Regional roundup: Finance in East Asia – Feb. 11

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ImageWell, the bad news continues across the East Asia and Pacific region. The Financial Times just ran a long article on the "speed and ferocity of the region's economic downturn." The piece highlighted that the fast downturn was a result of Asia's over-reliance on export-led growth over the past decade. This follows the IMF's slashed growth forecasts for the large East Asian economies. It projected only 5.5 percent growth across developing Asia for 2009, which sounds great for most economies these days, but it is way off of the 7.8 percent posted last year.

The IMF is expecting only 6.7 percent growth in China, which is 1.8 percent less than what they forecast only in October. This contrasts sharply with the view of the World Bank's Chief Economist, Justin Lin, who just two weeks ago said he thought China could achieve the target rate of growth – 8 percent – this year because of fiscal stimulus spending.

However, this seems to be optimistic relative to most other economists' predictions and in the face of increasingly bleak corporate earnings reports. Staying in China, the new US Treasury Secretary has already put the economic relationship with China on a controversial footing by stating to the Senate in his confirmation hearings that China was manipulating the currency to gain advantage for its exporters. The Chinese Government quickly rebutted this claim and has reacted angrily due to fears that this would raise trade protectionism, and just recently some prominent former official called for guarantees on China's holdings of US Treasuries to ensure the value isn't eroded by "reckless policies." On April 15, the US Treasury is required by law to report to Congress on the exchange rate policies of US trading partners, so we shall see what happens then.

Some worrying signs are emerging in the rural sector in China, with the number of migrant workers that lost their jobs doubling from the past estimate (10 million) to now at least 20 million. These workers are returning to areas that are largely lacking enough jobs to support them and thus, the Government now appears to be moving aggressively into subsidies, such as a 13 percent subsidy for purchases of electronic goods, subsidies for farmers of all kinds, and the possible creation of new "Government-sponsored investment corporations and industrial development funds for agriculture." Let us recall that the Agricultural Bank of China, which was just recapitalized last year, had 23.5 percent in non-performing loans (NPLs) at the end of 2007, so there is reason for concern with this renewed push and the idea for creating new rural lending institutions.

Now on to some of the countries we have not mentioned much lately...

Vietnam posted a lower level of growth last year at 6.2 percent, the slowest in a decade, and the IMF is predicting only 5 percent growth for this year. Other forecasters are projecting much less – Fitch Ratings is projecting only 3 percent growth. As with other countries in the region, business sentiment is down sharply and many businesses, particularly small- to medium-sized enterprises (SMEs), are restructuring or going out of business. A recent report indicated that about 175,000 SMEs would have to restructure to survive and part of this can be attributed to the rapid slowdown in exports – 24 percent in 2008 according to official statistics – and an 8.6 percent slowdown in industrial production. This of course is a country with a large state-owned banking system that has been rapidly issuing credit – 21 percent last year alone. However, the banks have a history of poor performance and we already saw an uptick in bad loans last fall. Fitch is now estimating that the NPLs will be over 15 percent this year and erosion in bank capital. The Government has been taking action to address the situation, with the latest action by the central bank being the reduction in the benchmark interest rate from 8.5 percent to 7 percent to encourage new lending. However, as in China, some worrying signs are on the horizon and the Government is pushing the idea of subsidized credit through commercial banks again (this is basically how the banks got into trouble years ago).

The Philippines is experiencing the same set of problems as most of its neighbors with economic growth slowing last year to 4.6 percent from 7.2 percent in 2007, and projections for this year are for growth of around 3 percent.  The Government is deploying fiscal stimulus spending and monetary policy to keep the economy afloat, with more rate cuts coming. As the World Bank's Quarterly Economic Report showed, there is an expectation of bad loans emerging due to the slowdown. But the NPL levels of the banks are at historical lows of around 4 percent, loan-loss coverage ratios at about 84 percent, capital adequacy levels above 15 percent, and loans-to-deposits ratio of under 80 percent, so the banks are in decent shape overall heading into this economic storm. However, the banks are heavily exposed to corporate borrowers and certain export-oriented sectors, such as the electronics industry, which have been hit very hard and recovery appears to be far off. Exports from the Philippines dropped by 40 percent in 2008 and exports of electronics, which account for half of total exports, fell by 48 percent.  

Cambodia posted its lowest economic growth rate in six years in 2008 at about 7 percent, but this year's growth is expected to reach only about 5 percent. The slowdown was largely due to the bursting of a real estate bubble and the slowdown in garment exports and tourism. In response to some of these events, the Government is now considering new institutions to provide financial support, such as an Export-Import Bank and some form of agricultural fund. This in the context of a small and relatively weak financial system, where access to finance is relatively low and efficiency is still limited. The banks were facing an acute liquidity crunch in mid-December due to exponential credit expansion in 2007 and the first half of 2008 (over 100 percent) and a withdrawal of deposits – but this was not a run on the banks. Although overall NPL levels are reportedly low, at about 5 percent, the NPLs are concentrated in two of the largest banks, which are owned by the same shareholder, and the supervisory authority has limited oversight and enforcement capacities. A recently released World Bank report provides a very in-depth look at many of these issues and I would recommend taking a look. 

As you may have noticed, a trend is emerging across Asia to create new institutions to do policy lending, or coerce existing institutions to do subsidized lending. One more recent example to note was in Thailand, where there is a proposal to provide about $1.5 billion in low-interest loans and guarantees from the Government to banks to lend to small businesses. There was also a plan that was approved by the cabinet to provide a $7.7 billion line of credit for short-term loans to 58 state enterprises to provide "liquidity" and to support new infrastructure projects.

Finally, the financial markets have been seeing some positive news lately. The emerging market stock indices are up by 5.5 percent in February, led by China and the Philippines. Much of the upward movement was attributed to hopes that the various stimulus packages in the region would stabilized economic growth, but the corporate earnings reports certainly don't seem promising across the region. The local currency bond market (pdf) in East Asia grew by 15 percent in 2008, driven largely by governments raising funds in their domestic markets. China represented approximately 60 percent of the total local currency bonds outstanding. It is expected that bond issuances will rise this year as governments across the region need to fund their stimulus packages and corporations refinance existing debt and search for additional financing outside of banks and equity markets. Although this is relatively positive news, the bond markets across developing Asia are still maturing and largely dominated by banks buying and holding bonds, and the risk premium on many bonds is still at elevated levels, particularly for corporate bonds.


James Seward

Senior Financial Officer

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