The Asia Recovery Report (ARR) is a semi-annual review of Asia's recovery from the crisis that began in July 1997. The analysis is supported by high-frequency indicators compiled under the ARIC Indicators section of this website.
The Asia Recovery Report (ARR) is a semi-annual review of Asia's recovery from the crisis that began in July 1997. The analysis is supported by high-frequency indicators compiled under the ARIC Indicators section of this website.
The Asia Recovery Report (ARR) is a semi-annual review of Asia's recovery from the crisis that began in July 1997. The analysis is supported by high-frequency indicators compiled under the ARIC Indicators section of this website.
Followlng more than a decade of rapld growth, Thallands gross domestlc product (GDP) contracted sharply ln 1997. In that year, growth slowed ln Indonesla, Republlc of Korea (henceforth Ko- rea), Malaysla and Phlllpplnes. Shortly thereafter, output began to contract ln these economles too. By the end of 1998, GDP had fallen by 13.2 percent ln Indonesla, 6.7 percent ln Korea, 7.5 percent ln Malaysla, 0.5 percent ln Phlllpplnes, and 10.4 percent ln Thalland. But these decllnes proved short-llved. By early 1999, economles had stopped contractlng and embryonlc slgns of growth began to emerge. As 1999 progressed, economlc recovery qulckly gathered momentum. Korea made the blggest galns, lts GDP grow- lng by 10.7 percent. Output also expanded ln Malaysla, Phlllp- plnes and Thalland, growlng at 5.4, 3.2 and 4.2 percent, respec- tlvely. Whlle Indonesla lagged behlnd ln the recovery process, output ln 1999 stablllzed and grew by 0.2 percent. Whlle the reglonal recovery ls tanglble, lt ls not yet complete. There are varlatlons ln the pattern of recovery across countrles, and across the components of aggregate demand and supply. As ls usually the case, recovery ln flnanclal and asset markets has preceded that ln the real sector. Per caplta real lncomes have yet to cllmb back to thelr pre-crlsls levels ln Indonesla, Malaysla, Phll- lpplnes and Thalland. One way to gauge the extent of the recovery ls to compare per caplta lncomes, measured ln local currency at constant prices, wlth thelr pre-crlsls peaks (Flgure 1). For four of the flve affected countrles, 1997 ls the most recent peak of per caplta GDP. In Thalland, 1996 ls the peak. By the end of 1999, only Korea had achleved a level of GDP per caplta that exceeded lts prevlous peak. In all other economles, GDP per caplta stlll has lost ground to make up. At the end of 1999, the gap to the prevlous peak was Aslas Recovery- A Reglonal Update Recovery ln Asset Markets and the Real Sector Contents Asia's Recovery A Regional Update Recovery ln Asset Markets and the Real Sector Medlum-term Aspects- Bank and Corporate Restructurlng & Longer Term Aspects- Soclal Recovery, Governance and Competltlveness % Recovery Prospects and Rlsks The PRC, Singapore and Viet Nam Updates % The PRC % Slngapore ' Vlet Nam ! Asian Development Bank Regional Economic Monitoring Unit 6 ADB Avenue, Mandaluyong Clty 0401 Metro Manlla, Phlllpplnes Telephone (63-2) 632-5458/4444 Facsimile (63-2) 636-2183 E-mail arlc_lnfo@adb.org How to reach us The Asia Recovery Report 2000 was prepared by the Reglonal Economlc Monltorlng Unlt of the Aslan Development Bank and does not necessarlly reflect the vlews of the ADB's Board of Governors or the countrles they represent. ASIA'S RECOVERY-A REGIONAL UPDATE 2 narrowest ln the Phlllpplnes, malnly because GDP dld not fall so much there. The gap ls larger ln Malaysla, and at lts wldest ln Indonesla and Thalland. The speed wlth whlch these gaps wlll be closed depends, of course, on future growth. The tlme needed for the recovery of per caplta lncomes measured ln US dollar terms wlll take even longer. Even when these gaps are closed, a process that could yet take some tlme to complete, lncomes wlll remaln substantlally below what they would have been had they contln- ued to grow at pre-crlsls levels. Asset Market Recovery. Followlng thelr lnltlal preclpltous col- lapse, exchange rates stablllzed and, ln early 1998, began to re- cover lost ground (Flgure 2). Subsequently, the volatlllty ln ex- change rate movements that accompanled thelr collapse and partlal recovery dlsslpated. Today, ln nomlnal terms, the value of local currencles has become more stable, but they stlll buy 20 to 35 percent fewer US dollars than before the crlsls ln Korea, Ma- laysla, Phlllpplnes and Thalland, and about 70 percent fewer dol- lars ln Indonesla. Stock markets fell to thelr lowest polnt around mld-1998 (Flgure 3). Slnce then they have recovered and all but the Phlllp- plne market made strong galns ln 1999. In part, these galns were drlven by the addltlonal llquldlty generated by current account surpluses and lower lnterest rates. The earller rebound ln equlty values has not, however, been malntalned. As of late Aprll 2000, stock market lndlces ln most affected economles were stlll about 15-40 percent lower than thelr pre-crlsls levels ln local currency terms and about 45-75 percent off ln US dollar terms. Only ln Korea have markets recovered almost fully both ln local currency terms and ln US dollars. But even ln Korea, equltles have per- formed poorly ln 2000, wlth the KOSPI 200 decllnlng by more than 30 percent slnce the start of the year. To some degree, the lnablllty of reglonal equlty markets to sus- taln 1999s galns has been a consequence of external factors, partlcularly rlslng lnterest rates ln the Unlted States and lncreases ln world oll prlces. But ln some places lt also reflects lnvestors concerns over the slow pace of flnanclal and corporate restruc- turlng. Corporate earnlngs have yet to show conslstent slgns of renewed vlgor. In recent weeks, the downward drlft ln US equlty prlces and thelr helghtened volatlllty have negatlvely affected reglonal markets. In the Phlllpplnes, where equlty values have been loslng ground slnce mld-1999, recent allegatlons of lnslder Flgure 1: GDP per Capita Indices (1996=100) Note: 1999 data on populatlon are forecasts by ADB staff. Sources: ADB, Key Indlcators of Developlng Aslan and Paclflc Countrles; varlous natlonal sources. 1996 1997 1998 1999 85 90 95 100 105 110 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland Flgure 2: Exchange Rate Indices (weekly average, last week of 1997June=100, $/local currency) Source: ARIC Indlcators. 27 Jun 1997 6 Mar 1998 13 Nov 1998 30 Jul 1999 21 Apr 2000 0 20 40 60 80 100 120 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland ASIA'S RECOVERY-A REGIONAL UPDATE 3 tradlng and stock market manlpulatlon have also undermlned market confldence. In a generally turbulent envlronment, Malay- slan equltles have done well; the KLCI has lncreased by 10 per- cent to date thls year. In most economles, there are, as yet, few slgns of recovery ln the markets for physlcal assets. Property markets remaln generally depressed. Although offlce vacancy rates have started to stabl- llze, rents ln US dollar terms contlnue to soften (Flgures 4 and 5). Loan assets also remaln heavlly dlscounted. In Korea, fast growth Flgure 4: Office Vacancy Rates in Major Cities (%) Source: Jones Lang LaSalle, Asla Paclflc Property Dlgest, January 2000. 96Q1 97Q1 98Q1 99Q1 0 10 20 30 40 50 Bangkok Jakarta Kuala Lumpur Manlla (Makatl) Flgure 5: Office Rents in Major Cities (US$ per square meter per annum) Source: Jones Lang LaSalle, Asla Paclflc Property Dlgest, January 2000. 96Q1 97Q1 98Q1 99Q1 0 100 200 300 400 Bangkok Jakarta Kuala Lumpur Manlla (Makatl) Flgure 3: Composite Stock Price Indices* (last week of 1997June=100, ln local currency) *Weekly averages of JCI (Indonesla), KOSPI 200 (Korea), KLCI (Malaysla), PHISIX (Phlllpplnes), and SET Index (Thalland). Source: ARIC Indlcators. 27 Jun 1997 6 Mar 1998 13 Nov 1998 30 Jul 1999 21 Apr 2000 25 50 75 100 125 150 175 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland Flgure 6: Real GDP Growth (y-o-y, %) Source: ARIC Indlcators. 97Q1 98Q1 99Q1 -20 -15 -10 -5 0 5 10 15 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland ASIA RECOVERY REPORT 2000 4 has brought about a qulcker recovery ln the prlces of physlcal assets. Recovery in the Real Sector. The pace of recovery ln the af- fected countrles has been faster than expected (Flgure 6). Slnce the beglnnlng of 1999, the Consensus Economlcs forecasts 1 of 1999 economlc growth rates have been revlsed upwards almost every month for every country. Recovery has, however, been uneven. It has been most pro- nounced ln Korea-so strong, ln fact, that there are now latent lnflatlonary pressures. In Malaysla and Thalland, lt has also been lmpresslve, but somewhat slower. Desplte accommodatlng mon- etary pollcles and substantlal deflclt spendlng measures, lnfla- tlonary pressures remaln muted ln both of these economles. The Phlllpplnes relatlvely mlld recovery of output ls partly at- trlbutable to the fact that economlc actlvlty there dld not con- tract to the same extent as ln the other countrles. In Indonesla, where polltlcal developments have had a declslve lnfluence on the economy, output has only now stablllzed after collapslng ln 1998. On the supply slde, the agrlcultural sector has rebounded follow- lng the devastatlon caused by the El Nlo and La Nla weather phenomena. Thls rebound has beneflted malnly Indonesla, Phll- lpplnes and Thalland. Indeed, ln the Phlllpplnes, strong agrlcul- tural performance spearheaded growth ln 1999. Elsewhere, the manufacturlng sector has led the recovery pro- cess. The sectors strong recovery ls largely attrlbutable to a re- surgence ln export demand. The lndlces of the manufacturlng sector value added ln all the affected countrles except Indonesla now exceed pre-crlsls levels (Flgure 7). In Korea, the capaclty utlllzatlon rate ln manufacturlng ls now close to lts pre-crlsls level (Flgure 8). Although lmproved somewhat, the rate ls stlll well below the pre-crlsls level ln Thalland and, posslbly, ln Indonesla, although data are not avallable for the latter. In the Phlllpplnes, the avallable data suggest that the capaclty utlllzatlon ln manu- facturlng has lmproved from lts 1998 level. Capaclty utlllzatlon rates are expected to lncrease ln 2000 as recovery contlnues. Flgure 7: Manufacturing Value Added Indices (1997Q2= 100), seasonally adjusted Source: ARIC Indlcators. 97Q2 97Q4 98Q2 98Q4 99Q2 99Q4 80 90 100 110 120 130 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland 1 Publlshed by Consensus Economlcs, Inc., Unlted Klngdom. Flgure 8: Average Capacity Utilization in Manufacturing (%) Note: 1996-1999 data are yearly averages except those for the Phlllpplnes whlch are monthly averages. February 2000 data are averages for the month. The 1996 and 1997 data for the Phlllpplnes are not avallable. Sources: Natlonal Statlstlcs Offlce, Korea; Natlonal Statlstlcs Offlce, Phlllpplnes; and the Bank of Thalland. Rep. of Korea Philippines Thailand 1999 1998 1997 1996 Feb-00 0 15 30 45 60 75 90 ASIA'S RECOVERY-A REGIONAL UPDATE 5 Latest data suggest that manufacturlng ls malntalnlng the strong momentum lt acqulred last year. In Korea, lndustrlal productlon, whlch ls heavlly lnfluenced by manufacturlng sector performance, grew by 24 percent year-on-year ln the flrst quarter. Malaysla's lndustrlal productlon grew by 25 percent year-on-year ln the flrst two months of thls year. In Phlllpplnes and Thalland, year-on- year manufacturlng productlon growth reached more than 9 and 8 percent, respectlvely, ln the flrst two months of 2000. On the demand slde, the recovery was lnltlally led by publlc con- sumptlon expendlture. Growth of publlc consumptlon expendl- ture was supported by the deflclt spendlng measures that gov- ernments took ln 1998. The plcture wlth respect to prlvate consumptlon demand ls more mlxed. In Korea, consumptlon has rlsen more or less ln llne wlth lncome. In the Phlllpplnes, prlvate consumptlon never fell. In the other countrles, renewed growth of consumptlon lagged behlnd broader recovery ln lncome. Largely as a consequence, real prl- vate consumptlon remalns below pre-crlsls levels ln all the af- fected countrles except the Phlllpplnes (Flgure 9). However, there are now early lndlcatlons of a sustalned recovery ln prlvate con- sumptlon demand. Consumer durable consumptlon and automo- blles ln partlcular are showlng renewed strength (Flgure 10). Flgure 9: Real Private Consumption Expenditure Indices (1997Q2=100), seasonally adjusted Source: ARIC Indlcators. 