It’s been tough for many Asian countries these past several years. First the financial crisis, then just as the worst appeared to be over along came a slowing global economy.

Developing countries in the Asia Pacific region have been among the hardest hit, particularly those who were still struggling from the effects of the financial crisis—Indonesia, South Korea, Malaysia, the Philippines, and Thailand. Others in the region—China, Hong Kong, India, Singapore, and Taiwan—are faring better, yet their substantial dependence on trade and investment with the US, and’ to a lesser extent, Japan, puts them in a vulnerable position.

Although one could argue that the current global economic slowdown couldn’t have come at a more inopportune time, on the contrary some countries’ economies are in better health now than before 1997. This is due in large part to the corporate and financial reforms that have been implemented since the crisis. Nonetheless, given that the US’ economic conditions generally guide the direction of the rest of the world’s economies, the duration of the current slowdown will have a major effect on Southeast Asia, especially because the region relies so heavily on exports to the US.

Climbing Out of the Crisis

The five countries most affected by the financial crisis—Indonesia, South Korea, Malaysia, the Philippines, and Thailand—have made notable strides in the restructuring process. Their biggest efforts have gone towards addressing the problem of insolvent financial institutions by closure, merger, or recapitalization; dealing with corporate debt overhang; and improving corporate governance.

Banks initially received the most attention. They were ordered to adhere to international standards of capital adequacy, loan classification, loan-loss provisioning, accounting, and disclosure. Although many banks were closed, the stronger ones were merged or recapitalized with public funds.

The result has been a dramatic reduction in the number of nonperforming loans. Last June, Indonesia’s nonperforming loan ratio was down to 30% of the country’s banking system, compared to a high of 70%. Thailand’s nonperforming loans peaked at 48% in May 1999, but fell to 18% in December of last year.

Shipments of information technology products to the US, especially from Malaysia, South Korea, India, and Thailand, helped push export growth into the double digits last year. Indonesia got some relief from its oil exports, which benefited from rising international prices, and China saw increased demand for labor-intensive manufactured goods. China’s preparations for membership in the WTO also prompted the country to take further steps toward liberalizing its financial sector. Domestic demand was lifted by rising consumer and investor confidence, more so in South Korea and Malaysia, while inflation in the region was for the most part held in check.

There are other positive signs. In the five countries hardest hit by the financial crisis, the balance of payments on current account are in surplus, and international reserves are in relatively good shape. Many countries in the region have also adopted more flexible exchange rate policies, which can help economies adjust to external shocks. Transparency has also been enhanced, making it less likely that negative surprises will turn up unexpectedly.

But Not Yet out of the Hole

The million-dollar question remains: How long will the US economic slowdown last? The answer is vitally important because it will have an immense effect on Southeast Asia’s economies. Some analysts remain optimistic about an early recovery, citing strong macroeconomic fundamentals in the US, coupled with continued high investment levels in technology. Others are less enthused. They worry about an overvalued US stock market and the ability of the US to sustain high productivity growth rates.

The ability for other economic powerhouses to pick up the slack is also uncertain. The EU’s economic growth is more centered on domestic demand than on exports. Further, investment growth, tax cuts, and falling unemployment will help keep growth around 3% this year. However, a sizeable correction in the exchange rate between the euro and the US dollar, which could be brought on by investors’ resistance to continue financing the US current account deficit, may hurt export competitiveness and growth. In the meantime, Japan won’t be able to offer too much assistance, either. Although economic recovery there is on course, it’s very slow, as is the pace with which the government has implemented critical structural reforms. Intra-regional trade, which has increased greatly over the last decade, can help offset the slowdown in the US. But it’s too soon to know how much assistance it will ultimately provide.

Furthermore, the region is still very dependent on export growth, and those exports are largely information-technology goods. In addition, reforms are not firmly rooted and political instability persists in some countries.

The Region Remains a Mixed Bag

It’s worth mentioning again that China’s preparations for accession to the WTO have been very influential in improving the country’s economic outlook, despite some sticking points that remain on key issues, such as the agricultural and service sectors, as well as industrial subsidies. Foreign investment pledges, which registered a 47% increase during the first two months of this year over the same period last year, now stand at approximately $9.2 billion. GDP growth is forecast at 7.5% this year, with a slight decrease to 7% in 2002.

Hong Kong’s growth in GDP reached 10.5% last year, the highest rate since 1987. By comparison, this year’s prospects have been downgraded to an estimated 4% growth in GDP, due mostly to slower export growth. While the country’s budget deficit for fiscal year 2000-01 is forecast to hit HK$11.4 billion, the figure should narrow to HK$3 billion in fiscal year 2001-02.

Political risk continues to be the hairpin turns in Indonesia’s road to recovery. Conflicts between President Wahid and the legislature abound, and security issues in outlying areas, such as the province of Aceh, only exacerbate the situation. Meanwhile, the International Monetary Fund, World Bank, and Asian Development Bank have implemented stricter lending terms.

South Korea has been particularly hurt by the reduction in electronics exports to the US. The external environment is also being marred by the weakness in the Japanese yen, which threatens South Korea’s export competitiveness and slows economic recovery. GDP growth is forecast to drop to 4% this year from last year’s 8.8%, but should improve a bit in 2002 to 5%.

Similar to South Korea, Malaysia’s reliance on electronics exports to the US have likewise dampened economic conditions in the country. Exports dropped year-to-year for the first time in over 20 months in December 2000, and the trade surplus shrank by nearly 40%. Foreign currency reserves are also on the decline, which makes it more difficult for the government to boost domestic consumption and investment.

Philippines President Gloria Macapagal Arroyo has an uphill battle. Not only does she need to shore up political support for her administration, the government must act to reduce the fiscal deficit, which grew to 136.1 billion pesos in 2000, more than double the original target. GDP should remain around 3% for this year, while inflation should grow to 8% from last year’s 5%.

Domestic demand oculd help Singapore offset some of the losses prompted by falling electronics exports. Corporate balance sheets are healthy, and development of the corporate bond market will also play a part in bolstering the economy. GDP growth is estimated to descend to 4.8% this year, though next year it’s likely to improve to 6.1%.

Not surprisingly, Taiwan is also reeling from a downturn in exports. However, liberalization measures have helped make local markets more attractive to foreign investors. Rules on foreign ownership in the telecommunications sector have also been eased. Parliamentary elections are set for the end of this year, which will put politics, specifically Taiwan’s relations with China, at the forefront of domestic issues.

Indeed, the sagging global economy has been trying for many Southeast Asian economies, many of which are still fragile from the financial crisis. But their ability to withstand the present conditions is better now than before, and this will prove to be their greatest strength no matter how long the downturn lasts. wt