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Asiaweek: Asia's Unhappy Future (Must Read)
By David Roche

11/3/2001 10:57 am Sun

[Satu rencana yang begitu BAIK sekali dari seorang pakar. Jangan kita mudah alpa kononnya krisis ekonomi sudah reda. Kerajan tidak mereformasikan sistem kewangan sebaliknya menggunakan dana awam untuk menyelamatkan kroni kemuflisan. Sikap kerajaan ini akan mengheret negara ke lembah kesusahan yang lebih ngeri di masa hadapan. Bayangkan ekonomi Amerika sedang merudum dan Jepun sendiri pula kini tenat (politik, ekonomi dan nilai yen.)

Ini semua akan menggugat ekspot negara dan mengurangkan lagi pelaburan mereka di negara kita. Dan kali ini... pemimpin negara tidak akan dapat mempersalahkan Soros lagi kerana merekalah yang sebenarnya boros. Selamat bermuram durja pemimpin yang mewaswaskan masa depan negara... Tanpa Daim pun negara tetap sakit jiwa - Editor]


Issue 16th March 2001

Asia's Unhappy Future

Think the worst of the financial crisis is over? Dream on....

DAVID ROCHE is chairman of Independent Strategy, a London investment firm

If you thought everything that could go wrong with Asia has gone wrong, think again. Something else is about to happen that might drive up regional stock prices in the short run but will make the long-term pain even greater than that of the 1997-98 financial crisis.

Wasting capital - as if it were free water from a faucet - was the root cause of Asia's crisis. Since then, the region has failed to reform its financial system. Banks were bailed out, but not reformed. Some of their lousy loans were purchased by government-backed agencies and their balance sheets puffed up with taxpayers' money. Instead of letting the worst deadbeat borrowers go bankrupt to cleanse the economy of dead investments, the insolvent have been kept alive on a drip-feed of failed foreclosure laws and rescheduled debts. The price of this "softly-softly" approach will be paid for by lower growth and higher taxes over the next decade.

If that was all, it would be bad. But it gets worse. The U.S. is in a high-tech recession. One of the great benefits of globalization is that the U.S. corporate sector spread the largesse of American economic growth among the world's emerging economies by locating its electronics and other industries there. This boosted growth for poor countries dramatically. But a U.S. high-tech recession means these countries will now suffer disproportionately. If Asia's technology exports to the U.S. fall 6% for the first half of 2001 and then recover to where we are now by year-end, most emerging Asian countries will lose between one and four percentage points of GDP growth this year.

As domestic economic activity slows, Asian leaders will face increasing pressure to deliver both growth and democracy. But whether you are looking at the Philippines, Indonesia, Taiwan or Thailand, it makes little difference - democracy has produced a crop of leaders without vision. You can be sure that they will do something populist about their slow-growth economies to placate their restive electorates. The most obvious - and dangerous - course will be to bail out their banks again by spending money they don't have. Already, new Thai Prime Minister Thaksin Shinawatra is preparing just such a bailout with his proposed National Asset Management Corporation.

The good news for investors in the short run is that saving the banks will generate some false optimism about Asia's financial sector, leading equity markets, gunned on by locals, to rise for a while. But this brief celebration will produce a long-term hangover. There are more bad debts left in the private sector than Asian governments officially recognize. If Asian banks are bailed out by the taxpayer, the public debt-to-GDP ratio will reach up to 60% in Thailand, 65% in Malaysia and a massive 120% in Indonesia and the Philippines over the next five years. Interest costs on this debt as a share of government revenues are two to four times larger than OECD levels. That's because Asia's tax base is less than half that of the OECD.

Even more worrying, these bailouts will further postpone the development of an efficient banking system. A revitalized financial industry can only be created if bank shareholders are forced to share the losses from bad loans. Banks that cannot survive such drastic action should be merged or nationalized. The government could then resell the cleansed banks to new investors.

Reforming banks properly yields two major benefits. First, a cleansed financial system and corporate sector can allocate capital more efficiently and so boost productivity and growth. That is why the U.S. can grow more productively than Asia with a savings-and-investment rate half that of Asia. Second, the resale to the private sector of banks nationalized in the process of reform can reduce the public-sector debt burden.

But Asian government bailouts will simply use taxpayers' money to prop up existing owners. Rotten management will live to make even more bad loans, ensuring that the Asian crisis will repeat itself a few years down the road. In addition, higher government debt and deficits are already sucking up an increased share of national savings. And in the future, savings will be lower, because given the slowdown in the U.S., Asian economies will rely more on domestic consumer demand to grow.

Unfortunately, that's not all. Populist policies can only be financed if interest rates are low. Current-account surpluses and international reserves will suffer as domestic demand rises and electronics exports slow. Worse still, Asia's foreign reserves are shrinking faster than the current-account surplus - a sure sign that capital is fleeing much of the region for safer shores.

Japan will not ride to the rescue this time. Its woeful political and economic state and weak yen are starting to send its huge stock of surplus savings to safer climes. Foreign investors are less likely than locals to be suckered by a short-term liquidity boost from low interest rates, so capital inflows to Asia will stay low. That's bad news for Asian currencies, which in a year or so could once again begin a precipitous decline. And this time, Asians won't be able to blame George Soros for their woes.