http://www.time.com/time/asia/biz/magazine/0,9754,167614,00.html

Thursday, July 19, 2001
JULY 23, 2001, VOL.158 NO.3

Sinking Feeling

With U.S. demand slowing, Asia's economies are hurting. How bad will the regional slowdown be? And who can expect to take the hardest hit?

BY MARK R. MITCHELL

Drastic measures had to be taken-and fast.

On July 8, President Chen Shui-bian summoned 34 of Taiwan's brightest minds to the presidential palace, put them in a conference room, and told them not to come out until they had a plan for fixing the shuddering economy. The best and brightest dutifully took their places around the mahogany table and Premier Chang Chun-hsiung opened the floor to ideas. One came from banker-tycoon Jeffrey Koo, who said the meeting was a big waste of time because there were too many politicians present. Morris Chang, celebrity chairman of Taiwan Semiconductor Manufacturing Corp., said he didn't think 34 people could agree on anything. A couple of ministers noted that drastic measures were probably needed. Everyone ate mangoes. And then, finally, they made the day's only decision: to go home. "Nobody addressed the economic problems. They couldn't figure out what to discuss," says committee member Norman Yin, a professor at National Chengchi University. "You could say there was some confusion."

This is how it is all over Asia. Calculator punchers have spent the past couple of weeks apologizing for their earlier, relatively rosy forecasts. Now they say the next six months could bring the most dismal growth since the financial apocalypse that hit the region in 1997. Singapore looks to be headed toward full-blown recession, while things in Taiwan haven't been this bad since the early 1970s. Currencies most everywhere are getting clobbered. Stock markets are comatose. And you could just about paper over Bangkok's skyscrapers with all the pink slips Asia's companies are handing out. Yet ask government officials or corporate chieftains if anything can be done to cure their economic ills and it's blank stares all around. It is as if they are powerless victims of some malevolent god.

But it's no heavenly being that is doing them in. It's America. Asia's economies are fueled largely by companies making cars, consumer electronics and all manner of high-tech gewgaws and shipping them overseas. Exports account for more than 70% of Malaysia's and Singapore's GDPs, while the figure is around 50% in Taiwan, Thailand and the Philippines. The problem is, about about half of those shipments go to the U.S., which is dealing with its own economic travails. American consumers and corporations just aren't buying like they used to, and so Asia's warehouses are overflowing with unsold goods.

To make matters worse, about 40% of the stuff Asia makes for the U.S. is electronics, mainly components like microchips, motherboards and monitors-the parts for the computers that U.S. dotbombs stopped buying after the tech boom went bust. The result is that Asia has been hit with what Arup Raha, chief economist at UBS Warburg in Hong Kong, calls a "double whammy" of depressed U.S. demand for all goods, and a particular slump in electronics, the cornerstone of Asia's new economy. Taiwan's exports plunged nearly 17% in the second quarter. Singapore, South Korea, Thailand and the Philippines are not faring much better.

The U.S. tech slowdown began almost a year ago and Asia's stock markets and economies have been taking it on the chin ever since. But the sense of panic is something new. Until recently, Asia's policymakers and business leaders were confident that it would not be long before American consumers started partying again. Like kids waiting for a joyride in the backseat of a souped-up Mustang, Asia's markets cheered each time U.S. Federal Reserve chairman Alan Greenspan cranked the engine with yet another interest rate cut. But the car never budged. And as June turned to July, the mid-year profit warnings began to roll in from Asia's biggest U.S. customers: companies like Advanced Micro Devices, Compaq and Dell Computer. Asia, it turned out, had hitched its hopes to a jalopy economy.

Nobody is expecting anything quite as dramatic as the 1997 crisis, when speculators demolished the region's currencies, money fled the property and stock markets, and economies crumbled in a matter of days. Asia's markets are not nearly as inflated as they were then and most nations-with the notable exceptions of Malaysia and Hong Kong-have abandoned their currency pegs. If currencies continue to be debased, it will be a more gradual process. While troubles in Argentina-which effectively dumped its own peg recently amid a gargantuan debt crisis-might prompt traders to take a second look at Malaysia and Hong Kong, those nations have built defenses that should keep speculation under control.

Nonetheless, Asia is going to feel a lot of pain. Analysts are talking about an old-fashioned slowdown in which things get steadily worse over a period of many months. Already, Singapore's GDP is shrinking after it grew 9% last year. The jobless ranks in Taiwan are more swollen than they've ever been in history; not coincidentally, the suicide rate has seen a spike too. Unemployment rates are also rising in Malaysia, Thailand and Singapore. Companies everywhere say the carnage will only get worse in the months to come.

In places like the Philippines, where the unemployed frequently take to the streets, growing numbers of idle workers could become a serious threat to social stability. In Manila, 30,000 employees were laid off in May alone. Corporate leaders there have given President Gloria Macapagal Arroyo a deadline: jump-start the economy in 90 days, or we'll begin firing people in droves. Armand Almadrigo, 3l, a Philippine warehouse worker who hasn't managed to find a new job after recently being laid off, wiles away his days in karaoke lounges. "Such good distraction-and cheap, too," he says. The music might be a salve for now, but Almadrigo is precisely the sort of person who could wind up in a violent mob similar to the crowd of mostly unemployed laborers that stormed Manila's presidential palace in April.

