Feeble Dollar Threatens To Slay Asian Tigers

Global Finance, Jan 2005 by Hawser, Anita

Politically, 2004 was a crucial year in Asia, with new or incumbent regimes elected in countries such as Taiwan, the Philippines, Indonesia, Hong Kong and Malaysia. This year will be the litmus test for these leaders-both the known and unknown quantities. They will show if they can continue to pursue the economic, social and structural reforms that have characterized the region since the 1997 Asian crisis.

Economies across the region are growing, but higher oil prices and a slowing US economy are likely to take their toll in the coming year, with the IMF predicting "continued solid but slowing growth." Regional GDP growth is expected to moderate to 6.5% in 2005.

According to the Asian Development Outlook (ADO) from the Asian Development Bank (ADB), countries such as China, India, Thailand and Vietnam are expected to lead the region's growth. Japan's gradual economic recovery is expected to continue, but a slowing of global demand is expected to cause real GDP growth to decline to 1.6% in 2005 compared with 3.4% in 2004, according to the Mitsubishi Research Institute.

If the dollar continues its slide, however, all bets are off. John Hewson, member of the advisory council, ABN AMRO Bank, Australia, says if the US dollar plummets, it could lead to an exchange rate crisis in the region. "Asia is sitting on a powder keg in terms of exchange rates," he says. "The [Chinese] yuan is way undervalued. As soon as it changes, the relativities of other currencies will need to change." Japan recently threatened to sell off its multi-billion dollar US holdings unless the Bush administration intervened to counteract the declining dollar. Overheating of the Chinese economy could also have a negative impact on the growth of intraregional trade, the ADB says in its ADO.

Hewson also highlighted the potential for heightened political risk across the region: "There are a range of new leaders in Asia, and in a policy sense, they are still untested," he says. Despite efforts to restructure balance sheets and institute wide-ranging market reforms, he believes that Asian banking and financial systems are still unsophisticated by Western standards and that some countries had not addressed the issue of NPLs and bad debts.

Strong Growth in Bond Issuance

One area that has undergone significant reform since the 1997 crisis is local currency government bond markets, the development of which has been fueled by market, legal and regulatory reforms in the ASEAN 3 countries. According to the ADBs Asia Bond Monitor, East Asian local currency bonds outstanding increased from $356 billion in 1997 to $1.2 trillion in 2003. Most of this growth has come from government bonds, which were used to finance bank recapitalization and fiscal stimulus.

However, Juzhong Zhuang, a principal economist with the ADB, expects to see in the coming year more diverse sources of growth beyond the government sector as asset-backed securities gain popularity, governments privatize state-owned companies, and contractual savings institutions such as pension funds develop and demand more diversified local currency debt securities. "Corporate bond markets are expected to grow more rapidly as government reforms and policies help to reduce impediments and create an environment conducive to development," he says.

Free trade agreements (FTAs) between the ASEAN group of countries are also expected to be an ongoing theme in 2005. Based on a proposal first mooted by Singapore, countries have begun signing FTAs on a bilateral basis with countries that did not want to participate initially. "Using this kind of approach is a smart way of looking at it," says Jimmy Yap, Asia Pacific head, Deutsche Bank Global Cash Management for Corporates. "Those countries that aren't in initially are under pressure to eventually join, and I am fairly optimistic that there will be some form of regional harmonization over time." Anita Hawser