97Q2 97Q4 98Q2 98Q4 99Q2 99Q4 80 90 100 110 120 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland Flgure 10: Light Automobile Sales Indices (1997=100) Source: Standard & Poor's DRI-Global Automotlve Group. 1996 1997 1998 1999 0 20 40 60 80 100 120 140 160 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland ASIA RECOVERY REPORT 2000 6 Largely because of excess capaclty, and debt overhang, lnvest- ment remalns generally depressed, although recently there have been some slgns of lmprovement ln Korea, Malaysla and Thalland. Desplte thls, real lnvestments ln plant and equlpment remaln well below pre-crlsls levels ln all of the countrles (Flgure 11). Export demand, supported ln part by a global upswlng ln the electronlcs lndustry, has played an lmportant role ln propelllng recovery. Exports now exceed pre-crlsls peak levels ln Korea, Malaysla and Thalland (Flgure 12). In the Phlllpplnes, exports re- malned largely lmmune to the crlsls because of the countrys tlght llnks to the boomlng US market and the growth of lts fledgllng electronlcs lndustry. Whlle lmport demand preceded more general economlc recovery, thls recovery started from very low levels. As a result, lmports stlll remaln below thelr pre-crlsls peak levels ln all the affected countrles (Flgure 13). However, strengthenlng lmport demand slnce early 1999 has meant that the contrlbutlon of net exports to growth has been decllnlng, and suggests that domestlc de- mand must become a more lmportant contrlbutor to growth lf recovery ls to be sustalned. Latest data polnt to contlnued strong recovery ln external trade. In Indonesla, where the recovery ln trade has lagged behlnd, exports grew at 44.7 percent and lmports at 17.4 percent ln the flrst two months of thls year. In the Phlllpplnes, where lmport demand has also been slow to perk up, growth of about 9 percent was recorded over the flrst two months. Elsewhere, strong per- formances are belng malntalned or exceeded, wlth stellar growth rates for exports and lmports ln Korea, Malaysla and Thalland belng posted ln the flrst months of 2000. Forces Driving the Recovery. At a macroeconomlc level, the forces drlvlng the recovery process that has been descrlbed above can be summarlzed as follows: - Domestlc pollcles have played an lmportant role. After an lnltlal bout of austerlty, a move to more accommodatlng monetary pollcles and large deflclt spendlng programs helped nurture the recovery. Most of the affected economles are now experlenclng large flscal deflclts (Flgure 14). Short-term nomlnal lnterest rates have also come down sharply and are now elther below thelr pre-crlsls levels or close to them (Flgure 15). However, except Flgure 12: Quarterly Export Indices (1997Q2=100), seasonally adjusted Source: ARIC Indlcators. 97Q2 97Q4 98Q2 98Q4 99Q2 99Q4 80 100 120 140 160 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland Flgure 11: Real Gross Domestic Investment Indices (1997Q2= 100), seasonally adjusted Source: ARIC Indlcators. 97Q2 97Q4 98Q2 98Q4 99Q2 99Q4 20 40 60 80 100 120 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland Flgure 13: Quarterly Import Indices (1997Q2=100), seasonally adjusted Source: ARIC Indlcators. 97Q2 97Q4 98Q2 98Q4 99Q2 99Q4 50 60 70 80 90 100 110 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland ASIA'S RECOVERY-A REGIONAL UPDATE 7 Flgure 15: 3-Month Interbank Rates (%) Source: ARIC Indlcators. Jan 1997 Oct 1997 Aug 1998 Jun 1999 Mar 2000 0 10 20 30 40 50 60 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland Flgure 16: Real Bank Credit* (1997June=100), seasonally adjusted *Clalms on the prlvate sector: deposlt money banks. Source: ARIC Indlcators. Jun 1997 Dec Jun 1998 Dec Jun 1999 Dec 20 40 60 80 100 120 140 160 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland ln Korea and, more recently, ln Malaysla, the more accommo- datlng monetary stance has not yet been reflected ln a growth of the stock of prlvate sector credlt (Flgure 16). In part, thls ls because non-performlng loans (NPLs) have reduced the stock as they have been removed from the balance sheets of banks and converted lnto other lnstruments. Nevertheless, lower ln- terest rates have undoubtedly eased the dlstress experlenced by buslnesses and helped support recovery ln reglonal equlty markets. The major steps taken ln flnanclal and corporate re- structurlng have also started to bear frult. Much more, of course, remalns to be done. - The lnvestor panlc that trlggered the Aslan crlsls has subslded. Partly, thls ls because whatever capltal was golng to be wlth- drawn has now been pulled out. In fact, the fllght of capltal had more or less abated by the mlddle of 1998. Although lnflows of dlrect equlty and portfollo lnvestment ln 1999 (Flgure 17) were not sufflclent to stem the outflow of capltal arlslng from nega- tlve net transfers from banks, they have helped to ease con- stralnts on domestlc absorptlon. To a large degree, better- lnformed domestlc lnvestors led forelgn lnvestors back lnto the reglons equlty markets. Accordlng to the Instltute of Interna- tlonal Flnance, net capltal outflows from the flve affected coun- trles ln 1999 were about US$2.5 bllllon. Thls year, as recovery consolldates further, net prlvate capltal lnflows are expected to reach a total of US$5.3 bllllon. - External developments also turned out to be more favorable than expected. At the beglnnlng of 1999, deflatlonary rlsks cast a shadow over the global economy and there were fears that reglonal currencles may agaln come under pressure. But the global economy has shown ltself to be more reslllent than even the most optlmlstlc observer could have hoped. The latest World Economlc Outlook (WEO) lssued by the Internatlonal Monetary Fund (IMF, Aprll 2000) lndlcates that global output growth ln 1999 grew by 3.3 percent, whlch ls 1.1 percentage polnt hlgher than what was projected at the end of 1998, and 0.3 percent- age polnt hlgher than the average global growth slnce 1990. The US economy has played a cruclal role ln supportlng global demand durlng the recent turbulence. Over the past two years, the Unlted States has accounted for more than 50 percent of the growth of global demand. A steady renmlnbl and careful management of the Hong Kong dollars llnk to the US dollar by the government of the Hong Kong, Chlna have helped stablllze reglonal currencles. Flgure 14: Central Government Fiscal Balance (as % of GDP) Source: IMF, World Economlc Outlook, Aprll 2000. 1996 1997 1998 1999 -6 -4 -2 0 2 4 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland ASIA RECOVERY REPORT 2000 8 - Luck has played a role ln Aslas recovery, just as lt compounded underlylng dlfflcultles ln 1997. In partlcular, favorable weather condltlons ralsed agrlcultural output, especlally ln Indonesla and the Phlllpplnes. The negatlve effects of the global elec- tronlcs downturn that occurred from 1996 through 1998 have now been reversed. Rlslng global electronlcs demand has helped boost Korean, Malayslan and Thal exports. But rlslng oll prlces have proven somethlng of a mlxed blesslng. They have worked ln favor of net exporters of fuel, such as Indone- sla, but agalnst net lmporters, such as Korea, Phlllpplnes and Thalland. - Recovery ls lncreaslngly belng supported by strong trade llnks that exlst among the reglonal economles. To a degree, renewed growth wlthln the reglon wlll become self-propelllng as the ben- eflts of expandlng demands splll across borders. Medlum-term Aspects-Bank and Corporate Restructurlng Weaknesses ln the flnanclal and corporate sectors were at the heart of the Aslan crlsls. They stlll pose a threat to the recovery process. Tackllng the hlgh levels of NPLs and corporate bad debt, and the lnstltutlonal and operatlonal lnefflclencles they reflect, ls the blggest challenge the affected countrles face ln sustalnlng recovery over the medlum term. Fallure to tackle these problems could yet cause economles to sllp and get caught ln a low growth, hlgh debt trap. Approaches to Bank and Corporate Restructuring. The af- fected countrles have taken dlfferlng approaches to bank and corporate sector rehabllltatlon. From the very beglnnlng, Indone- sla, Korea and Malaysla have chosen a more government-led ap- proach to banklng sector restructurlng. In these economles, the governments have gulded the restructurlng process through ll- quldlty support and natlonallzatlon of troubled banks, and have establlshed centrallzed agencles to manage NPLs and re-capltall- zatlon programs. In Thalland, a more nuanced approach has been followed. The Thal authorltles lntervened dlrectly ln the restruc- turlng of flnance companles and have also absorbed the losses of state banks. However, the Thal government has favored a more market-orlented approach to the restructurlng of prlvate banks. Flgure 17: Net Direct and Portfolio Investment Flows to the Five Affected Countries (US$ bllllon) Sources: IMF, World Economlc Outlook, Aprll 2000. 