Asean stimulus Once bitten twice shy

Asean stimulus Once bitten twice shy
WHAT ARE WE TO DO
BY TAN SRI LIN SEE-YAN


OVER the past two weeks, I have had the opportunity to make brief study trips to the other main countries in Asean (Singapore, Indonesia, the Philippines, Thailand and Vietnam) and more recently, Asean’s “Plus 3” partners (Japan, China and South Korea) to update (and learn at first hand) for myself the impact of the ongoing global financial crisis and the attendant global recession.

First, the broad brush. For many countries in Asean, the effects of the now global recession were felt on the ground with a rather long time lag for structural/seasonal reasons:

(a) East Asia, in varying degrees, was devastated by the Asian financial crisis 1997/98. Stock markets fell like a waterfall; banks and financial institutions were highly distressed; exchange rates were significantly devalued as international reserves fell; fiscal deficits mounted and external debts for many became difficult to service. As expected, growth decelerated and many nations even experienced brief periods of negative growth.

But unlike now, world demand for East Asia’s exports did not collapse at that time since the crisis was essentially “Asian born.” Painful stabilisation and recovery efforts took a heavy toll; indeed, the financial systems had to be fundamentally restructured, toxic assets disposed and its institutions re-capitalised and in some cases, merged. To their credit, all of them took the bitter pill, and their banks and capital markets had since emerged leaner but stronger – so much so that when the US financial crisis struck in 2008, it had little impact on the integrity of Asean’s financial system and infrastructure.

The irony is that in 1997/98, flight to quality meant deposits and prime borrowers moved to the foreign banks. This time around, deposits and prime borrowers switched to the domestic banks for cover!

Nevertheless, Asean paid a high price for its financial resilience today. For example Malaysia (a relatively well structured and stable nation even then) took 8-9 years to regain its 1996 annual per capita income of US$4,500. Today it stands at US$7,700.

(b) Advanced economies, which account for about two thirds of global GDP, was in recession for most of 2008. The impact of this sharp contraction in demand (and getting worse) was transmitted (in an increasing globalised world) to Asean with varying degrees of rapidity and severity depending on each nation’s openness to, and composition of, trade. For Singapore (trade being 350% of GDP), its growth rate flattened in the 3Q08 and then on to recession. In the case of Indonesia (less than 50%), the impact on growth was mild and slower; it still recorded a growth rate of 6% in ’08. Malaysia (160%), Vietnam (140%) and Thailand (120%) felt it by the 4Q’08, so did the Philippines (75%). Nevertheless, all four countries registered decent growth rates of 3%-5% for 2008 as a whole.

(c) With the exception of Singapore, the widespread impact did not really hit home until after the first two months of 2009 mainly because of continuing consumer spending (albeit at an increasingly decreasing rate) during the Christmas, New Year and related-Chinese festivities. But the situation since then had deteriorated rapidly. Throughout Asean, growth had slackened in 1Q09 simply because the same period a year ago was rather buoyant.

Second, exports have become the principal casualty of the sharp drop in global demand. For the quarter ended February 2009, Asean exports fell by significant double digits with the rate of decline in succeeding months steeper than in the previous month. By February 2009, Asean exports as a whole had fallen 30%-40% compared with the same period the year before.

The collapse of global demand calls into question the sustainable viability of the export-led growth model that had helped to jump-start the transformation of East Asia into the often regarded “model” collection of dynamic economies they are today.

Third, the currency crisis of 1997/98 had made most businesses and consumers (especially their bankers) quite risk adverse.

For the banks in particular, the bad experience with toxic assets (high NPLs i.e. non-performing loans) and the hard scramble for new capital left an indelible mark on their psyche. This also explains why the banks have managed to remain well-capitalised with low NPLs – at least so far. Except for Singapore, the world of CDO and CDS derivatives hardly entered their books.

Similarly for most investors, even though the financial systems in Asean had been liberalised enough for them to have ready access to foreign exchange accounts and to invest abroad. By chance, this has insulated most of Asean from the recent excesses and toxic influence of Wall Street.

Fourth, they often say – once bitten, twice shy. For Asean, the need to accumulate international reserves was (and still remains) a major driving force for recovery and revitalisation in order not to be painted into a corner once again with insufficient “working capital” cushion to cover black swans, unscheduled unforeseens, and bloated debt servicing. With the onset of global recession, all the main Asean nations saw to it that they are well-stocked with reserve funds to help support (when needed) jittery markets and unstable & unwelcome situations.

Today, the 12 central banks in the region hold close to US$4.5 trillion in international reserves, of which China has about US$2 trillion and Japan, US$1 trillion. Each nation has managed to maintain a comfortable reserves position to meet contingencies on a rainy day.

Unfortunately, it looks like the global recession is still gathering momentum. Latest data on employment in the US and Euro-zone and Japan have not been encouraging.

