Asia Times: Asian Crisis


	April 30, 2002	atimes.com

Asian Crisis

Ravaged Asian nations playing the fooling game
By Marwaan Macan-Markar

BANGKOK - Unless East Asian countries step up efforts to restore the health of their financial systems, they will find it increasingly difficult to stabilize their economies, recover the growth levels achieved during boom times and sustain that growth, regional experts here say.

So far, only South Korea has enacted the required levels of change in its financial system since the 1997 Asian economic crisis. This has restored confidence in the country's banking sector to lend for new economic activity, giving Seoul the reputation of having undertaken the deepest structural reforms in the region. In 1999, the ratio of non-performing loans (NPLs) to total loans in the financial sector in South Korea stood at 11.3 percent. This fell to 8.1 percent in December 2000 and to 6 percent in September 2001. In a sign of returning economic health, the South Korean economy is projected to reach 4.8 percent growth this year.

"This is a big issue in Asia. Korea took a bold measure to clean up thenon-performing loans," Kim Hak-su, head of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), said at a press conference on Friday. "Already there is a sign that Korea is benefiting from the economic recovery in the United States," he added, referring to a rebound that in the US economy that began in late 2001 and was confirmed in 5.8 percent first-quarter growth figures reported on Friday.

In short, how the Asian economies most affected by the 1997 financial meltdown - South Korea, Indonesia, Thailand, Malaysia and the Philippines - handle financial reforms and the overhang of bad loans resulting from it, is paramount to determining their full recovery from the crisis. ESCAP officials noted that Malaysia is making some progress in its financial sector reforms. Thailand is much slower and Indonesia has still a long distance to travel - these two economies had the biggest ratio of NPLs in 1998, or nearly half of financial sector loans.

ESCAP's annual report on the economic and social trends in Asia-Pacific countries, released on Friday, also takes up the question of the region's fragile financial sector, five years after the financial flu caused contractions in economic growth of up to 13 percent.

According to the 246-page "Economic and Social Survey of Asia and the Pacific 2002", the region gains from "orderly debt-workout mechanisms" needed to repair the structural flaws that helped make economies more vulnerable to financial and economic shocks. There is no escaping banking reform in East Asia, asserts Raj Kumar, head of ESCAP's development research and policy analysis division. "The region's banks have so much losses on their books that they are very nervous to lend. And no lending means no sound development."

According to the Asian Development Bank (ADB), which released its own projections this month, "nearly five years after the start of the financial crisis, the five most crisis-affected economies show uneven progress in resolving the problem of high levels of NPLs in the finance sector".

Other than the Philippines, the four other countries formed asset management firms to buy distressed loans from financial institutions with public or publicly guaranteed funds, in order to strengthen financial institutions and get them to lend again. Many banks had become wary after the 1997 crisis, averse to risks. Most of the losses sustained by the banks occurred during the 1997 economic meltdown in East Asia, when the value of currencies in the region crashed and triggered a massive withdrawal of capital that led to economic and social problems. Overnight, banks were saddled with million dollars in loans - many of them used to fund non-productive and speculative sectors - that the borrowers could not pay back.

Even today, the countries most affected by the crisis still have not put it behind them, says Kumar. "They are still grappling with non-performing loans. The crisis has not been resolved."

ADB figures show that NPLs have been falling in the five countries hit most by the 1997 crisis, dropping from 49.2 percent in December 1998 to 14.7 percent in September 2001 for Indonesia, 13.6 percent to 11.7 percent in Malaysia and from 45 percent to 12.9 percent in Thailand. But the asset-management firms created to buy the bad loans and dispose of them have not always done well. While South Korea's AMC has disposed of more than half of purchased NPLs and Malaysia's 85.2 percent, Indonesia has sold less than 7 percent of them.

Kim and Kumar share the view that East Asian governments cannot delude themselves into believing that their countries are making progress by only pointing to economic growth indicators that have picked up in the past few years. To draw further attention to this - that the state of the financial sector has to be factored in an honest appraisal of a country's growth potential - ESCAP plans to bring out a publication in June on banking and financial reforms.

For instance, Thai financial analyst Supavud Saicheua says the prospect of Thailand's economy growing faster in the coming year is dim given the slow-paced reform of the financial system. "Thailand is sacrificing growth as a result of the decision to spread the much-needed financial reform over many years," says Supavud. "This makes it difficult for banks to raise capital and that translates to the system not having enough to lend for economic activity." The Thai Asset Management Co (TAMC), set up only last year, said that as of early January it had disposed of some 6 percent of NPL assets.

But although high levels of NPLs hinder long-term growth, ESCAP's flagship report says that the region's developing economies are not as vulnerable amid the prevailing global economic slowdown as they were in 1997. The report credits this to "improved external current account positions, built-up foreign exchange reserves and reduced short-term indebtedness". In fact, the report asserts that there is hardly a country in the region displaying signs of experiencing the crisis that savaged Argentina, whose banking system collapsed recently. "None of the countries in the Asian and Pacific region exhibits the combination of factors that led to the Argentine crisis," it says.

And to avoid such a possibility in the future, countries have to ensure that they sound exchange rate policies and remain economically competitive, Kumar explains.

The ESCAP report forecasts that Southeast Asian economies will grow by 3.2 percent this year, as opposed to 1.8 percent last year and 6.5 percent in 2000. East and Northeast Asia is expected to achieve 4.3 percent growth this year, up from 3.2 percent last year and 8 percent in 2000.

(Inter Press Service)