1996 1997 1998 1999 -10 -5 0 5 10 15 20 25 Net Portfolio Investment Net Direct Investment ASIA'S RECOVERY-A REGIONAL UPDATE 9 Although publlc capltal has been made avallable to asslst the re- capltallzatlon process, the prlmary responslblllty for flndlng new capltal and resolvlng NPLs has been left wlth the prlvate banks themselves. In the Phlllpplnes, desplte some slgns of stress ln the banklng sector, clrcumstances dld not warrant any expllclt bank restructurlng measures. The process of corporate restructurlng has generally been more decentrallzed. In all the economles, the governments have now provlded frameworks and set rules to help debtors and thelr credl- tors reach agreements. Whlle the processes have been volun- tary, corporate debt restructurlng agencles have, ln some cases, played qulte an actlve role ln forglng agreements through pursu- lng target cases, and by other means. Added lmpetus has been glven to these processes through the promulgatlon of new bank- ruptcy laws ln both Indonesla and Thalland. In Korea, the sheer slze and lnfluence of the chaebols have requlred that the government take a more dlrect role ln the corporate restructurlng process. For the smaller chaebols, re- structurlng focused on voluntary debt settlements along the llnes of the London Approach and has been led by deslgnated lead banks. The flve largest chaebols, through government lnl- tlatlves, have entered speclflc agreements wlth thelr lead banks, wlth debt resolutlon agreements belng closely monltored by the Flnanclal Supervlsory Servlces (FSS). Thls process has been centrally coordlnated and gulded by, on occaslon, dlrect gov- ernment lnterventlons. The Corporate Restructurlng Coordlna- tlon Commlttee (CRCC) was establlshed to resolve dlfferences where settlement plans could not be agreed upon among debt- ors and credltors. Progress in Bank Restructuring. Progress ln bank restruc- turlng varles across the flve affected countrles. There are sev- eral reasons for thls. Flrst, lnltlal banklng sector condltlons dlf- fered slgnlflcantly among countrles, wlth dlstress greatest ln Indonesla and the least ln the Phlllpplnes. Second, economlc growth ltself helps rehabllltate bank balance sheets and, there- fore, the recovery of banklng systems has been lnfluenced by macroeconomlc developments. Thlrd, the dlfferent ways ln whlch problems have been tackled and reforms undertaken have been reglstered ln dlfferent ways on bank and non-bank balance sheets. ASIA RECOVERY REPORT 2000 10 Systemlc flnanclal dlstress led to sharp lncreases ln NPL ratlos on bank and non-bank flnanclal lnstltutlons allke ln all of the affected countrles. Isolatlng and comparlng the evolutlon of NPLs ls, how- ever, not a stralghtforward task. Dlfferent countrles have adopted dlfferlng deflnltlons of NPLs. The accuracy of NPL data ls also llkely to vary across place and over tlme. More recent flgures are llkely to be more accurate than earller ones. NPL ratlos are also sensl- tlve to the range of flnanclal lnstltutlons covered. Ratlos would lncrease lf the loans housed ln asset management companles (AMCs) were consolldated wlth those remalnlng on the balance sheets of flnanclal lnstltutlons. Partly because government-backed AMCs have purchased a slg- nlflcant share of NPLs from banks, the reported NPL ratlos ln the banklng sector are lowest ln Korea and Malaysla (Flgure 18). In Thalland, where prlvate banks have been left to work out thelr bad debts and NPLs wlth credltors, uslng the Corporate Debt Re- structurlng Advlsory Commlttee (CDRAC) and other mechanlsms, the ratlo of NPLs ln the banklng system remalns comparatlvely hlgh, though lt ls now falllng. In the Phlllpplnes, where banks have also been left to manage thelr assets, the NPL ratlo has lncreased slnce the outbreak of the crlsls, largely because of weak- nesses of thrlft banks, but may have peaked now. In Indonesla, the sltuatlon remalns hlghly problematlc. Whlle some progress has been made ln transferrlng NPLs from the banklng sector to the asset management unlt of the Indonesla Bank Restructurlng Agency (IBRA), the sheer slze of the problem has left the banklng sector wlth a hlgh level of NPLs. One of the attractlons of removlng NPLs from bank balance sheets and houslng them ln asset management companles ls that lt strengthens balance sheets of banks and, thereby, eases con- stralnts on lendlng. NPL removal, together wlth targeted publlc sector flnanclal asslstance and prlvate sector capltal lnfuslons, have been effectlve ln strengthenlng the capltal backlng of banks. Banklng sector capltal adequacy ratlo has lmproved ln all the af- fected countrles where data are avallable (Flgure 19). Aspects of the flnanclal operatlons of publlc owned AMCs provlde an addltlonal perspectlve on the pace and nature of restructur- lng. Publlcly owned AMCs have been the major vehlcles for re- movlng NPLs from banklng systems ln Indonesla, Korea and Ma- laysla. In all cases, a substantlal portlon of non-performlng loans have been left to banks to work out themselves, elther for logls- tlcal reasons or because the authorltles wlsh to mltlgate the rlsks Flgure 19: Capital Adequacy Ratios of Commercial Banks* (%) *Cover only commerclal banks for Korea, Phlllpplnes and Thalland, and the banklng sector for Malaysla. Sources: The Flnanclal Supervlsory Servlces web slte, Korea; Mlnlstry of Flnance and Economy, Korea; Monetary and Flnanclal Developments, the Bank Negara Malaysla web slte; the Bangko Sentral ng Plllplnas, Phlllpplnes; Phlllpplnes Update, East Asla Quarterly Brlef, March 2000, World Bank web slte; and the Bank of Thalland web slte. Nov 99 Dec 97 Rep. of Korea Malaysia Philippines Thailand 0 3 6 9 12 15 18 Dec 97 Dec 99 Dec 97 Feb 00 Dec 97 Dec 99 Flgure 18: NPLs of Commercial Banks* (as % of total commerclal bank loans) *NPLs cover only commerclal banks for Korea, Malaysla, Phlllpplnes and Thalland, and the banklng sector for Indonesla; and exclude those transferred to AMCs. Sources: Pollcy Implementatlon ln 1999 and Pollcy Dlrectlons for 2000, the Bank Indonesla web slte (data approxlmated from a chart ln the Report); the Flnanclal Supervlsory Servlces web slte, Korea; Mlnlstry of Flnance and Economy, Korea; the Bank Negara Malaysla web slte; the Bangko Sentral ng Plllplnas web slte, Phlllpplnes; the Bank of Thalland web slte. Latest estimate available Peak level since the crisis Indonesia Rep. of Korea Malaysia Philippines Thailand Mar 99 Jun 99 Dec 99 Nov 98 Jan 00 Nov 99 Feb 00 0 10 20 30 40 50 60 Dec 99 Feb 00 May 99 ASIA'S RECOVERY-A REGIONAL UPDATE 11 of moral hazard. In Indonesla, the asset management unlt of IBRA has now purchased about 36 percent of the total NPLs of the flnanclal system (Flgure 20). In Korea, as of the end of 1999, more than 52 percent of total NPLs of the flnanclal system had been transferred to Korea Asset Management Corporatlon (KAMCO). In Malaysla, Danaharta had purchased about 36 per- cent of total NPLs by the end of 1999. AMCs have typlcally ac- qulred NPLs at a blg dlscount: almost 60 percent ln Korea and 56 percent ln Malaysla (Flgure 21). In Thalland, the Flnanclal Restructurlng Agency (FRA) and a gov- ernment-backed AMC were establlshed as early as 1997. How- ever, thelr mandate was llmlted to managlng the bad debts of flnance companles, not those of commerclal banks. The FRA took over the assets of 56 out of 58 suspended flnance companles and had almost completed the llquldatlon of these assets by the end of 1999. Thallands AMC has acted as a bldder of last resort for the FRAs assets, and has purchased about 30 percent of the face value of the assets taken over by the FRA. Informatlon on asset dlsposal by the AMC ls not readlly avallable. In assesslng the performance of AMCs, lt ls lmportant to bear ln mlnd that thelr mandates vary somewhat. Qulck dlsposal of assets ls more of a prlorlty ln Indonesla and Korea than ln Malaysla, where there ls a greater emphasls on the restoratlon of value to the as- sets acqulred. Fast dlsposal of assets under AMCs control brlngs three beneflts. Flrst, the revenues ralsed help to ease flscal bur- dens and may also help strengthen bank balance sheets when there are revenue sharlng arrangements ln place. Second, by put- tlng assets back to work, dlsposal helps speed economlc recovery dlrectly. Thlrd, the dlsposal of NPLs helps asset markets to adjust by provldlng reference prlces and by maklng markets more llquld. But lf demand for non-performlng loans ls subdued, hasty dlsposal may prove counterproductlve and entall hlgh flscal costs. IBRA reports that lt has now ralsed about $2.5 bllllon from asset sales. Whlle thls exceeds 1999-2000 flscal targets, the process ln Indonesla ls stlll comparatlvely slow. Sales of several banks have been delayed, and cases agalnst debtors are, ln general, pro- ceedlng slowly. By comparlson, the process of asset dlsposal has been qulck ln Korea (Flgure 20). Even ln Malaysla, where fast dlsposal ls not an lmmedlate prlorlty, the process ls movlng ahead. AMCs have, ln general, been able to recover more from dlsposal than they pald to acqulre NPLs (Flgure 21). As of the end of 1999 Flgure 20: NPLs Purchased and Disposed by AMCs* *NPLs purchased and dlsposed refer to those by IBRA (asset management unlt; data on dlsposal not avallable) ln Indonesla, KAMCO ln Korea and Dana- harta ln Malaysla as of the dates lndlcated. In the case of Thalland, these refer to assets taken over from the 56 suspended flnance companles and dls- posed by the FRA. The exact data on asset dlsposals by the FRA are not avallable. But accordlng to the World Bank, the FRA has almost flnlshed llquldatlon of all the assets taken over from the closed flnance companles. Sources: The Indonesla Bank Restructurlng Agency web slte; the Korea Asset Management Corporatlon web slte; the Danaharta web slte, Malaysla; Thalland Economlc Monltor, Feb. 2000, World Bank-Thalland web slte; and Indonesla Update, East Asla Quarterly Brlef, March 2000, World Bank web slte. Dec 99 NPLs disposed (as % of NPLs purchased) NPLs purchased (as % of total NPLs) Indonesia Rep. of Korea Malaysia Thailand 0 25 50 75 100 Dec 99 Dec 99 Dec 99 Feb 00 Dec 99 Feb 00 Flgure 21: Discount Rates on NPL Purchases and Disposals by AMCs* (%) *NPLs purchased and dlsposed refer to those by KAMCO ln Korea and Danaharta ln Malaysla as of the dates lndlcated. In the case of Thalland, the assets of the 56 suspended flnance companles were trans- ferred to the FRA (whlch ls not an AMC). The dlsposal dlscount refers to that at whlch the assets were dls- posed by the FRA. Sources: The Korea Asset Management Corporatlon web slte; the Danaharta web slte, Malaysla; Thalland Economlc Monltor, Feb. 2000, World Bank-Thalland web slte; Thalland Update, East Asla Quarterly Brlef, March 2000, World Bank web slte. Disposal discount Purchase discount Rep. of Korea Malaysia Thailand 0 25 50 75 100 Feb 00 Feb 00 Dec 99 Dec 99 Dec 99 ASIA RECOVERY REPORT 2000 12 and early 2000, the average dlscount on the face value of assets was about 44 percent ln Korea, and 20 percent ln Malaysla. In Thalland, assets have been sold at a dlscount that averages about 72 percent. As recovery strengthens, dlscounts have generally edged down. Publlc funds have been used extenslvely to support flnanclal re- structurlng (Flgure 22). In some countrles, thls has slgnlflcant flscal lmpllcatlons. 2 Government-led recapltallzatlon programs have resulted ln the state ownlng substantlal proportlons of as- sets ln the flnanclal sectors (Flgure 23). The prlvatlzatlon of na- tlonallzed flnanclal lnstltutlons, malnly banks, ls progresslng more slowly than orlglnally antlclpated. Progress in Corporate Restructuring. In all the flve countrles, the resolutlon of corporate debt has been slower than the re- capltallzatlon and restructurlng of the banklng sector. To supple- ment market and bankruptcy process, arrangements for volun- tary workouts, along the llnes of the London Approach, have been adopted ln Indonesla, Korea, Malaysla and Thalland. In the Phll- lpplnes, thls responslblllty lles wlth the Securltles and Exchange Commlsslon (SEC). Across the reglon, a substantlal amount of corporate bad debt ls now undergolng such government-spon- sored voluntary settlement. 3 Debt resolutlon, however, has been proceedlng at an uneven pace (Flgure 24). In Indonesla, of 331 cases reglstered wlth the Jakarta Inltlatlve Task Force (JITF), only 2 percent ln terms of number and less than 4 percent ln terms of value have been resolved as of March 2000. In the other countrles, the process has been more encouraglng. In Korea, substantlal progress has been made ln restructurlng four of the flve largest chaebols. The FSS reports that Hyundal, Samsung, LG and SK have now met the overall requlrements of the Capltal Structure Improvement Plans (CSIPs) for 1999. The debt-to-equlty ratlos of the four conglomerates have now fallen below the targeted level of 2.0 as of the end of 1999. Thelr debt- equlty ratlos average 1.73, compared to 3.55 ln 1998. 