This is the latest installment of the regional round-up and it has been a while. However, there has not been much groundbreaking news related to the financial crisis to report, with a few exceptions (more to come later).
Overall, the East Asia region continues to weather the economic storm relatively well compared to most regions in the world. The economic forecasts for Asia are improving rapidly and the consensus view now seems to be that Asia will lead the global recovery this year and into 2010. The World Bank’s own analysis, as well as that of the OECD, IMF, Asian Development Bank and others have raised their economic growth forecasts. The Bank’s forecast is that GDP growth in Asia will slip to 5% in 2009 from 8% in 2008. The regional rate of growth without China is negative 0.2% for 2009. The growth forecasts for China are now gravitating upwards to the magic number of 8% - our latest economic update from June indicated a 7.2% growth rate for 2009, up from 6.5% only three months ago. Overall, the prediction is that 2010 will show a more robust recovery in the region. Substantial fiscal and monetary stimulus efforts by many of the larger countries in the region, particularly China, appear to be the main drivers of this recovery, with domestic demand and consumption largely holding up. Although the pace of fiscal and monetary actions has slowed recently, some countries are still taking new policy actions as witnessed by the July 9 reduction on the benchmark interest rate by the Philippine central bank – the sixth such cut in seven months.
However, exports, imports, and capital inflows continue to slide across the region. The average decline in exports in the major emerging markets (i.e., China, Indonesia, Malaysia, Philippines, Thailand, Vietnam) peaked at negative 26% (on a year-on-year, or yoy, basis) in April and has since slowed slightly. In terms of imports, the decline is much more substantial and consistent (about 34%), reflecting weak domestic demand in some countries and a continued slowdown in industrial production. Capital inflows have also dropped off significantly to emerging Asia, but we will cover this more in the next blog post.
The emerging Asia financial markets have been highly volatile and reacting largely to indicators or recovery or lack thereof in the US and Europe. As of July 8, the major emerging market stock indices are up by 32% this year, led by Indonesia (up 61%), Thailand (35%) and China (30%). One of the big stories in the region in terms of stock markets is that in June, the regulatory authorities in China allowed for the first IPO since September 2008. A number of companies in China announced intentions to issue shares domestically this year, including a $6.2 billion offer by the largest residential property developer, China Construction, in August. Beyond the equity markets, a number of countries are planning to issue sovereign debt internationally in the coming months, including the Philippines, Indonesia, and Vietnam.
As we have discussed for about a year now on this blog, the main concern with Asian financial systems continues to be the potential impact of the overall economic deterioration and in corporate profits on the balance sheets of banks. For example, in China, profits in heavy industry fell 43% and in light industry by 10% (yoy basis) by end-February. Some of the ratings agencies and analysts have finally caught up to the potential for problems when banks are massively scaling up lending (30% loan growth in May alone and $850 billion in new loans by the end of May) in an environment of falling corporate profits and general economic decline, but better late than never! As a May 2009 Fitch Ratings report on Chinese Banks noted, “Ordinarily falling corporate earnings are met with tightened lending, but in China precisely the reverse is evident.” An early warning signal of potential problem are that the foreign banks in China have reported increased non-performing loans in the first quarter of the year and the domestic banks have sharply increased their provisions against losses. The banking regulator recently warned that the rapid credit growth threatened financial stability. Similar warning signs have appeared in Korea, the Philippines and Thailand (although unlike the case of China, these countries have not witnessed rapid credit growth this year). Generally, bank performance has been relatively steady through the crisis in the region with some declines in profitability and an uptick in losses. However, as I have mentioned previously, regulatory forbearance has been reported in many countries and the degree to which loans have been restructured is unclear at this stage. Thus, when, where, and how the problems of corporate customers will translate to balance sheet problems in the banks is still not certain.
Despite the relatively not-so-bad economic news around Asia, there are two countries that have been severely and quickly impacted by the current global crisis in East Asia – Mongolia and Cambodia.
Cambodia’s economic growth has been dependent in large measure on tourism and exports of garments. However, exports of garments in the second quarter of the year were 27% below those a year before and tourist arrivals 2% below. The economy is expected to contract by 1% in 2009 and its possible recovery in 2010 is conditional on the external environment. Corporate stress is revealing itself in these key industries, with 15% of garment factors closing in the first half of 2009 and the creation of new businesses falling by 50% (as measured by the number of firms registered at the Ministry of Commerce). Credit to private sector, which was growing at double digit rates, has essentially stopped growing since October 2008. Banks reportedly have low overall NPL levels, but it is highly likely that the corporate sector problems will translate into a much higher level of NPLs in the coming year.
Mongolia is a much more extreme case. Mongolia is suffering from a commodity-fueled boom and bust cycle. The economy is dependent on the mining sector – copper and gold make up 56% of total exports and the revenue from the sector fueled domestic investment in real estate, industry, and other areas (and also fueled high inflation). According to our latest economic report (pdf), when global prices for copper and gold fell, the value of Mongolia’s copper exports fell by 59% and gold by 30% by the end of May (yoy basis). The ripple effects of this slowdown in the economy caused a drop of 64% in corporate income by the first quarter of this year. Due to the poor corporate performance, bank lending contracted massively starting in mid-2008 (new loan issuance fell by 57% in the first quarter of 2009) and banks have instead turned to buying central bank bills. This is exacerbating the problems in the corporate sector as firms cannot get credit to maintain operations in some cases. NPLs rose quickly in 2009, up to 11.6% of total loans by end-May (up from 5.3% in November 2008). In addition, loans with principles in arrears also rose to 6.5% of total loans, indicating that more NPLs will be appearing soon in the banking system. With such rapid deterioration in asset quality, it seems that many banks may not have sufficient capital to absorb the losses and remain solvent. Recognizing these potential problems, the Government is taking action and already has a $229 million program with the IMF (pdf) to help stabilize the economy and is expected to get further assistance to shore up the banking sector.
That about does it for now, but stay tuned for more (but less frequent) round-ups.