Regional roundup: Finance in East Asia – Jan. 23

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ImageI’m beginning to sound like a broken record, but the bad news keeps coming on the economies in the region.  As the Financial Times just put it, “The Asian Financial Crisis Deepens.”  Thus far, the deteriorating economic performance has not appeared to flow through to the financial sector, but it now seems that the banks across the region can not avoid some damage from this worsening storm…
The stock markets in the major developing countries in the region were once again down – by an average of 9.7% for the year.  China and Korea have been the loss leaders for the year with 12.2% and 8.9% decreases respectively.  Much of this was a reflection of poor corporate earnings reports and continued fears of spillover from ailing financial institutions in the US and Europe.

In terms of overall economic news, China’s GDP grew at only 6.8% in the fourth quarter, its slowest pace in over a decade (David Dollar blogged about this yesterday).  However, GDP growth was 9% for 2008, which is still quite impressive by global standards given the onset of the financial crisis.  Some economists are now predicting 6% growth for 2009, which would be the slowest rate of growth in 20 years.  Also, about 10 million migrant workers lost their jobs by November, and many migrant workers are returning home for the lunar new year on one-way tickets.  To round out the bad news on China, in December housing prices dropped for the first time on record and construction is projected to shrink by 30% this year.

Korea reported worse than expected news that GDP contracted by 5.6% and exports dropped about 12% in the fourth quarter of last year.  This economic performance is the worst in Korea since the Asian financial crisis.  Korea also has a new Finance Minister this week who was formerly the head of the Financial Supervisory Commission, which may signal new focus on financial markets.

Japan saw exports plunge 35% in December.  Economists are predicting a double-digit contraction in the economy in the fourth quarter of 2008, following on the 1.8% contraction in the third quarter. 

The Singaporean Government reported that growth would contract by up to 5% this year.  GDP shrunk by 3.7% in the last quarter of 2008, which was the worst performance on record (since 1976).  One third of the cranes at Singapore's port facilities are idle now, which is a very bad sign for world trade given Singapore’s role as a major global trading hub.   The Government just announced a $13.6 billion stimulus package, or “resilience package” as the Finance Minister has called it, to boost bank lending and spending on infrastructure among other things.  

Malaysia reported a decline in exports of 4.9% in November, which was the worst performance in six years.  The Central Bank cut the benchmark interest rate, the overnight rate, by 75 basis points to 2.5%, and it cut the Reserve Requirements for banks from 3.5% to 2%.  Both of these actions were of a greater magnitude than expected and were designed to lower borrowing costs and boost credit in the domestic market. 

There was some interesting news out of Mongolia – the Government is reportedly seeking to raise $500 million through a sovereign bond issuance to support its fiscal spending priorities.  The country’s rating was downgraded by Fitch from B+ to B with a negative outlook on Monday, so the financing costs of this issuance are likely to be quite high.  To give some sense of perspective, Mongolia only has about $637 million in reserves, which is one reason why Fitch downgraded Mongolia in the first place.  Fitch also downgraded due to serious banking risks, which largely stem from the inability of the banks to absorb further exchange rate depreciations and the expected rise in non-performing loans.

The actions of Singapore, Malaysia, and Mongolia this week lead to an important positive point to finish on – the governments across the region are not standing idly by, but instead are reacting quickly and forcefully to try to mitigate the impacts of this global recession.  I highlighted this in a recent post and this is the good news among what seems to be nothing but negatives recently…


James Seward

Senior Financial Officer

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