2 Slnce the restructurlng process has stlll a long way to go, the total cost of restructurlng ls expected to lncrease further. 3 Data on restructurlng outslde the government-supervlsed schemes are lncomplete. Flgure 22: Total Public Funds Used for Financial Restructuring* (as % of 1999 GDP) *Refer to government bonds lssued for flnanclal restructurlng as of 1999. Sources: IMF, World Economlc Outlook, Aprll 2000, for Indonesla, Korea, and Thalland; and the Danaharta and Danamodal web sltes for Malaysla. Indonesia Rep. of Korea Malaysia Thailand 0 10 20 30 40 50 60 70 Flgure 23: State Ownership in the Financial Sector (%)* *Refer to % of flnanclal sector assets owned by the government as of mld-1999. Source: Claessens, S., et al. (1999), "Flnanclal Restructurlng ln East Asla: Halfway There?, World Bank web slte. Indonesia Rep. of Korea Malaysia Thailand 0 20 40 60 80 ASIA'S RECOVERY-A REGIONAL UPDATE 13 The four conglomerates also out-performed agreed targets ln terms of asset dlvestlture and capltal lnfuslons. In March 2000, the Falr Trade Commlsslon announced that cross guarantees be- tween chaebol afflllates had been completely ellmlnated. Slgnlfl- cant progress has also been made ln restructurlng Daewoo. Debt restructurlng plans have been settled for the 12 Daewoo afflll- ates. An agreement was reached wlth forelgn credltors resolvlng some $4.8 bllllon ln unsecured loans, removlng one of the largest lmpedlments to Daewoos corporate restructurlng. Labor unrest, however, contlnues to slow the pace of reform lmplementatlon. For smaller chaebols and lndependent flrms, 104 cases have so far been reglstered under the Corporate Restructurlng Accord (CRA) framework, of whlch, 78 plans, representlng 75 percent of appllcatlons flled, have been agreed upon as of December 1999. As of March 2000, the Malayslan Corporate Debt Restructurlng Commlttee (CDRC) had resolved 42 percent ln terms of number and about 46 percent ln terms of value of the total cases lt has handled. The CDRAC of Thalland has also met wlth some success ln debt restructurlng. As of March 2000, of the 7,102 target cases lt has handled, about 40 percent ln terms of number and 32 per- cent ln terms of value have been completed. Outslde the govern- ment-supervlsed restructurlng framework, Thal flnanclal lnstltu- tlons have also reported that, as of February 2000, they have restructured about 52 percent of the total debt that has gone through workouts carrled out by flnanclal lnstltutlons themselves. So far, the use of formal bankruptcy procedures has been llmlted ln all the flve countrles (Flgure 25). In part, thls ls a reflectlon of buslness cultures that, hlstorlcally, have favored out-of-court settlements and prlvate negotlatlons. The hlgh costs of resortlng to formal bankruptcy procedures due to blases agalnst credltors ln lnsolvency proceedlngs and lneffectlve judlclal systems ln some of these countrles also deter credltors from taklng legal actlon agalnst defaultlng borrowers. New lnsolvency laws ln Indonesla and Thalland provlde a more credlble framework that may com- pel debtors to negotlate settlements wlth thelr credltors. In Ma- laysla and Korea modern bankruptcy laws exlsted before the crl- sls. The governments ln all of the affected countrles are taklng measures to lmprove the effectlveness of the judlclary ln han- dllng bankruptcy cases. The recent rullng ln favor of Thal Petro- chemlcal Industry credltors ln Thalland and the ASTRA rullng ln favor of IBRA ln Indonesla suggest that bankruptcy laws wlll ln- creaslngly be lmplemented as they are lntended. Flgure 24: Progress in Government-supervised Voluntary Workouts* *Indonesla: data refer to the cases reglstered under JITF. Korea: data refer to the cases reglstered under the CRA framework and do not cover the top flve chaebols. Data on % of debt restructured are not avallable. Malaysla: data refer to the cases reglstered under CDRC. Thalland: data refer to the target cases reglstered under CDRAC. Sources: Updates of Indonesla and Korea, East Asla Quarterly Brlef, March 2000, World Bank web slte; CDRC web slte, Malaysla; CDRAC web slte, Thalland. Indonesia Rep. of Korea Malaysia Thailand Mar 00 0 20 40 60 80 % of cases resolved Mar 00 Dec 99 Mar 00 Mar 00 Mar 00 Mar 00 % of debt restructured Flgure 25: Number of Bankruptcy Cases Filed, Accepted and Completed Since the Crisis* *For Indonesla, Korea and Malaysla untll August 1999; for the Phlllpplnes untll September 1999; for Thalland untll December 1999. Sources: Global Economlc Prospects 2000, World Bank web slte; Thalland Update, East Asla Quarterly Brlef, March 2000, World Bank web slte; Lamberte, M., 2000, "The Phlllpplnes: Challenges for Sustalnlng the Economlc Recovery, Phlllpplne Instltute for Development Studles web slte. Indonesia Rep. of Korea Malaysia Philippines Thailand Completed Accepted Filed 0 20 40 60 80 100 ASIA RECOVERY REPORT 2000 14 Debt-equlty ratlos of the corporate sectors ln most of the affected countrles reached hlgh levels when the crlsls broke out nearly three years ago. Slnce then, because of the flnanclal and opera- tlonal restructurlng measures taken, the ratlos have fallen ln all the countrles except ln Indonesla (Flgure 26). The ratlo was al- ready close to the lnternatlonal average 4 ln Malaysla ln 1998 and by 1999 had fallen towards thls average ln Korea. However, the debt to equlty ratlos remaln hlgh ln the Phlllpplnes, and partlcu- larly hlgh ln Indonesla and Thalland. Market Assessment of Progress in Bank and Corporate Restructuring. One dlfflculty ln assesslng restructurlng and recovery programs ls how to lsolate thelr lmpacts from those of other events. Some perspectlve as to the success or otherwlse of restructurlng programs can be galned from market data. Equlty lndlces, credlt ratlngs, and real bank credlt growth, among other pleces of lnformatlon, provlde an lndlcatlon of the prlvate sectors assessment of progress of restructurlng and rehabllltatlon. - Banking Sector Equity Index. One summary lndlcator of mar- ket assessment ls the performance of flnanclal (or banklng) sector equlty relatlve to broader stock market lndlces. If the banklng sector equlty outperforms the broader market over a perlod of tlme, thls would tend to suggest a bulllsh outlook, and could be lnterpreted as market endorsement of restructurlng and re-capltallzatlon efforts. On the other hand, a lackluster performance of thls lndlcator means that doubts remaln about the effectlveness of restructurlng efforts. Indoneslan flnanclal stocks have under-performed the broader market durlng the crlsls (Flgure 27). Investors re- acted posltlvely when a major restructurlng program was announced ln September 1998. But thls optlmlsm was short- llved and flnanclal stocks have slnce lost ground relatlve to other sectors. Desplte eplsodlc recoverles, flnanclal sector stocks ln Korea have fared worse than the overall market slnce late 1997. By early 2000, they had surrendered about 65 percent of thelr value to the overall market lndex. Desplte the generally posltlve com- 4 For example, the debt-equlty ratlo was 1.07 ln the US ln 1995 and 1.48 ln Germany ln 1995. Flgure 27: Ratios of Financial to General Stock Price Indices (weekly average, last week of June1997=100) Source: ADB calculatlons derlved from Bloomberg. 27 Jun 1997 6 Mar 1998 13 Nov 1998 30 Jul 1999 7 Apr 2000 20 40 60 80 100 120 140 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland Flgure 26: Debt-Equity Ratios of the Corporate Sector Sources: Country papers, Conference on Aslan Corporate Recovery: Corporate Governance and Government Pollcy, World Bank web slte; Buslness World, Phlllpplnes; Korea Herald web slte; Thalland: Selected Issues, IMF web slte. Indonesia Rep. of Korea Malaysia Philippines Thailand 0 1 2 3 4 5 1996 1998 1997 1999 1996 1998 1997 1998 1999 1997 ASIA'S RECOVERY-A REGIONAL UPDATE 15 mentary on Korean banklng sector restructurlng, flnanclal sec- tor equlty values would seem to lndlcate that market partlcl- pants are not yet convlnced of the earnlngs prospects for Koreas banks. Slow progress ln restructurlng the chaebols and con- cerns about the true extent of thelr debt are llkely to have had a negatlve lnfluence on the markets assessment of flnanclal stocks. In Thalland, banklng stocks have lost conslderable ground to the broader market slnce mld-1997. Although they staged a recovery at around the tlme of the announcement of Thallands flnanclal restructurlng package, they have subsequently fallen back and are now under-performlng the broader market. Whlle market partlclpants seem to have been skeptlcal about the pace of restructurlng, recent days have seen reports of a welcome return to profltablllty for Thallands commerclal banks. In Malaysla, flnanclal stocks underperformed the stock mar- ket untll September 1998. Slnce then, and followlng the com- mencement of operatlons of Danaharta and Danamodal, the market valuatlons of flnanclal stocks have recovered. By mld- 1999, Malayslan flnanclal sector stocks were outperformlng the broader market relatlve to the June 1997 benchmark. Thls reflects a posltlve vlew of restructurlng and lts lmpact on pro- spectlve earnlngs. In the Phlllpplnes, flnanclal stocks outperformed the broader market ln 1999 but thls should be seen ln the context of a lackluster performance by Phlllpplne equltles. However, market partlclpants have clearly welcomed ongolng consolldatlon wlth mergers of large banklng groups and the strengthenlng effect that ls expected to follow ln the medlum term. - Real Bank Credit Growth. Real bank credlt growth can also glve some lndlcatlon of the general health of the banklng and corporate sectors. Slow growth or a contractlon ln the stock of credlt can occur when banks balance sheets are too weak to support new lendlng. However, the stock of credlt wlll also be lnfluenced by demand factors, so that data should be lnter- preted wlth care. The scale of the problems ln Indoneslas banklng and corporate sectors and the slow progress of restructurlng led to a sharp ASIA RECOVERY REPORT 2000 16 fall ln the stock of real bank credlt. As yet, lt shows no slgns of recovery. On the other hand, desplte the fact that Koreas fl- nanclal system was among the worst hlt by the crlsls, lmpres- slve progress ln flnanclal restructurlng has strengthened banks balance sheets to a polnt where they have been able to resume lendlng. Thls ls reflected ln an lncrease ln the stock of real bank credlt. Slnce the second half of 1999, real bank credlt has also been lncreaslng ln Malaysla. In both the Phlllpplnes and Thal- land, the stock of real bank credlt was stlll below pre-crlsls lev- els at the end of 1999 (Flgure 16). - Sovereign Credit Ratings. Soverelgn credlt ratlngs provlde a broad barometer of the general economlc health of a country. But slnce soverelgn ratlngs provlde a celllng for non-soverelgn flnanclal and corporate borrowers ln any glven country, they also provlde an lndlrect assessment of the health of the flnan- clal and corporate sectors. After the crlsls, the soverelgn credlt ratlngs for all flve countrles were revlsed sharply downwards to levels below lnvestment grade. Subsequently, soverelgn credlt ratlngs for Korea and Malaysla have been posltlvely reassessed (Table 1). Ratlngs for the Phlllpplnes are stable whlle Indonesla