| [an error occurred while processing this directive] | [an error occurred while processing this directive] |
 |
 |
 |
 |
   |
View items related to this story
ASIA: THE GLOBAL IMPACT (int'l edition)Six months--maximum. Back in December, when the International Monetary Fund was putting the finishing touches on its $100 billion rescue package, that was the conventional thinking in the West on how long it would take for East Asia to start on the road to recovery. After all, anybody who bet on Mexican stocks when the IMF intervened in February, 1995, would have reaped a 70% gain in just five months. And now the Bolsa Index has tripled in value, to 5000. Well, it has been six months. And if anything, Asia's recovery seems as precarious as ever. Indonesia is in political upheaval, and its economy remains virtually frozen. In South Korea, worries over the domestic debt bomb continue to mount, and President Kim Dae Jung's reform campaign is losing political steam. Japan, which many had hoped would be the engine of growth, is instead sinking into recession and may send the region into another tailspin. After rebounding this spring, most of the region's stock markets have tumbled back down to their January lows. In smoldering Jakarta, investors are rushing to the airport. As the full force of the financial typhoon hits the region's economies, the unsettling realization has set in that Asia's turnaround will be long-term and torturous. Instead of months, economists now say solid recovery in the most bombed-out countries could take half a decade. That's because for any recovery to be sustainable, Asian countries will have to complete the huge task of building modern financial institutions and political systems. And a whole new type of company must emerge that can compete in the global economy. Even the progress achieved so far could be swept away if the Asian flu strikes again. The most immediate threat is the falling yen, which, if unchecked, could trigger another round of devastating devaluations. It's becoming clearer Asia's ordeal will have consequences for the rest of the world. Markets for commodities have crashed to four-year lows, a blow to emerging economies from Mexico to Russia and a harbinger of global deflationary pressure. Analysts are slashing forecasts for world demand for semiconductors and aircraft engines. While America's economy is still sizzling, dreary earnings reports from the likes of Hewlett-Packard, Motorola, and National Semiconductor reveal that U.S. blue chips are feeling the pinch. What about compa-nies just starting to factor Asia into their growth plans? Any payoff is distant. ''I don't think we'll see order and tranquility emerge anytime soon,'' says Ford Motor CEO Alexander J. Trotman. ''We're looking at quite a few years of instability.'' Has the IMF rescue been a colossal flop? Not exactly. Although the agency clearly made mistakes, it has halted the free fall in currencies ranging from the South Korean won to the Philippine peso. New governments in Thailand and Korea have begun to force reforms on distressed banks and companies and to establish the foundations of a modern financial system. By playing hardball with Indonesia, the IMF inadvertently set in motion a backlash that could topple the Suharto dictatorship. Yet the bailout has failed to restore confidence in Asia's equity markets, and it has done little to defuse an even bigger debt bomb in local-currency loans to private companies. In Korea, where banks continue to funnel funds to the teetering chaebol, bad loans are expected to balloon from $50 billion last December to $90 billion by yearend. Analysts such as Stephen Marvin at Ssangyong Investment & Securities figure Korea is on course for another financial crisis. In truth, for the Asia recovery plan to have worked smoothly, a lot of things beyond the IMF's control had to go right. Tokyo needed to stimulate its economy and solve its own debt crisis so that it could absorb exports from its neighbors, just as exports to the U.S. propelled Mexico's rebound. Instead, Premier Ryutaro Hashimoto is pumping $120 billion into dubious domestic public-works projects and tax rebates that will do nothing to kick-start regional growth. That's bad enough. But now Japan seems ready to drop an even bigger bomb--a steep slide in the yen. On May 19, the yen hit 137 to the dollar: It could reach 150 by yearend. Especially hard-hit would be Korea, which competes with Japan in cars, steel, and ships. ''The blow to Korean exports would be huge,'' says Lee Chae Kwang, head of equity research at Daiwa Securities. The yen's slide puts more pressure on Beijing to devalue. That ''would make Asia's recovery hopeless for some time to come,'' frets Samsung Economic Research Institute economist Kwon Soon Woo. Grim news for the Asians. But for the U.S. economy, Asia's woes have helped keep inflation in check and U.S. interest rates low. Yet confidence that Asia's markets won't be missed is starting to be put to the test. In this year's first three months, U.S. exports fell by 3.4%--the first quarterly drop in three years. Washington's Institute for International Economics reckons the total cost to U.S. manufacturing output--factoring in lost exports, more Asian imports, and the lower prices on goods--will be $75 to $100 billion this year. Reports from the front lines aren't encouraging. On May 1, CSX Corp. hiked the fee it charges to ship a containerload of goods from Asia to the U.S. by $300, or 14%. While the containers arrive in American ports laden with goods, they return to Asia empty, because there's ''very little to haul from the U.S.,'' says CSX CEO John W. Snow. ''The weakening of U.S. exports is clear to us.'' It's clear to the Asians too. ''One trillion dollars has been wiped out in the region as a result of this crisis,'' says Francis Yeoh, managing director of Malaysian construction giant YTL Corp. ''That's a lot of Boeing 747s, a lot of Airbuses, and a lot of power plants we're not going to buy.'' LOSING PATIENCE. Corporations are having to rethink basic assumptions. Earlier this year, most analysts predicted at least 7% growth in the $136 billion world semiconductor industry. Due partly to Asia, especially Japan, research firm In-Stat now expects demand to contract by 0.6%. Meanwhile, in Asia the crisis is feeding on itself. The benefits of the jump in exports to the West have been wiped out by the plunge in exports to neighbors. Japanese banks may have up to $44 billion in dud loans around the region, and they've only begun to set aside some reserves for write-offs. In Indonesia, Korean banks have some $10 billion in loans and bond holdings. The more serious danger is that foreign investors will lose patience and write the region off as a backwater. A blowup in Indonesia could taint the image of all of East Asia. Says Choong Khuat Hock, Kuala Lumpur-based research director at Caspian Research: ''In these days of international capital flows, perception counts a lot.'' The perception now is that a few more big setbacks could cause the entire Asia bailout to unravel. Clinton Administration officials remain sanguine. Says one top Clintonite: The odds of Asia Meltdown II are ''less than 50%.'' Considering the global consequences of another Asian blowout, those odds are too close for comfort.
By Pete Engardio in New York, with Brian Bremner in Tokyo, Michael McNamee in Washington, Moon Il Hwan in Seoul, and bureau reports Recovery will take years, and companies everywhere will feel the pain To read a Letter to the Editor about this story, click here
RELATED ITEMS
|
Updated May 21, 1998 by bwwebmaster
Copyright 1998, by The McGraw-Hill Companies Inc. All rights reserved.
Terms of Use