Despite the Fed cairman’s recent reference to “green shoots” of hope, I am convinced this recession will be prolonged. The IMF’s September 2008 study (of 17 developed nations over 3 decades) concluded that recessions preceded by financial crises are always deeper and longer; recessions tend to be worse if the crisis is in banking; and recessions linked to banking crises last 2-times longer and the cumulative GDP loss, 4-times more.

There is tremendous downside risk in the global outlook. So, it makes sense to plan ahead based on the worse-case scenario. As I see it, the prudent approach is to prepare for more difficult times ahead. Global GDP is set to shrink 2% in 2009 (World Bank) and modest recovery in 2010 is uncertain. I can’t see the US, Euro-zone and Japanese recessions stabilising until towards year-end at the earliest. The situation in Asean appears somewhat better. As a group, growth at an anaemic 2%-3% is possible, bearing in mind Singapore, Malaysia and Thailand could post negative rates. None of the even modest recovery can be taken for granted.

The outlook for 2010 continues to be surrounded by extreme uncertainty globally.

Like the industrial nations, Asean and its Plus 3 partners have individually embarked on a stimulus programme (ala Keynes) to revitalise their lagging economies, especially their battered export industries.

Massive numbers of jobs have been lost or are at risk. Each national programme has been designed to suit their particular purposes, especially in providing the needed social safety nets and create jobs. International demand has collapsed.

In Asean, because their economies are dynamically export oriented, domestic consumption (though expanding) has not been as dependable a counterveiling force in stressful unusual circumstances. This is so simply because incomes are low and savings high (a cultural thing?). The stimulative packages put in place reflect this reality.

Among the Asean 6, Singapore and Malaysia have been the most aggressive in their “policy-induced recovery” programmes (pump prime of 8% of GDP in Singapore and 9.5% in Malaysia). Singapore is into this for obvious reasons since it is the worst affected (contraction could possibly even be at -8% to -10% in 2009). Malaysia used the slowdown to also push for value-added investment to restructure and revitalise its low productivity labour intensive industries. Manufacturing in both nations is the worst affected.

Singapore was confident enough to finance 25% of its stimulation package by drawing down its vast international reserves. Malaysia, just as confidently, relied on its vast domestic savings to do the job. As I see it, since both countries have large unutilised capacity and low inflation, the dangers emanating from deficit finance are remote.

In the end, it is vital to ensure that government borrowing and lending do not crowd out private initiative.

As for Indonesia and Thailand, I am convinced that their relatively modest stimulus push would soon be significantly enhanced given the rapidly deteriorating economic situation, especially in Indonesia. Like Malaysia and Singapore, their manufacturing activities are also the worst affected.

In addition, Thailand’s fragile political malaise weighs heavily on the success in pushing through a badly needed second stimulus as most non-politicians (a powerful force) are worried that the monies so created will be politically diverted or misdirected.

The Philippines, with just 30% of its economy driven by exports, relies more on remittances from millions working overseas in industries (healthcare and education) less vulnerable to recession. Its current stimulus programme at 4% of GDP appears adequate and intact.

In Vietnam, the situation is rather different, having just emerged from coping with overheating and inflation. Monetary and fiscal adjustments are being worked through to one of relative easing. Most (including World Bank) expect 5% growth in 2009 (6.5% in 2008).

Overall, the Asean 6 appear set to ride the recession “storm”, marshalling resources (human and financial) to create jobs, strengthen social safety nets, aggressively promote training and re-training to build future capacity, and foster lasting confidence among consumers and businesses to spend again.

What are we to do

Recent experience tells me that to succeed, any stimulus package in Asia has to be more than just a “shot in the arm”. Keynes’ Way envisages the integration of two key approaches:

(i) Pump-priming – significant fiscal spending in the face of growing impotent monetary policy; and

(ii) Reinvigorating “animal spirits” (AnS): this

·Relates to building consumer & business confidence, but much more.

·Refers also to a sense of fair play; to a sense of trust (this is critical); and to a sense against bad faith and corruption.

·When AnS is at the ebb (like now), consumers withhold spending, and businesses don’t invest and don’t hire.

·For Keynes, AnS drives the business cycle. Swings in trust/confidence are not always logical. In good times, people are trusting and this emotional state (and associated feelings) contribute to building an eco-system of confidence.

They can make decisions spontaneously; they follow their instincts to gain success; even suspend suspicions. As this state spreads and people believe in the system, they can even become rash & impulsive.

Recent display of trust in the mortgage/housing system in the US drove real-estate prices to unstainable heights – a dramatic case of unbridled AnS that has ever been seen. The case of Thailand is also a classic example. So is the Madoff case.

In the end, active stimulation to revive AnS must involve firm leadership, targeted policies, bold action and visible implementation.

A former banker, Dr Lin is a Harvard educated economist who now spends time promoting the public interest.