ls on watch for a posslble further downgrade. Table 1: Sovereign Credit Ratings Note: Moodys: Baa bonds are considered medium-grade obligations. Interest payments and principal security appear adequate for the present. Ba bonds are judged to have speculative elements, their future cannot be well assured. B bonds generally lack characteristics of the desirable investments. Standard & Poor's: BBB bonds have adequate protection parameters, but adverse economic conditions could lead to weakened repayment capacity. BB bonds have a speculative element. B bonds are more vulnerable to nonpayment than BB bonds. CCC bonds are currently vulnerable to nonpayment. Fitch IBCA: BBB bonds are investment grade, good credit quality bonds. BB bonds are speculative with a possibility of credit risk developing. B bonds are highly speculative, with a significant credit risk. Source: Bloomberg. Item Moodys Forelgn Currency LT S&P Forelgn Currency LT Fltch IBCA Forelgn Currency LT Indonesia B3 19 March 98 B2 9 January 98 CCC+ 15 May 98 B- 11 March 98 B- 16 March 98 B+ 21 January 98 Korea Baa2 16 December 99 Baa3 12 February 99 BBB 11 November 99 BBB- 25 January 99 BBB+ 30 March 2000 BBB- 19 January 1999 Malaysia Baa3 3 December 98 Baa2 23 July 98 BBB 10 November 99 BBB- 15 September 98 BBB 7 December 99 BBB- 26 Aprll 1999 Philippines Ba1 18 May 97 Ba2 23 January 97 BB+ 21 February 97 BB 30 May 95 BB+ 8 July 99 Thailand Ba1 21 December 97 Baa3 1 December 97 BBB- 8 January 98 BBB 24 October 97 BBB- 24 June 99 BB+ 14 May 98 Outlook. Looklng ahead, lt ls llkely that further resources for the re-capltallzatlon of banks wlll need to be found ln Indonesla, but posslbly too ln Thalland. Partlcularly ln Indonesla thls could present formldable flscal problems. In Thalland, prlvate capltal may be more forthcomlng. Glven the more modest scale of the capltal shortfalls ln Korea and Malaysla, economlc recovery should go a ASIA'S RECOVERY-A REGIONAL UPDATE 17 long way towards heallng bank balance sheets. In the Phlllpplnes, the prlvate sector ls belng left to address addltlonal capltal needs. Over the longer term, the future safety of flnanclal sectors ln the affected countrles wlll depend not only on buttresslng balance sheets, but also on further strengthenlng of operatlonal restruc- turlng and the regulatory and supervlsory systems, and lmprov- lng banklng and corporate governance. Longer Term Aspects-Soclal Recovery, Governance and Competltlveness Sustalnlng and further acceleratlng the recovery ln the soclal sector remalns a crltlcal challenge faclng the affected countrles. The crl- sls has demonstrated forcefully that lnformal safety nets provlde lnadequate protectlon ln a turbulent envlronment. Thls ls why soclal recovery stlll lags behlnd economlc recovery. Whlle soclal support systems ln the reglon have been strengthened slgnlfl- cantly, much more remalns to be done. As these economles move forward, lnstltutlonal arrangements must be found to better pro- tect the most vulnerable and least well-off segments of soclety. More generally, contlnulng lnvestments ln the health, educatlon and general welfare of the broad mass of the populatlon should be a prlorlty. An approach that empowers people rather than pro- vldes unsustalnable subsldles ls more llkely to reconclle legltl- mate soclal objectlves wlth economlc efflclency and dynamlsm. Whlle some growth may be posslble wlthout these changes, lt wlll lnevltably be of lower quallty, more dlfflcult to sustaln, and more vulnerable to adverse shocks. Although results have been mlxed, several lndlcators for the af- fected countrles suggest some measure of soclal recovery, al- belt slow. Unemployment rates fell somewhat ln most of the affected countrles ln 1999 (Flgure 28), although they remaln above thelr pre-crlsls levels. Care should be taken, however, ln lnterpretlng these data, as falllng unemployment rates could partly be a result of decllnlng labor force partlclpatlon rates. Further, lt ls posslble that falllng unemployment masks an ln- crease ln low pald jobs. However, ln Korea, Phlllpplnes and Thal- land, real wage lndlces now exceed thelr respectlve pre-crlsls levels (Flgure 29). Flgure 28: Unemployment Rates (%) Source: ARIC Indlcators. 1996 1997 1998 1999 0 3 6 9 12 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland Flgure 29: Real Wage Rate Indices (1997Q2=100*) *For Thalland, 1997Q1=100; Prlor to 1999, data for Thalland are avallable only for the flrst and thlrd quarters. Source: ARIC Indlcators. 97Q1 98Q1 99Q1 60 70 80 90 100 110 120 Indonesla Rep. of Korea Phlllpplnes Thalland ASIA RECOVERY REPORT 2000 18 A further lndlcator that suggests some soclal recovery ln the affected countrles ls per caplta real consumptlon, whlch has recovered some portlon of the ground lost earller durlng the crlsls, partlcularly ln Korea (Flgure 30). However, compared to the recent peak of 1997, per caplta real consumptlon ln 1999 was stlll 4.8 percent lower ln Indonesla, 4.3 percent lower ln Korea, and 12.8 percent lower ln Malaysla. For Thalland, per caplta real household consumptlon peaked ln 1996. In 1999, lt was stlll 12.8 percent lower than the 1996 level. The only exceptlon ls the Phlllpplnes, whlch dld not see a drop ln per caplta real household consumptlon durlng the crlsls. Agaln care should be taken ln lnterpretlng aggregate consumptlon data because lf lncome dlstrlbutlons have become more unequal, and there ls some evldence that thls mlght be the case, then the consumptlon of the poorest may not be lncreaslng or recoverlng as qulckly as the economy-wlde average. Some of the countrles are commlttlng larger amounts of resources to soclal sectors such as publlc health, educatlon and soclal pro- tectlon (Flgures 31, 32 and 33). For example, ln three of the affected countrles (Malaysla and the Phlllpplnes are exceptlons), the share of government expendlture on soclal safety nets and welfare ln the total budget lncreased ln 1999 to address the so- clal lssues arlslng from the crlsls. Among the flve countrles, only Korea has a formal system of unemployment beneflts, whlch was lntroduced ln the aftermath of the crlsls. Consequently, Korea has the hlghest soclal safety net expendlture. Soclal safety net provlslons ln other countrles cover only baslc welfare, and, ln the case of Malaysla, houslng. The Aslan crlsls had a marked lmpact on poverty levels, although less than lnltlally predlcted. In all of the affected countrles, rls- lng unemployment and falllng real wages brought hardshlp to the poor. However, there are now some slgns that levels of pov- erty are startlng to fall, albelt slowly, as recovery gets underway ln these countrles. Encouraglng slgns are emerglng from the worst affected of the flve, Indonesla, where the lmpact of the crlsls and polltlcal clrcumstances sparked fears of a sustalned lncrease ln poverty. Accordlng to the latest survey data, 5 pov- erty levels ln 1999 have fallen back to almost pre-crlsls levels. These data, however, have to be lnterpreted wlth extreme care because the sample slze, at only 10,000 famllles, was small. Flgure 30: Per Capita Real Private Consumption Indices (1996=100) Source: ARIC Indlcators. 1996 1997 1998 1999 85 90 95 100 105 110 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland 5 Provlnclal Poverty and Soclal Indlcators, selected from the Indonesla Natlonal Soclal and Economlc Survey (SUSENAS) 1993-1999. ASIA'S RECOVERY-A REGIONAL UPDATE 19 Flgure 32: Central Government Expenditure on Education (as % of total budget) Sources: Web sltes of Bank Negara Malaysla and the Mlnlstrles of Flnance of Indonesla and Thalland; Mlnlstry of Flnance and Economy, Synopsls of the Budget of the Republlc of Korea, December 1998 and 1999; Republlc of the Phlllpplnes, FY2000 Budget of Expendltures and Sources of Flnanclng. Indonesia Rep. of Korea Malaysia Philippines Thailand 0 5 10 15 20 25 30 2000 1999 1998 1997 1996 Flgure 33: Central Government Expenditure on Social Safety Nets* (as % of total budget) *Indonesla: soclal welfare; Korea: soclal safety nets lncludlng unemployment beneflts; Malaysla: soclal welfare lncludlng welfare servlces, sports, labor, local government and houslng; Phlllpplnes: soclal welfare lncludlng soclal securlty and employment; Thalland: soclal securlty and welfare. Sources: Web sltes of Bank Negara Malaysla and the Mlnlstrles of Flnance of Indonesla and Thalland; Mlnlstry of Flnance and Economy, Synopsls of the Budget of the Republlc of Korea, December 1998 and 1999; Republlc of the Phlllpplnes, FY2000 Budget of Expendltures and Sources of Flnanclng. Indonesia Rep. of Korea Malaysia Philippines Thailand 2000 1999 1998 1997 1996 0 2 4 6 8 10 Studles wlth a larger sample slze are requlred lf more rellable results are to be obtalned. In other countrles, more recent data are needed to make slmllar assessments. But fast recovery ls expected to have had some posltlve lmpact on reduclng poverty provlded lt ls not assoclated wlth greater lnequallty ln the dlstrl- butlon of lncome. Beyond soclal recovery, the affected countrles, ln partlcular Indo- nesla, Phlllpplnes and Thalland, stlll face a blg challenge ln lm- provlng the quallty of llfe for mllllons of thelr cltlzens who stlll llve ln poverty. In Asla as a whole, accordlng to the most common lnternatlonal deflnltlon of poverty-those who llve on less than $1 a day measured ln 1985 dollars-about one ln four, or 900 mllllon people, were poor ln 1998. Thls ls about more than twlce as many poor people than those llvlng ln the rest of the developlng world comblned. In Indonesla, the same poverty deflnltlon glves a na- tlonal headcount lndex of 20.3 as of December 1998. The Phlllp- plne offlclal estlmate of natlonal headcount lndex ln 1997 was 36.8, based on a poverty threshold of about US$3 per person per day at 1985 purchaslng power parlty (PPP) dollars. In Thalland, Flgure 31: Central Government Expenditure on Health (as % of total budget) Sources: Web sltes of Bank Negara Malaysla and the Mlnlstrles of Flnance of Indonesla and Thalland; Republlc of the Phlllpplnes, FY2000 Budget of Expendltures and Sources of Flnanclng. 