The rate of change is dramatic since 2007 when the regional average growth rate was and average of 8%. The countries most dependent on exports were hit the hardest, such as Cambodia, Thailand, Malaysia, Korea, and China. Speaking of which to give the latest examples include Korea, where exports declined by 21% in March, but the good news was that this drop was less than the 26% decline in the first two months of the year. Korea also experienced a 10.3% decline in industrial output in February.
In Indonesia, exports dropped 33% in February. Exports from Thailand fell by 11% in February, but like Korea, this was better than January when exports plunged 25%. Related to exports, manufacturing output fell by 20% in February continuing a four month streak. However, in the category of less worse news, manufacturing activity in China rose slightly in March after eight straight months of decline, indicating the country's stimulus spending may be having some impacts already.
Given the overall economic decline, it's not surprising that corporations are hurting. Based on the available earnings figures for the largest 20 companies by market capitalization across the largest economies in the East Asia and Pacific region (which include China, Indonesia, Korea, Malaysia, Philippines, Thailand and Vietnam), we have seen a deterioration in the profitability across the board, according to Bloomberg data. Although the relative levels of profit remain healthy, the worsening trend is the concern. Corporations experienced worst of the economic impact in the fourth quarter of 2008 with major decreases in most profit indicators, including a 57% drop in net profit margins.
An issue related to the emerging signs of corporate stress in the region is the potential need for the refinancing of debt and a recent Fitch Report on this was quite interesting. The report concluded that East Asia and Pacific (EAP) corporations are severely constrained in accessing international markets for debt financing and inflows of capital to the region are decreasing quickly. However, companies in the EAP region have much greater access to domestic bank financing (about 45% of debt financing on average is from banks) and to a lesser degree, domestic bond markets. The maturity profile of EAP corporate debt is relatively short-term, with 54% of all debt coming due by December 2010. So, there is some risk that debt refinancing will be an issue for some large corporations, but it does not seem to pose a major threat to the longer-term viability of firms.
The sum total of all of the earnings problems is likely to be problems in the banking sectors across the region. Some signs are already emerging in the countries hit the fastest and hardest by the crisis via the export channel. Not to pick on Korea, but it stands out as one prime example (this is partly because there is a much higher level of transparency of data on the financial sector than in most countries across the region). Although the overall non-performing loan (NPL) ratio for banks in Korea is among the lowest in the EAP region at 1.1% in 2008, defaults are growing. Among small and medium-sized enterprises (SMEs), defaults surged to 2.7% by the end of February, up from 1% the year before, and this was a rate of increase of 57% in the first two months of the year.
To compound the pressures felt by the banks in terms of the health of their customers, interest margins are also likely to shrink given the continuing decline in interest rates. Due to a combination of factors, overall NPL level is estimated to be 3.6% by the end of this year. This may be underestimated, because banks may be rolling over potential problem loans now and the authorities are reportedly providing regulatory forbearance to the banks – all of which appears to be quite common now across the EAP region. In pre-emptive moves, the central bank and financial supervisor established a $14 billion bank recapitalization fund and the financial supervisory authorities are pushing ahead with a plan to launch a $27 billion fund, managed by the bad debt resolution entity Korean Asset Management Company (KAMCO), to buy toxic assets from otherwise healthy banks and companies. However, the largest banks in Korea are now discussing creating their own "bad bank" to deal with their bad assets instead of going to KAMCO, which the banks felt bought bad assets too cheaply during the Asian crisis.
One note on the growing trend in the region that I have discussed before is the reemergence of subsidized and directed lending in response to the rapid downturn of economic growth. Vietnam's central bank proudly announced that domestic banks issued $10.6 billion of new loans with subsidized interest rates of 4% just since the beginning of February, with the state owned banks doing about 75% of this. Keep in mind that the base interest rate is 7%, total lending in 2008 was only about $53 billion, and Vietnam has a fiscal deficit of about 4% of GDP. The details of the program are not clear to me, but it is certainly a worry to me knowing the past asset quality problems in the banks (this was a constant topic of work when I was based in Hanoi).
Lastly, an interesting development has been the self-protection measures some Asian countries are taking. Of course, in May last year the Chiang Mai Initiative (a network of bilateral currency swap arrangements between the central banks) was expanded from $80 billion to $120 billion. However, a recent news item on China indicates that this is going even further now due to fears of a weak US dollar (due to unsustainable debt of the US). The report revealed that China bilaterally arranging $95 billion worth of currency swap lines around the world to allow importers in China to settle trade in Chinese Yuan instead of US dollars. This comes after the central bank governor of China floated the idea of relying more on the IMF's special drawing rights as an alternative currency to the US dollar and calls for guarantees of the security of US government debt.
This is all getting very interesting ... stay tuned!
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