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| December 16, 2002 | Monday | Shawwal 11, 1423 |
World economies report
An economy that needed a $58 billion bail-out from the IMF to prevent it from the collapse in 1997, has been transformed into one of Asia’s strongest with forecast growth of 6 per cent this year. Aggressive restructuring of its financial and corporate sectors by tackling bad loans and closing rotten companies and financial institutions has been hailed as an example to Japan and other debt-laden Asian economies that have failed to take similar steps. Ballooning household debt and continued weakness in part of the corporate sector are fuelling fears that more trouble could be in store for the economy if the US suffers a renewed slowdown or if war in Iraq sends oil prices and interest rates soaring.
Having avoided the recession that gripped many Asian countries last year, South Korea has again been among the region’s best-performing economies this year, registering 6.1 per cent growth in first-half gross domestic product. Domestic demand has been the engine of growth, with construction and service industries, such as retailing, expanding rapidly. However, after a sluggish start to the year, exports have begun contributing to the upturn. With the annual GDP growth of 4.5 per cent since 1996, South Korea’s economic expansion in recent years is surpassed in Asia only by China and Vietnam. Viewed in this context, the 1997 crisis and subsequent recession appears little more than a blip in the country’s 50-year ascent from war and poverty to the nearly full advanced economy of today. Confidence in South Korea’s future is strengthened by the aggressive measures taken to remove structural weaknesses that caused the 1997.
The foreign exchange reserves, which ran dry in 1997, forcing Seoul to seek a $58 billion bail-out from the IMF, have been rebuilt to $116 billion and the IMF loan has been repaid. South Korea’s restructuring of its financial and corporate sectors has been more ruthless than any of the other Asian “tiger” economies that crumpled in 1997. More than one-quarter of all financial institutions and more than half of the 30 biggest conglomerates have closed.
The surviving banks have returned to profit and cut their ratio of non-performing loans from 13 per cent in 1998 to 2.4 per cent now. Debt to equity ratios in the corporate sector have fallen to their lowest level since the early 1970s. All three main global credit ratings companies - Moody’s Standard & Poor’s and Fitch - have rewarded South Korea’s reforms by upgrading the country’s sovereign credit rating to “A” - indicating “high” credit quality. While South Korea’s progress has been dramatic, the country’s economic weaknesses have not all been eliminated. Standards of corporate governance in companies and risk analysis in financial institutions remains well below best global standards. The government’s ownership of a third of the banking sector - a legacy of the Won156,000 billion of public funds used to keep it afloat in 1998 - continues to impede the efficient allocation of capital. And one-third of all manufacturing companies still do not generate enough operating income to pay the interest charges on their debt.
Malaysia has staged a remarkable recovery from the Asian financial crisis of 1997. At that time, the country’s leadership was heavily criticized for rejecting the advice of the IMF by imposing selective capital controls and defying the new policy orthodoxy by fixing the ringgit to the US dollar at a rate of 3.8:1.
Although the country’s economy contracted sharply by 7.4 per cent in 1998, it rebounded swiftly, expanding by 8.3 per cent in 2000 as confidence was restored. The drop in the US demand for information technology goods last year slowed the recovery. But the GDP is still expected to expand by 5 per cent this year and 6.7 per cent in 2003, restoring Malaysia’s reputation as one of the fastest growing economies in the world.
Economy was always more robust than those of most of its Asian peers before the crisis. Like all of Asia’s other one time tigers, Malaysia faces an array of challenges as it is forced to redesign its economy to prosper in the 21st-century jungle. It is clear that the old economic model of attracting strategic investors to Malaysia to build export oriented manufacturing plants is not going to work for long.
Malaysia’s labour rates are low considerable higher than those of other Asian countries, most notable China. For the moment, it also lacks the critical mass of educated workers to migrate in scale into higher value-added sectors, such as high technology and biotechnology. Between 1997 and 2001, Malaysia attracted $20.3 billion of foreign direct investment, compared with $215.9 billion in China, which is not bad on a per capita basis. But the cracks are already beginning to show: in the first quarter of 2002 the central bank reported a net outflow of foreign direct investment of M$300 million as a result of the repayment of loans and the withdrawal of equity capital.
In the 10 years before the crisis, Mahathir’s government turned Malaysia into a highly industrialized economy, recording growth rates of 8 per cent a year. But Malaysia will increasingly have to focus on developing its service economy. For the past few years, the government has been running sizeable budget deficits - expected to be about 5.1 per cent of the GDP this year - and its total external debt has risen to $45 billion. But with domestic savings rates in excess of 35 per cent, Malaysia’s consumers have plenty of scope to splash out on new cars and houses. Banks’ consumer lending has risen by 8 per cent over the past year, while corporate lending has remained flat.
Based largely on data from July and August, which is still subject to revision, the ministry of Trade and Industry reported the economy expanded by 3.7 per cent year on year in the third quarter. That was significantly lower than the private sector’s consensus forecast of 6.5 per cent. And the GDP actually contracted an annualized 10.3 per cent when compared with the previous quarter.
Concerns over a double-dip recession in the United States, a likely war against Iraq, terrorist bombings in Indonesia and lingering worries about the impact of a ten-day lockout at the US West Coast ports continues to grow. The country’s recovery remains “tentative. For the time being the government is sticking to its official full-year GDP growth target of 3 to 4 per cent. Non-oil domestic exports, a key barometer of Singapore’s economic health with electronics the major component, came in slightly weaker than expected. While non-oil domestic exports rose 16.9 per cent year on year in September, the consensus forecast had been that they would come in at about 20 per cent. On seasonally adjusted terms, non-oil domestic exports actually contracted on a month-on-month basis. As in recent months, a low base in the same month last year inflated the over-year-ago growth. Seasonally adjusted, non-oil domestic exports fell 1 per cent month on month, following a decline of 1.7 per cent month on month in August. There is little to suggest that a meaningful rebound is in the works.
Equally sobering is the country’s unemployment rate, which remains at historical highs. Last month the ministry of manpower said that the seasonally adjusted unemployment rate likely jumped to 5.5 per cent in the second half of the year. The unemployment rate had already hit a 15-year high when it topped 4.5 per cent in the first quarter. Economists are worried that the outlook for the fourth quarter doesn’t look promising either.
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