2000 1999 1998 1997 1996 Indonesia Malaysia Philippines Thailand 0 2 4 6 8 ASIA RECOVERY REPORT 2000 20 the share of the poor was estlmated at 13 percent ln 1998. But quallty of llfe cannot-and should not-be deflned by dollar ln- come alone. A broad deflnltlon of the quallty of human llfe must lnclude other aspects of human deprlvatlon: llllteracy, malnutrl- tlon, bad health, poor access to water and sanltatlon, vulnerabll- lty to economlc shocks, and lack of polltlcal freedom. Flghtlng poverty and addresslng broad aspects of quallty of llfe wlll remaln the most presslng lssues faclng many Asla countrles, lncludlng those affected by the crlsls, for many years to come. The crlsls has brought to the fore lssues of governance ln the publlc and corporate sectors. Too much has probably been made of the weaknesses that clearly exlsted before the crlsls. Fast growth coexlsted wlth these prlor to the crlsls, and growth has now re- sumed wlth only modest changes. But thls ls no reason for com- placency. Good governance can and does contrlbute slgnlflcantly to both the quantlty and quallty of growth. In an lncreaslngly lnterdependent global economy, good practlces are llkely to as- sume greater lmportance ln assuaglng lnvestor concerns and at- tractlng needed capltal and expertlse. Governments have a key role to play ln developlng lnstltutlonal frameworks conduclve to good governance and ensurlng that they functlon effectlvely. After the sharp appreclatlon of real effectlve exchange rates slnce the beglnnlng of 1998 (Flgure 34), lssues related to competltlve- ness have also resurfaced. Whlle the affected countrles have fo- cused on gettlng back on thelr feet, competltlon from other coun- trles wlthln the reglon and outslde has contlnued to lntenslfy ln key export markets. On a global scale, excess capaclty ls now apparent ln a number of sectors. Prlces of electronlcs and electrl- cal machlnery and equlpment, telecommunlcatlons equlpment, computer equlpment and offlce machlnes, and transportatlon equlpment have all fallen sharply ln recent years. And prlces of exports from East Aslan natlons have fallen more sharply than those from other reglons. Thls, no doubt, contrlbuted to the 1998 contractlon ln the nomlnal dollar value of exports from the af- fected countrles. Electronlcs prlces have recovered slnce then, although they are now falllng back agaln, lndlcatlng that the prlces of these products are qulte sensltlve to the balance between sup- ply and demand. Partly because of the recovery ln electronlcs, export growth rates recovered strongly ln 1999 ln all the affected countrles except Indonesla. Export volumes have been buoyed by strong world demand, but have also responded, although wlth a lag, to depreclated real exchange rates. Flgure 34: Real Effective Exchange Rate Indices* (1997June=100) *Traded vs. non-traded goods prlces. Source: ARIC Indlcators. Jun 1997 Jan 1998 Sep 1998 May 1999 Feb 2000 20 40 60 80 100 120 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland ASIA'S RECOVERY-A REGIONAL UPDATE 21 There are, however, competltlve pressures faclng Indonesla and, to a lesser degree, Thalland and the Phlllpplnes ln markets for labor-lntenslve exports. These may lncrease wlth the entry of the PRC lnto the World Trade Organlzatlon (WTO), although that would also provlde new opportunltles for trade. Wlth lntenslfylng export competltlon, the reglons major tradlng partners may glve ln to pressures to apply antl-dumplng and other protectlve measures to llmlt the market penetratlon of Aslan exports. Another poten- tlally serlous challenge arlses from the fallure of the Seattle Mln- lsterlal Conference of the WTO. The lack of consensus on further llberallzatlon of trade on a most-favored natlon basls through multllateral negotlatlons may encourage countrles to focus on strengthenlng reglonal tles on a dlscrlmlnatory basls. These pref- erentlal arrangements carry the potentlal of trade dlverslon and may further llmlt the market access of the crlsls-affected coun- trles ln reglons such as the Amerlcas and Europe. Golng forward, to sustaln a recovery ln lnternatlonal trade, lt wlll be essentlal for reglonal economles to lmprove thelr access to markets overseas. Thls may requlre a more focused and coordl- nated volce ln negotlatlons over multllateral trade llberallzatlon. Domestlc constralnts also need to be addressed. Wlse lnvest- ments ln educatlon and human resources, as well as lnfrastruc- ture, and further deregulatlon of lnvestment and llberallzatlon of trade pollcles wlll help achleve thls. Movlng resources from actlvl- tles ln whlch comparatlve advantage ls fadlng lnto others where opportunltles are expandlng ls a perpetual challenge. Recovery Prospects and Rlsks Medium-term Prospects. Havlng proved overly pesslmlstlc ln 1999, the accepted vlew now ls that recovery ln the affected coun- trles wlll be consolldated and further strengthened ln 2000. Con- sensus Economlcs expects the Indoneslan economy to grow by 4.2 percent, but projectlons vary wlthln qulte a large range of 3.0 to 5.5 percent (Table 2). To varylng degrees, growth ls also ex- pected to plck up ln Malaysla, Phlllpplnes and Thalland. But Con- sensus Economlcs expects growth to slow down ln Korea, falllng to 7.7 percent, after the pronounced recovery that has already taken place there. The range of projectlons ls, however, rather wlde from 6.0 to 9.6 percent, suggestlng that there are stlll slg- nlflcant underlylng uncertalntles. Three factors underlle these generally reassurlng assessments. Flrst, monetary and flscal poll- cles are expected to remaln broadly accommodatlng. Second, ASIA RECOVERY REPORT 2000 22 favorable condltlons ln the global economy are expected to con- tlnue. Thlrd, output ls stlll somewhat below potentlal. As the gap ls closed, growth wlll be supported. As growth ls consolldated, soclal recovery should progress further. Wlth uncertalnty llftlng, domestlc sector prlvate demand ls ex- pected to play a stronger role ln propelllng growth ln 2000 than lt has done so far. Whlle publlc consumptlon ls expected to stablllze as governments focus more on flscal consolldatlon, the upward trend ln prlvate consumptlon wlll contlnue and lnvestment de- mands are expected to plck up. However, net exports may shrlnk, as lmports rlse wlth the general tlde of economlc actlvlty. In 2000, flnanclal markets ln the affected countrles should be drlven more by fundamentals. Although stock markets have soft- ened somewhat slnce early thls year, there should be less volatll- lty ln the future. Reglonal flnanclal markets should be more at- tractlve to lnvestors seeklng dlverslflcatlon opportunltles. Real estate prlces should also start to nudge up. Rlslng domestlc de- mand should lmprove credlt flows ln the economy, and cash flow posltlons of banks and corporates. Flscal deflclts are also llkely to narrow. Taken together, these developments should make do- mestlc assets more attractlve to forelgn and domestlc lnvestors. Tanglble as the recovery process ls, lt remalns prone to rlsks ln both the domestlc and global economlc envlronment. On a posl- Consensus World Country 1996 1997 1998 1999 Economics 1 Official 2 ADB 3 IMF 4 Bank 5 Indonesla 7.8 4.7 -13.2 0.2 4.2 (3.0-5.5) 3.0-4.0 4.0 3.0 3.0 Rep. of Korea 6.8 5.0 -6.7 10.7 7.7 (6.0-9.6) 6.0 7.5 7.0 6.0 Malaysla 10.0 7.5 -7.5 5.4 6.4 (5.0-7.6) 5.8 6.0 6.0 6.0 Phlllpplnes 5.8 5.2 -0.5 3.2 3.9 4.0-5.0 3.8 4.5 4.0 Thalland 5.9 -1.7 -10.4 4.2 5.2 (4.1-6.0) 4.5 4.5 4.5 5.0 2000 Note: Data for 1996-1999 are from ARIC Indicators. 1 Consensus Economics Inc., Asia Pacific Consensus Forecasts, March 2000; Figures in parentheses represent the range of forecasts. 2 Official government projections were obtained from the following sources: IndonesiaBank Indonesia, Policy Implementation in 1999 and Policy Direction for 2000, January 2000; Rep. of KoreaMinistry of Finance and Economy, Korea Economic Update, 24 January 2000; MalaysiaBank Negara Malaysia, 2000 Budget Speech, 25 February 2000; PhilippinesNational Economic and Development Authority, 1999 Economic Performance and 2000 Prospects, 28 January 2000; ThailandBank of Thailand, Revised Economic Forecasts for the Thai Economy, 29 February 2000. 3 ADB, Asian Development Outlook 2000, April 2000. 4 IMF, World Economic Outlook, April 2000. 5 World Bank, East Asia and Pacific Quarterly Brief, 22 March 2000. Table 2: GDP Growth and Projections (%) ASIA'S RECOVERY-A REGIONAL UPDATE 23 tlve note, contaglon and flnanclal volatlllty ln the global economy seem to have faded through 1999, and the affected countrles of Asla are now ln a much better posltlon to wlthstand shocks. In all flve affected economles, forelgn exchange reserve posltlons have strengthened conslderably over the past 12 months (Flgure 35) and now provlde hlgher coverage of short-term external debt (Flg- ure 36). The calm response ln global flnanclal markets to the devaluatlon of the Brazlllan real ln early 1999 marked a return to more orderly market dynamlcs. Ecuadors default hardly regls- tered at all ln Aslan markets. Spreads on Aslan debt narrowed throughout 1999 ln response to lmprovlng reglonal economlc con- dltlons (Flgure 37), although they have recently edged up wlth falllng long-term ylelds ln the US. External Risks. The IMF now projects the global economy to grow by 4.2 percent ln 2000, a slgnlflcant upward revlslon from lts October 1999 projectlon of 3.4 percent (IMF, WEO, October 1999 and Aprll 2000). Most of the addltlonal growth ls expected to be provlded by the US economy, where the IMFs forecast for 2000 has been ralsed to 4.4 percent. Flrst quarter growth rate was 5.4 percent on an annuallzed basls, the thlrd consecutlve quarter of growth above 5 percent. Domestlc demand ln the US contlnues to grow strongly, wlth unemployment at an unprec- edented low rate. Recent US performance has ralsed questlons about long-held as- sumptlons regardlng macroeconomlc relatlonshlps. One vlew ls that underlylng structural changes are allowlng the US economy to sustaln faster growth than before (for any glven lnflatlon tar- get). A conjunctlon of relatlvely low lnflatlon and acceleratlng growth seems to support thls proposltlon. Proponents of thls vlew clalm that dramatlc productlvlty growth assoclated wlth rapld tech- nologlcal advances and demographlc and lnstltutlonal shlfts, whlch make for much more flexlble labor markets, are the plllars of the so-called New Economy. As yet, lt would seem the Federal Reserve Board (Fed) ls not qulte persuaded by thls thesls. Whatever changes may be taklng place ln the US economy, the vlew of the Fed appears to be that the current allgnment of unemployment, growth and lnflatlon ls not sustalnable. Concerned by latent lnflatlonary pressures, the Fed has gradually ralsed overnlght borrowlng rates. Beglnnlng June 1999 the Fed has ralsed the federal funds rate by flve quarterly lncrements totalllng 125 basls polnts. By hlstorlcal standards, thls tlghtenlng has been mlld. Recent economlc data, partlcularly those that lndlcate strong growth and hlgher lnflatlon ln the flrst quarter of 2000, suggest that further short-term lnterest rate lncreases may be ln the plpellne. Flgure 35: Gross International Reserves Less Gold (US$ bllllon) Source: ARIC Indlcators. 1996 1997 1998 1999 0 20 40 60 80 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland Flgure 36: Short-term External Debt as % of Gross International Reserves less Gold Note: Flgures for Indonesla represent short- term external debt as a % of net lnternatlonal reserves. The 1999 flgure for the Phlllpplnes ls as of end September. Source: ARIC Indlcators; for Indonesla, Internatlonal Department, Bank Indonesla. 1996 1997 1998 1999 0 50 100 150 200 250 300 350 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland Flgure 37: Emerging Market Bond Indices (JP Morgan EMBI+ basls polnts) Source: JP Morgan. 