors along on the back of its exports (the key economic driver in pulling it out of the 1998 recession), economic growth of 9.5 per cent in 2000 will slow to 6.5 per cent in 2001, said the IMF. There is already evidence of this downturn, with the won depreciating and the stock market weak.

In Taiwan, although its economy will continue to grow at a healthy rate (6.5 per cent in 2000 according to the IMF, and 6 per cent in 2001) there are clouds on the horizon.

It is the deteriorating banking system that is the crux of the problem. The central bank announced in November that non-performing loans had increased from 5.4 per cent of outstanding loans to 10 per cent. Although the government is debating whether to allow foreign banks to buy control of domestic banks, it has scrapped plans for a new state agency to buy bad loans from lenders and on-sell them to investors.

Export growth is forecast to decline by 66 per cent in 2001, to eight per cent, due mainly to slowing world demand for computer chips and computer-related products. With the chip manufacturers the most reliable recipients of bank loans until now, this could further impact the banking sector.

The Taiwan dollar is now trading at its lowest level in 19 months, having slumped 4.8 per cent in the six weeks to end of November alone. Some analysts believe the government is seeking a lower Taiwan dollar to boost exports, but should this be so it could lead to a round of competitive devaluations by South Korea and South East Asian countries Malaysia, Indonesia and Thailand.