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Emerging Market Report May 28, 2009, 5:00PM EST

Asia: Weathering the Economic Crisis

Its banks are strong, while debt loads and inflation are low. But that doesn't mean there aren't challenges for investors

By Frederik Balfour

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At Convergys in the Philippines, Zamora hopes to double the staff this year Paul Hu/Assignment Asia

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A café in Hanoi: Vietnam is a popular alternative for companies diversifying away from China Justin Mott

Cebu, Philippines - Painful economic slowdowns are nothing new to Southeast Asia. The region went through its own gut-wrenching financial crisis more than a decade ago in what now seems like a dress rehearsal for today's turmoil. Companies defaulted, banks collapsed, stock markets tanked, and economies shrank at double-digit rates as foreign investment slowed to a trickle. But Southeast Asia dutifully swallowed the bitter pill of austerity, devaluing currencies and working off debt while banks restructured and companies patched up balance sheets.

Now Southeast Asia is getting whacked again, a victim of sins on the other side of the globe. Last autumn the region's exports plunged as the U.S., and then China, slumped. Foreign investment, meanwhile, has plummeted as multinationals rein in spending. "It's frustrating that we are in a crisis that is not of our own making," says Thai Prime Minister Abhisit Vejjajiva.

Yet this downturn is hardly a full-blown repeat of the Asian crisis. That's testament to the surprising strength of the 10 countries that belong to the Association of Southeast Asian Nations (ASEAN). The region's banks are virtually free of toxic assets and haven't needed government bailout money. Years of trade surpluses and high savings rates have contributed to record foreign reserves. Debt loads—for governments, corporations, and consumers—are a fraction of those in the U.S. and Europe, and inflation and interest rates have fallen dramatically. "Of course there is a slowdown, but [these countries] are well prepared to weather the storm," says Mark Mobius, president of Templeton Emerging Market Funds. "They have outperformed global markets, which is telling us they are going to do quite well." ASEAN bourses have led the recovery in emerging-market stocks, with Jakarta's benchmark index up 70% and Vietnam's up 80% from recent lows.

Some companies operating in the region continue to do well, as demand for everything from computers to discount airline tickets remains strong. Unilever Indonesia has sold so much Pepsodent toothpaste, Lifebuoy shampoo, and other goods that its first-quarter revenue jumped 18%, to $412 million, boosting earnings 9%, to $70 million. "The impact from the global crisis is minimal," says Franky Jamin, Unilever Indonesia's corporate secretary. And London's Standard Chartered Bank, which gets two-thirds of its revenue in Asia, says first-quarter profits were its best ever, indicating that the region's slump will be shallower and shorter than elsewhere. Consumer banking and lending to small companies are strong, while the mortgage business continues to grow, says Ray Ferguson, the bank's CEO for Southeast Asia. Foreclosures, he adds, "are not a feature of the market."

Southeast Asia's strength is an encouraging sign that the region is still a player. Though it may have been half-forgotten by many investors since the crisis, its educated workers, natural resources, and—in some countries, at least—first-class infrastructure make it worth paying attention to. ASEAN has a total population of 560 million, and its combined gross domestic product of $1.3 trillion is greater than India's. Indonesia, Thailand, Malaysia, the Philippines, Vietnam, and Singapore—which account for about 95% of the region's economy—attracted nearly $50 billion in foreign direct investment last year, vs. China's $92 billion.

General Electric (GE), for instance, has committed more than $1 billion to Southeast Asia in the past 18 months. Those investments include expanded aircraft maintenance facilities in Kuala Lumpur and a water-technology research center in Singapore. And in May, GE broke ground on its first project in Vietnam, a $61 million plant in the port city of Haiphong to produce wind turbine generators for export. "We wanted to put the GE footprint into a high-potential country," says Stuart Dean, the company's Southeast Asia president.

SCUTTLED SUMMIT

That's not to say the region doesn't pose significant challenges for investors.

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