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 EMBIPLUS Asia Latin America 31 Dec 1997 11 Apr 2000 30 Apr 1999 7 Jan 2000 28 Aug 1998 ASIA RECOVERY REPORT 2000 24 In cruclal ways, US prospects hlnge on the stablllty of bellefs about asset prlces and earnlngs growth. Increaslng market volatlllty seems to suggest that perceptlons rather than fundamentals have lncreas- lngly come to lnfluence behavlor. A collapse of the stock market could cause wldespread flnanclal dlstress and turn a soft landlng lnto a hard one. A hard landlng of the US economy would ad- versely lmpact global demand, trade and asset markets. There are a number of developments that could unhlnge bellefs. Flrst, faster than expected growth of domestlc demand may ne- cessltate sharp lncreases ln US lnterest rates and trlgger substan- tlal correctlons ln equlty prlces and a depreclatlon of the US dollar. Slgns of overheatlng are emerglng ln the US, lncreaslng the pros- pects of more agresslve lnterest rate lncreases by the Fed. Sec- ond, glarlng lmbalances ln personal savlngs and the current ac- count balance may leave the US economy vulnerable to shlfts ln lnternatlonal lnvestors appetlte for US dollar assets. Thlrd, the productlvlty spurt that underplns the New Economy doctrlne may not last. If productlvlty sllps, the gap between expected and actual earnlngs mlght be so large as to cause a collapse ln stock prlces. Seen from thls perspectlve, the recent fall ln NASDAQ may be a blesslng ln dlsgulse. Slowlng down the torrld expanslon of paper wealth ln the US may help curb growth of domestlc demands. Prospects ln Japan ln 2000 wlll depend cruclally on prlvate sector growth. The large flscal stlmulus at the end of 1999 should mean that growth ln 2000 at least matches 1999s outcome, but lm- provement wlll depend on a recovery ln prlvate lnvestment and consumptlon demand. The Japanese economy grew by 0.3 per- cent ln 1999, and the WEO projects that lt wlll grow by 0.9 per- cent ln 2000. Recent economlc data suggest that, drlven by prl- vate sector actlvltles and prlvate consumptlon, growth has plcked- up somewhat ln the flrst quarter of 2000. Japan has embarked on a complex banklng and corporate restruc- turlng and reform program. Substantlal flscal resources have been devoted to thls program. Over the medlum term, restructurlng ef- forts wlll help remove lngralned lnefflclencles and establlsh a strong foundatlon for future growth. However, the more lmmedlate lm- pact of reform ls unllkely to be expanslonary. Once dlfflcult adjust- ments have been completed, a relnvlgorated flnanclal and corpo- rate sector should help propel the Japanese economy forward. Growth ln Europe ls expected to plck up further ln 2000. Posslble obstacles to thls lnclude the posslblllty of sharp reductlons ln US equlty prlces that may carry over lnto European markets. Some fur- ther monetary tlghtenlng ln the Euro area ls also posslble. In the Unlted Klngdom, lnterest rates have been ralsed ln response to ASIA'S RECOVERY-A REGIONAL UPDATE 25 strong demand and a tlghtenlng labor market. Desplte the expected near-term decllne ln lnflatlon to a record low, the medlum-term out- look ls far less benlgn and, therefore, further rate lncreases cannot be ruled out. The WEO also projects economlc growth to plck up ln other non-Euro Western European economles. On the posltlve slde, global market condltlons are expected to lmprove for commodlty-exportlng developlng countrles over the course of the year. Oll prlces have lncreased sharply slnce early 1999 and, followlng the end-March agreement among mem- bers of the Organlzatlon of Petroleum Exportlng Countrles (OPEC) to ralse productlon, the prlces have fallen somewhat and now stablllzed. On average, oll prlces ln 2000 are expected to be substantlally hlgher than ln 1999. Oll-exportlng coun- trles, lncludlng Indonesla, wlll beneflt from galns ln terms-of- trade. The antlclpated acceleratlon of global growth ln 2000 should provlde stronger support for non-fuel commodlty prlces and create favorable demand condltlons for export-orlented East Aslan economles, lncludlng those affected by the crlsls. Domestic Risks. As the recovery takes hold, concern ls mountlng that lt may be used as a pretext to postpone or cancel reforms. Thls ls a rlsk brought about by the swlft rebound. Some have suggested that a more cautlous approach to reform may now be needed to al- low growth to take flrmer root. They polnt out that the lnltlal lmpact of restructurlng ls llkely to be deflatlonary as retrenchments and bankruptcles occur, and that thls could dlsrupt the recovery. The ar- gument then runs that slnce growth can ease the debt burden, lt should be accorded a hlgher prlorlty than reforms. Only once growth ls more flrmly establlshed should reforms proceed. In an envlron- ment where growth ls more flrmly anchored, lt ls suggested, reforms wlll meet wlth less reslstance and entall lower costs. Whlle thls reasonlng has lts appeal, much depends on the sever- lty of the underlylng dlfflcultles, and the rate of economlc growth that can reallstlcally be expected. Whlle the expected hlgh growth ln Korea and Malaysla may go a long way towards resolvlng thelr debt problems, projected growth for Indonesla and Thalland ls llkely to have much less of a remedlal effect glven the extent of debt overhang. If the expected growth dld not take place, and reforms were deferred, debts could escalate further and thls would make the entlre restructurlng process much more palnful than lt mlght otherwlse be. In these clrcumstances, newly replenlshed bank capltal could also be put at rlsk. A "growth flrst strategy ls not only rlsky, lt may lnvlte a recur- rence of problems at a later date, partlcularly lf underlylng struc- tural dlfflcultles are not tackled. Accumulated experlence lndl- ASIA RECOVERY REPORT 2000 26 cates that the best chances for durable recovery requlre perse- verance wlth reform. Encouraglng economlc actlvlty by postpon- lng or cancellng needed but dlfflcult reforms can exact a hlgh cost ln terms of a reductlon ln long-run potentlal growth. A senslble mlddle road ls to comblne reform wlth pollcles that provlde needed, and affordable, support for demand. However, the scope for accommodatlng demand pollcles ls narrowlng. Large deflclts and rlslng publlc debt levels would ralse questlons about the flscal sustalnablllty of further pump prlmlng (Flgure 38). Al- though current account surpluses permlt greater freedom over monetary pollcy, rlslng global lnterest rates may eventually re- qulre a less accommodatlng monetary stance too. In the Phlllp- plnes, lnterest rates are already edglng up. Longer-term Prospects. Looklng beyond the next year or two, an lmportant lssue ls whether the crlsls wlll have llngerlng effects on Aslas potentlal for growth. Has the crlsls permanently blunted Aslas prospects for economlc catch-up? Those who are pesslmlstlc about growth prospects polnt to the lnstltutlonal weaknesses that the crlsls has brought lnto sharp rellef. Slnce strengthenlng and modernlzlng lnstltutlons ls a tlme- consumlng actlvlty, and there ls a great deal of uncertalnty about whether the needed changes can and wlll be made, Aslas pros- pects for growth are dlmlnlshed. Growth that rests on the rapld accumulatlon of capltal may also be more dlfflcult ln the future, because dlmlnlshlng returns and lnefflclencles may set ln qulckly, especlally ln the presence of weak flnanclal and corporate sec- tors. Other factors that could permanently damage growth pros- pects would lnclude protectlonlsm ln the lndustrlallzed countrles and the breakdown of the world tradlng system. Whlle the growth pesslmlsts vlews cannot be lmmedlately dls- counted, much wlll depend on the cholces that are made about poll- cles and lnstltutlons. If pollcy and lnstltutlonal reforms are contln- ued, growth should be sustalned and become less vulnerable to ex- ternal shocks. Ultlmately, the crlsls could lndeed appear to be a moderate dlsturbance ln Aslas rlse and dynamlsm. Contlnued hlgh rates of domestlc savlngs, sound macroeconomlc pollcles, lnvest- ments ln educatlon and lnfrastructure, lmproved governance and publlc admlnlstratlon, and openness to trade and forelgn lnvestment, wlll help ensure that Asla contlnue to close the lncome gap wlth the lndustrlallzed countrles. It bears underllnlng that fast economlc growth ls vltal lf poverty ls to be eradlcated and broad-based galns ln llvlng standards are to resume. Whlle the crlsls undoubtedly brought paln, lt may galvanlze reform efforts and wlth the beneflt of hlnd- slght turn out to have been a temporary setback. Flgure 38: Gross Public Debt (as % of GDP) Source: IMF, World Economlc Outlook, Aprll 2000. 1996 1997 1998 1999 0 20 40 60 80 100 120 Indonesla Rep. of Korea Malaysla Phlllpplnes Thalland Consensus World Country 1996 1997 1998 1999 Economics 1 ADB 2 IMF 3 Bank 4 People's Republlc of Chlna 9.6 8.8 7.8 7.1 7.3 (6.5-7.9) 6.5 7.0 7.0 Slngapore 7.5 8.0 1.5 5.4 5.7 (4.9-6.5) 5.9 5.9 5.7 Vlet Nam 9.3 8.2 4.4 4.4 4.6 4.5 4.5 4.6 2000 Note: Data for 1996-1999 are from the Asian Development Outlook 2000. 1 Consensus Economics Inc., Asia Pacific Consensus Forecasts, March 2000; Figures in parentheses represent the range of forecasts. 2 ADB, Asian Development Outlook 2000, April 2000. 3 IMF, World Economic Outlook, April 2000. 4 World Bank, East Asia and Pacific Quarterly Brief, 22 March 2000. Table 3: GDP Growth and Projections (%) The Peoples Republlc of Chlna, Slngapore and Vlet Nam Updates 1 The Peoples Republlc of Chlna Recent Trends. Economlc growth began to slow ln the PRC ln the fourth quarter of 1998. In response, the government cut ln- terest rates ln June 1999 and announced a flscal stlmulus pack- age ln August. These measures, together wlth a rebound ln ex- ports durlng the second half of 1999, have helped support growth at an lmpresslve rate of 7.1 percent, whlch ls only 0.7 percentage polnt lower than the growth rate ln 1998 (Table 3). Flxed lnvestment grew by 5.2 percent ln 1999, down from 14 percent ln 1998 due to excess capaclty ln many sectors. Con- sumer demand remalns weak partly because of the lncreased unemployment arlslng from redundancles ln state-owned enter- prlses (SOEs). Weak aggregate demand and an overall deflatlon- ary trend ln the reglon caused the consumer prlce lndex to de- cllne another 1.4 percent ln 1999, after falllng by 0.8 percent ln 1998. To counteract these deflatlonary trends, more accommo- datlng flscal and monetary pollcles were adopted. Largely because of the Aslan crlsls, export growth was subdued ln 1998 and agaln ln the flrst half of 1999. Exports lncreased ln the second half of 1999 as growth ln the rest of Asla began to plck up. However, for 1999 as a whole, export growth was a modest 1 Among others, we have beneflted from the Aslan Development Outlook 2000, Aprll 2000. ASIA RECOVERY REPORT 2000 28 6 percent, whlle lmports grew at a robust 18 percent, leadlng to a decllne ln trade surplus. Forelgn dlrect lnvestment (FDI) lnflows decllned ln 1999 for the flrst tlme slnce 1990, reflectlng forelgn lnvestors concerns about weak flnanclal lnstltutlons. The exter- nal payments sltuatlon, however, contlnued to be comfortable. The external debt and debt-servlce ratlos are low by developlng country standards. Forelgn exchange reserves were about $155 bllllon ln December 1999 (11 months of lmport equlvalent), sllghtly hlgher than the total external debt and about nlne tlmes the short- term external debt. At less than 10 percent, the external debt- servlce ratlo ls easlly manageable. Medium-term Prospects. GDP growth ls expected to remaln at around 7 percent ln 2000-2001. However, there may be some slow- down ln lndustrlal and constructlon sectors and lncreaslng unem- ployment arlslng out of the contlnued SOE reforms. Moderate growth should help keep lnflatlon ln check. Recent constltutlonal amend- ments to recognlze the role of the prlvate sector should lmprove the prospect for prlvate lnvestment. Broader recovery ln the re- glon should lmprove the PRCs export prospects, whlle lmport de- mand ls expected to be more moderate. Balanclng these factors, the current account ls llkely to remaln ln surplus durlng 2000-2001, but the surplus wlll be lower. Thls, together wlth contlnued capltal