What is Asia to do? As Taiwan's ill-fated committee showed, there aren't a lot of ideas out there. Taiwan has let the value of its currency slip, while the Thai baht and the Philippine peso are trading at six-month lows against the greenback. This makes their products cheaper overseas, which would normally boost exports. But that hasn't happened. Korea and Malaysia are planning fiscal stimulus packages a la Japan. But as Japan's record shows, pumping cash into public works projects is a somewhat expensive way to keep an economy crippled. For the most part, Asia's governments and corporate leaders are pinning their hopes on optimistic forecasts of a mild U.S. recovery in the fourth quarter of this year. "We are in a pretty rocky bottom right now," says Han Yung Jung, an economist at the Korea Institute of Finance, an organization funded by big banking interests. How soon things get better "depends on how soon the U.S. economy gets its act together."

Waiting for the U.S. is risky, and not just because the growth might never come. Even if the U.S. economy does pick up later this year, it could be a decade before there is a repeat of the high-tech mania that carried Asia for three years after the 1997 crisis. New technologies, such as third-generation mobile phones, have been glitchy, and even consumers with money to spend seem unimpressed by those innovations that have come on the market. Unless U.S. shoppers can be convinced that something is wrong with the computers they already have, or that they need to trade in their mobile phones just because the new models display dancing Hello Kittys, any recovery in the U.S. is likely to be led by Old Economy stalwarts like Procter & Gamble or General Motors. That's bad news for Asia's tech-heavy economies.

One way for Asia's governments to ease the pain would be to finish cleaning up the mess left over from the 1997 debacle. In Thailand, many companies that ran into problems still haven't repaid their loans, leaving banks unwilling to lend to more viable firms. Korea has done more to reform its profligate ways but the government still props up sick companies with state funds, discouraging the kind of restructuring that would create more competitive businesses. Taiwan sailed through the crisis in 1997, but it is now reckoning with a Thai-style banking fiasco, albeit a less serious one. Taiwanese banks lent heavily to a sinking property sector, and now around 15% of their loans aren't being serviced.

The result in each case is that there has been little in the way of domestic investment-a big reason these economies are so dependent on exports. If companies can't get access to capital or are discouraged from innovating, they don't build new businesses at home. And if there's no building, people can't get jobs or pay raises. Underemployed people don't shop much, so local retailers and consumer product companies suffer too, leaving nobody to take up the slack from sluggish exports.

So far, governments in the region haven't shown much interest in taking on the harder reforms. As Korea's economy has faltered, President Kim Dae Jung has become more reluctant to let bad companies fail. In Thailand, Prime Minster Thaksin Shinawatra has been playing the victim card with claims that globalization and international banking standards are the causes of his country's woes. He has cut back on incentives for foreign investors and balked at forcing companies to repay their debts. Late last year, Taiwan's President Chen ordered banks to keep lines of credit open to delinquent debtors, a move that has put a straitjacket on liquidity and dampened investment. Malaysian Prime Minister Mahathir Mohamad clings to a peg that has hugely overvalued the ringgit. "It's going to take Thailand and Malaysia 10 years," says Tim Condon, chief economist at ING Barings. "So far, most Asian economies aren't willing to let the market have its way with them."

Even if technology took off again in the U.S., lack of reform is likely to keep growth rates in much of Asia slow for a long time. How long could depend on the one country in the neighborhood that is not in bad shape: China. The forecasts for China's future are a bit like harried traffic cops on Shanghai's streets pointing in two directions at the same time. The nation is not nearly as vulnerable to export slumps because its own consumers are spending like mad on everything from cars to vacations at Angkor Wat. That could well keep growth rates at the current 7%. But China also has other big problems-most notably corruption-that threaten to stifle growth. Either way, there is a general consensus that China is a serious competitor to the rest of Asia. And assuming nations in the region don't orchestrate a turnaround soon, the current slump might provide China with an opportunity to steal the show. Many foreign investors already shun Southeast Asian nations in favor of China's huge market and cheap manpower. The $1.9 billion that Motorola spent on a semiconductor plant in Tianjin last year was more than the company has invested in Malaysia in the past three decades. More companies are likely to choose China if the rest of Asia can't stimulate local demand, and quickly.

Equally worrying for Asia are people like Choi Man Jin, head of Union Metal, a small assembler of air-conditioning parts in the Nandong Industrial Park, west of Seoul. Choi says he has halved his staff, and his orders have all but dried up. Hurt badly by Korea's high cost of labor and the economic slump, he is thinking about moving to China. Hundreds of his compatriots have already gone, and big companies in Taiwan, Malaysia and Thailand are doing the same. "China has the potential to wipe Southeast Asia off the map as a manufacturing base," says Michael Enright, a business professor at Hong Kong University. "These nations are going to have to find new sources of growth."

That is a very stark message, given that export manufacturers are about the only thing that has fed Asia's economies for the past three years. If China takes this vital source of nourishment away, and Asian countries don't clean up their economies so that new industries in new sectors can develop, their only hope might be to wait for another speculative bubble. Anyone got a hot property tip?

With reporting by Hannah Beech/Beijing, Simon Elegant/Kuala Lumpur, Robert Horn/Bangkok, Joyce Huang and Macabe Keliher/Taipei, Donald Macintyre/Seoul, Daffyd Roderick and Jennifer Wang/Hong Kong and Nelly Sindayen/Manila