Anthony Browne: SHARE WORLD
As the financial whirlwind that started in Thailand 15 months ago engulfs the rest of the world, it is difficult not to be pessimistic. A quarter of the world is in recession, the United States and the United Kingdom may well follow, Brazil and China are struggling, while the Indonesian economy has shrunk by 16%in a year.
In its latest circular to clients, finance house JP Morgan intones: “Economic activity has weakened to the point where it is fair to say that the global economy, for all practical purposes, is in recession.”
But there are a few glimmers of hope. In its World Economic Report, the International Monetary Fund (IMF)highlighted the positive sides to the region where the crisis first started, South-East Asia. “Despite the setbacks, sight should not be lost of a number of significant achievements since the beginning of the year.”
The IMF is not alone. Even JP Morgan has shoehorned evidence of recovery in between its declarations that the world is coming to an end. Of Asia it comments: “Several factors are promoting a return to moderate growth.”
Dresdner Kleinwort Benson, long pessimistic about Asia, has also changed its tune. “We can see some very clear light at the end of the tunnel,” said its global strategist Albert Edwards. “The US and Europe will continue to fall apart, but Asia has been through that already.”
One area for hope in Asia (and gloom in Western economies) is exports. Currency devaluations mean Asia is now the low-cost region of the world. Thus most countries in the region have managed to sustain their export levels.
Neil Williams, head of emerging markets at Paine Webber, said: “The main reason for hope is exports, in particular in Korea, one of the bright lights in East Asia. Exports are the engine of growth.”
With imports slowing because of a collapse in domestic demand, most countries have rapidly turned their balance of payments deficits into surpluses. The IMF forecasts that this year Indonesia, Korea, Malaysia, the Philippines and Thailand will have surpluses of $57-billion, compared with a deficit of $54-billion in 1996.
Paying their way in the world has helped to stabilise their currencies. The Korean won, Thai bhat and Malaysian ringgit may all have taken a precipitous fall last year, but it turned into a bungee jump and they have now come to rest some way above their low points. The Indonesian rupiah is still devalued, but has strengthened in the past few months, making the country’s foreign currency debts less horrendous than they seemed.
With relative currency stability, South- East Asian countries have been able to embark on an extended series of interest rate cuts. Most had put rates up to grotesque levels to stem the slide of their currencies. Rates have dropped in Korea from 35% to 8% and in Thailand from nearly 30% to 10%.
The appreciation of the Japanese yen and the cut in US interest rates in the past week has also helped – particularly for companies with high borrowings – according to Williams.
Peter Warburton of Flemings Securities believes that access to credit will improve greatly in Asia over the coming year, helping to revitalise export industries.
JP Morgan’s World Financial Markets sums up: “Economic policy in the region is turning decisively stimulative. With interest rates falling and current account surpluses reducing its reliance on external finance, the region also has considerable scope to expand fiscal policy.”
But there are still sceptics. Graham Neilson, Asia economist at Paribas, said: “It’s a statistical recovery only. There’s a very important distinction to be made between perceived signs of recovery and actual recovery. The net wealth contraction is worse than in the US in 1929 – it’s not a recession but a full-blown depression, which makes recovery very difficult. The social fabric and political cohesion will be under pressure for some time.”
Graham Richardson, regional director for Asia at the Economist Intelligence Unit, also believes the present respite could prove short-lived. “The stabilisation of exchange rates could be temporary. The small reduction in interest rates will not make much difference to people who don’t have access to credit,” he said.
Richardson sat down with his researchers a few days ago to discuss signs of recovery. “Basically, there aren’t any yet,” he said.