lnflows, ls expected to lncrease forelgn exchange reserves further. Policy Issues. The reslllence of the PRC economy to the reglons crlsls was due to lts strong macroeconomlc performance and ex- ternal posltlons. Capltal and exchange rate controls also helped lnsulate the economy from external shocks. But the PRC suffers from structural weaknesses ln the flnanclal and corporate sec- tors, slmllar to those of the flve affected countrles. These weak- nesses lnclude hlgh levels of NPLs, a low capltal base ln many banks, weak prudentlal regulatlons and supervlslon, and a llm- lted role for market based competltlon. Addresslng these weak- nesses, lncludlng reformlng the SOEs, remalns the most chal- lenglng task confrontlng the government. Further SOE reforms wlll lncrease urban unemployment, whlch has become a presslng lssue ln recent years. The government needs to harness better the role of the prlvate sector to help generate needed jobs. It ls also essentlal to accelerate reforms ln the soclal securlty system to provlde effectlve protectlon for the unemployed and the poor. The PRC has been successful ln recent years ln reduclng poverty. But lnequallty, especlally, reglonal lnequallty, has lncreased slg- nlflcantly. The government ls now attachlng a hlgh prlorlty to de- veloplng the poorer western reglon of the country. THE PRC, SINGAPORE AND VIET NAM UPDATES 29 Slngapore Recent Trends. The Slngapore economy has rebounded strongly after a dlfflcult year ln 1998. GDP growth of 5.4 per- cent was achleved ln 1999, whlch was sufflclent to llft real per caplta lncomes (measured on a resldent basls) above the pre- vlous 1997 peak. The manufacturlng sector accounted for much of the growth, reflectlng strong external demand for electronlcs. Wlth lncreased reglonal trade flows, rlslng tourlst arrlvals, and lmproved re- glonal demand for flnanclal servlces, the servlce sector also staged a recovery. The constructlon sector, however, contlnued to decllne, malnly because of a sharp drop ln prlvate construc- tlon due to excess capaclty ln resldentlal and nonresldentlal markets. On the demand slde, overall growth ln flxed lnvestment remalned below lts pre-crlsls rate, due to lndustrlal overcapaclty. Flscal pollcy proved less of a stlmulus to the economy than orlglnally envls- aged. The orlglnal budget for flscal year 1999 endlng 31March 2000 had predlcted a budget deflclt. However, conslderably faster- than-expected revenue growth, comblned wlth lower operatlng and development expendlture, led to a budget surplus. Desplte an lncrease ln the lnterbank rate, reflectlng hlkes ln US lnterest rates that began ln mld-1999, domestlc retall rates remalned rela- tlvely stable throughout the year because deposlts contlnued to lncrease even as lendlng remalned weak. Inflatlon remalned low ln 1999. However, resldentlal property prlces rose slgnlflcantly, though they remaln about 30 percent lower than thelr peak levels of 1996. Prlces of commerclal prop- erty, by contrast, contlnued to decllne, as oversupply dampened the market. Boosted by growlng optlmlsm about the reglons growth prospects, equlty prlces rose sharply ln the flrst half of 1999, and then leveled off because of tradlng curbs by brokerlng houses, and rlslng US lnterest rates. Overall, equlty prlces, as measured by the Stock Exchange of Slngapore all-share lndex, rose 74.8 percent ln 1999. The Slngapore dollar remalned broadly stable agalnst the US dol- lar. The trade surplus narrowed from lts record level of 1998. Although strong growth ln the reglon and ln the Unlted States ASIA RECOVERY REPORT 2000 30 lncreased demand for Slngapores electronlc goods, a hlgher rate of lmport growth, whlch resulted from renewed consumer confl- dence and dlmlnlshed lnventorles, more than offset thls demand. However, due to a posltlve servlce account, the current account surplus decllned only sllghtly from lts 1998 level. In net terms, the wlthdrawal of portfollo and "other lnvestment capltal contln- ued ln 1999 but at a slower pace than ln 1998. Medium-term Prospects. GDP growth ls expected to accel- erate further ln 2000-2001 as prlvate demands strengthen. Thls should reduce excess lndustrlal capaclty and provlde greater lncentlves for lnvestment. As the reglonal recovery gathers momentum, the flnances of domestlc banks that have lent to non-resldents should lmprove. Inflatlon may edge up ln 2000 as a consequence of lncreased fuel prlces, some wage lnflatlon, and stronger domestlc demand. Meanwhlle, the trade surplus ls set to contract as lmports lncrease more rapldly than exports. An lmprovement ln the servlces and lncome account and steady lnflows of FDI, however, wlll ensure that overall reserves remaln at healthy levels. Policy issues. Slngapores strong lnstltutlons and flexlble ap- proach to macroeconomlc management have allowed lt to emerge qulckly from the Aslan crlsls. A recurrlng challenge, though, ls how to remaln competltlve. The Commlttee on Slngapores Com- petltlveness has called for a knowledge-based economy to help lmprove long-term competltlveness. To thls end, the govern- ment has been developlng an lnstltutlonal structure that wlll provlde approprlate support, and has taken steps to provlde ln- centlves to entrepreneurs enterlng hlgh-tech lndustrles and to traln people ln skllls related to lnformatlon technology. Although the governments past lnterventlons ln lndustrlal development have been beneflclal, there ls some concern that contlnued ln- terventlons on thls scale could lmpede necessary corporate re- structurlng as market condltlons change. Over the next flve years, a serles of measures lntended to strengthen and expand Slngapores role as a reglonal flnanclal center wlll be lntroduced. As portfollo and bank capltal return to the reglon, Slngapore wlll be better posltloned to provlde the range of servlces, wlthln a securely regulated envlronment, that lnternatlonal lnvestors ln- creaslngly demand. Among measures ln the plpellne are moves to deepen the Slngapore dollar bond market through allowlng forelgn soverelgns and companles to lssue Slngapore dollar- denomlnated bonds. THE PRC, SINGAPORE AND VIET NAM UPDATES 31 Vlet Nam Recent Trends. GDP grew ln Vlet Nam ln 1999 by about 4 percent; half the average growth rate durlng the slx-year pe- rlod from 1992 up to the onset of the Aslan crlsls ln 1997. The slowdown began ln 1998 as the country felt the lmpact of the reglonal crlsls and lost the reform momentum. Agrlculture sector growth lncreased to 5 percent ln 1999 from 3 percent a year earller, thanks to a bumper rlce harvest. The lndustrlal sector, however, contlnued to lag due to weak domestlc demand and wanlng competltlveness ln selected sectors. Tour- lsm, real estate servlces, and transportatlon were partlcularly hard hlt, resultlng ln a slowdown ln the servlce sector. Two years of slow growth have led to rlslng unemployment, partlcularly ln ur- ban areas, where lt reached about 7.4 percent ln 1999. Investment as a share of GDP has fallen durlng the last two years, due to lower lnvestment by the prlvate and state sectors, and reduced FDI lnflows. FDI decllned for the second year ln a row, as lnvestor sentlment remalned lukewarm because of un- certalntles about the dlrectlon and pace of reforms. Two thlrds of FDI lnflows orlglnated ln Asla before the crlsls, and hence were vulnerable to weaker reglonal growth. The budgeted ln- crease ln publlc lnvestment ln 1999 to stlmulate domestlc de- mand dld not materlallze. The budget deflclt was kept to a moderate level of 2 percent of GDP ln 1999, as revenue shortfall was accompanled by cuts ln current expendlture. The retall prlce level lncreased by 0.1 percent ln 1999, compared wlth 9.2 percent ln 1998. A fall ln the food prlce lndex, weak domestlc demand, and a relatlvely stable exchange rate contrlbuted to prlce stablllty. Growth of bank credlt to the government and SOE sector was more restrlcted than ln prevlous years, whlle credlt to the smaller non-state sector grew faster. Exports grew slowly ln early 1999 but plcked up towards the end of the year, largely because of rlslng crude oll and rlce exports. Overall export growth was 22.3 percent, up from 1.0 percent ln 1998. Imports, meanwhlle, reglstered only a small lncrease ln 1999 from the prevlous year. Consequently, the current account reglstered a substantlal surplus, ln contrast to a large deflclt ln 1998. External debt remalned wlthln manageable llmlts. ASIA RECOVERY REPORT 2000 32 Medium-term Prospects. Durlng 2000-2001, GDP growth ls expected to rlse moderately, as the lndustry and servlce sec- tors recover after two years of slow growth. Inflatlon wlll also lncrease because of hlgher prlces for petroleum products and the expected stronger domestlc demand. Export growth ls llkely to be moderate compared wlth 1999. But after a two-year slump, lmports should recover. Consequently, the current account bal- ance wlll probably remaln posltlve ln 2000, wlth the surplus narrowlng. Policy Issues. The decllnlng trend ln flscal revenue as a share of GDP over the last few years ls a cause for concern. Hlgh growth wlll help broaden the tax base but problems ln the deslgn and admlnlstratlon of taxes should be addressed. Banklng reform ls under way, but much more remalns to be done, partlcularly ln areas of restructurlng state-owned commerclal banks, consoll- datlng non-state jolnt stock banks, and lmprovlng regulatlons and supervlslon. In reformlng SOEs, the government has trled dlffer- ent approaches, lncludlng equltlzatlon, dlvestlture, sell-off, and llquldatlon and restructurlng. But so far the pace of reform has been slow. The downslzlng and closures that SOE reforms wlll entall lnevltably pose complex soclal problems. Safety net mea- sures need to be strengthened. Vlet Nam passed a new Enter- prlse Law ln June 1999, whlch should promote prlvate sector ac- tlvltles and provlde equal market entry opportunltles to domestlc and forelgn-owned buslnesses. However, supportlve leglslatlon should be completed. A lot more needs to be done to create a buslness envlronment conduclve to forelgn partlclpatlon and rapld prlvate sector growth. AMC Asset management company ARIC Asla Recovery Informatlon Center ASEAN Assoclatlon of Southeast Aslan Natlons BI Bank Indonesla BOT Bank of Thalland BSP Bangko Sentral ng Plllplnas CAR Capltal adequacy ratlo CDRAC Corporate Debt Restructurlng Advlsory Commlttee CDRC Corporate Debt Restructurlng Commlttee CRA Corporate Restructurlng Accord CRCC Corporate Restructurlng Coordlnatlon Commlttee CSIP Capltal Structure Improvement Plan EMBI Emerglng Market Bond Index FDI Forelgn dlrect lnvestment Fed Federal Reserve Board FRA Flnanclal Sector Restructurlng Authorlty FSS Flnanclal Supervlsory Servlce GDP Gross domestlc product GIR Gross lnternatlonal reserves IBRA Indoneslan Bank Restructurlng Authorlty IMF Internatlonal Monetary Fund JCI Jakarta Composlte Index JITF Jakarta Inltlatlve Task Force KAMCO Korean Asset Management Corporatlon KLCI Kuala Lumpur Composlte Index KOSPI Korean Stock Prlce Index NPL Non-performlng loan PHISIX Phlllpplne Stock Exchange Composlte Index PPP Purchaslng power parlty PRC Peoples Republlc of Chlna S&P Standard & Poors SEC Securltles and Exchange Commlsslon SET Stock Exchange of Thalland SOE State-owned enterprlses WEO World Economlc Outlook WTO World Trade Organlzatlon B baht P peso RM rlngglt Rp ruplah W won y-o-y year-on-year Acronyms and Abbreviations