Apocalypse Asia: horror story or hype? It seems like plenty of bad news has been coming from Asia recently, but just how dire is the economic situation? - SARS, terrorism and economic and political instability - Cover Story

Business Asia, May, 2003

SARS has infested the region. North Korea is becoming dangerously unstable. Terrorist cells are everywhere. Investors are staying away in droves. Japan continues to lie stagnant.

For a casual observer, the above sentences may seem to be an apt description of the state Asia finds itself in today. After what appears to be endless streams of negative reports from the region, one could be forgiven for thinking that Asia is facing an apocalyptic crisis.

But is Asia in as dire straits as the headlines make out? Or has hysteria clouded what is an otherwise healthy region?

The answer, it seems, lies somewhere in between. While Asia is facing serious threats, even the most bearish economists predict overall economic growth for the region for the year. With the region's economies still growing, albeit at a slower rate, the situation is clearly not as dire as the financial crisis of the late '90s.

Severe acute respiratory syndrome (SARS) has been receiving plenty of press lately, but most economists concur that if brought under control reasonably quickly, the disease will have a sharp but fleeting impact on Asian growth. Fitch Ratings Agency estimates that SARS may shave one percentage point, or roughly US$30 billion, off Asia's growth this year. The Asian Development Bank also cut its growth forecast for the region for 2003 (to 5.3 per cent from 5.6) due to SARS and the uncertain global economy.

"Prospects for 2003 are clouded by economic weakness in the industrial economies and uncertainties relating to the conflict in Iraq and SARS," the ADB said.

The ADB said China's voracious appetite for imports will continue to drive the region, but Beijing must pursue financial reforms that meet international standards and keep a lid on a growing budget deficit.

The ADB also said the region as a whole should benefit from strong domestic demand, increasingly intertwined trade and supportive policies.

SARS question

China has been hardest hit by the SARS outbreak, with Beijing resembling a ghost town in April as the capital was struck by the virus. If SARS cripples China, then the rest of Asia is at risk, as they have increasingly looked to China as both economic anchor and locomotive.

Analysts are certain, however, that the nation's large pool of cheap labour and its ability to pump prime the economy through state investment in infrastructure projects will help it weather the storm. While SARS is certain to lessen initial growth projections for 2003, the impact has been mainly on the demand side of the economy. Tourism has of course been devastated, but the sector only accounts for five per cent of the economy. So while vacant airports and bored travel agents make for good pictures, the impact of the travel slowdown on the overall economy is mild.

In Beijing, the empty shopping malls, shut theatres and bare streets contrast with the rest of the country, which has largely gone about business as usual. "In most of China, (there is) only limited impact to date on manufacturing, agriculture, construction, transportation, trade and government," Donald Straszheim, head of a consultancy based in the US, said. "Most people are still working, earning and spending."

FDI spreading

As for the other serious question of whether China is starving the rest of Asia when it comes to foreign direct investment (FDI), the SARS outbreak may become a blessing in disguise. Economists are now asking whether Beijing's handling of the outbreak will prompt international companies to spread their risk and divert some China-bound FDI to other Asian countries.

SARS has at the very least underscored the risks to a firm of putting all its eggs into the China basket. China attracted a record US$52.74 billion in FDI last year, larger than what the US received.

UBS Warburg Singapore economist Christa Janjic said some export oriented FDI into China would now be up for grabs.

"A lot of the FDI into China was based on expectations, and I am sure that SARS will lead to an adjustment of those expectations," Janjic said.

The beneficiaries of any FDI diversion would be countries that have coped reasonably well with China's growth, are highly specialised and have relatively low costs. These include the Philippines and Malaysia in the case of electronics, and Bangladesh, India and Vietnam in textiles.

Long-term view

Investors, at any rate, still seem to view Asia as ripe with opportunity, and are taking the long-term view in regards to engagement with the region. A recent Gallup survey of US companies found that 70 per cent of those questioned were expecting higher revenue contributions from Asian markets over the next two years.

The survey covered US companies in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, which account for about US$35 billion in regional investments. The study found that while the outbreak of SARS in particular had disrupted plans, it had only delayed expansion decisions and not cancelled them altogether.

Gary Wigmore, a member of the board of governors of the American Chambers of Commerce in South-East Asia, said SARS was a short-term problem. "It's clearly a bump in the road, but many of the businesses we're all involved with are long-term decisions," he said. Andrina Lever, head of Canada's Lever Enterprises and member of the APEC Business Advisory Council, is confident the region will bounce back strongly.