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Asia's Economic
Prospects for 2003 The global background With the global economic and political scene facing much greater than normal uncertainties, it is useful to remember the American comedian's dictum that " it is risky to make predictions, especially about the future." But we shall try, nevertheless. The key uncertainties on the political front are: the likely war with Iraq and its impact on the price and availability of oil and the extent to which the Middle East and the wider Islamic community is radicalised by the war; and closer to home, whether the North Korean situation can be contained. The typical baseline case for most strategists is that of the Centre for Strategic and International studies (CSIS) in Washington which believes there is about a 60 percent probability that the war will be short and sharp (less than six weeks) with a short spike in oil prices to about $36 and then a falling off, perhaps with a sharp drop if Iraqi oil production can be resuscitated quickly. However, that still leaves a 40 percent chance that oil prices might go considerably higher for longer and, in the worst case, they could spike to as high as $80 before falling to about $35 at the end of 2004. On the global economic front, beyond the obvious interplay with oil prices and confidence, is the health of the three largest economic blocs, the United States, Europe and Japan. Consensus estimates have been coming down recently but they still seem far too optimistic. They look for US growth of around 2.7 percent powered in the first half by continued consumer spending strength with capital expenditures picking up in the second half. However, Christmas sales indicate that the heavily indebted consumer, burdened by the threat of job cutbacks, is at last pulling in his horns and a capital expenditure pick-up also seems premature. Therefore, growth of about 1.5 percent for the US economy in 2003 might be more realistic, even under the short war scenario. A longer, messier war coupled with a lower dollar would further adversely affect these figures and virtually assure a recession. Whilst recovery in the US will be effected by the way the war plays out, the second half of the year should be better than the first with further improvements in the presidential year 2004. President Bush with his newfound control of both Houses of Congress will do his best to make tax and spending plans conducive to his re-election. The Fed under Greenspan or his successor will be accommodating as recent statements by Gov. Bernanke and he have indicated. Japan, even in the best of circumstances, cannot be expected to grow by more than the consensus one percent and continued deflation with close to zero growth for a while longer, whilst banking reform continues to be just talked about seems more likely. Europe is a mixed bag with its largest economy Germany verging on recession, even without a global oil induced recession. The other large Euroland economies, France and Italy, are struggling with the Growth and Stability pact and large public sector deficits, without the hope of substantial relief on the interest rate front and are struggling unsuccessfully to reform their over regulated and taxed economies. Euroland will be fortunate to average one percent growth in 2003 and it may also be closer to zero. Asian prospects In former days when the US prospered, Asia prospered even more, to the extent that it was frequently seen as a leveraged play on US growth. Indeed, countries such as Taiwan were even seen by some as leveraged plays on the US electronics or IT cycles. But that extreme dependence has been attenuated in recent years by two factors: First, the continued growth of the continental sized internal markets of China and India with relatively small external sectors are largely autonomous of global effects, and secondly, they have been exercising an increasing influence on their neighbours' economies. Thirdly, since the crisis, Asian countries have increasingly realised that the needs of their rapidly growing middle classes for quality housing, education, health care, vacations, leisure and infrastructure cannot continue to be sacrificed indefinitely on the cross of ever increasing exports. In effect, much of east and south east Asia is now undergoing the type of transformation effected on US society in the aftermath of World War II when the long expected depression caused by the collapse of defence expenditure was offset by development of the consumer society for housing, education, automobiles and the related infrastructure required by a suburban society. Asia should
therefore be the star region in a difficult year. Export growth is expected to grow roughly in line with this economic growth and China is expected by the Hong Kong based stockbroker CLSA to overtake Japan as the second largest exporter in the world in 2003 or 2004 with exports amounting to about 35 percent of GDP. But powered by rapidly growing incomes, access to easy credit and extremely low savings rates, China's import growth is growing alongside and CLSA expects imports to grow at 30 percent in 2003 compared with a 24 percent growth in exports. The country's problems with its commercial banking system with its intractable non- performing loans will continue growing as a commercial credit culture is slow to take hold in the state owned banks. The new economic leadership due to take over in 2003 will prove no more able to resolve the issue than its predecessor regime. If unresolved, at some point in the future that could set off a crisis. It is, however, unlikely to be 2003's problem. Hong Kong As a beneficiary of China's growth, Hong Kong could grow by 4 percent in 2003, double the rate in 2002. But the continuing large fiscal deficit will continues to raise questions about the need for future tax increases. India With an election due in 2004 and continued security threats from its neighbours, radical steps, including promised privatisations are unlikely to occur. Absent braver economic policies, the much-maligned Hindu rate of growth could yet reappear. A good monsoon would help though. Korea Economic growth in 2002 powered by domestic demand, intra regional trade and the World Cup is expected to be around six percent. On a ceterus paribus basis with its China connections, Korea should continue the same growth rate in 2003. However, this projection is probably the riskiest one in this paper for the reasons mentioned above. Taiwan South East Asia Singapore A large part of the problem is that the Government through its MPF programme and state owned enterprises has a national savings rate of close to 50 percent, the highest in the world. There are two problems with this: First, the strong state probably does not invest these funds as efficiently as a competitive private sector would; and second, the country's consumption levels are a mere 40 percent of GDP compared with over 6 percent in the US. Singapore would therefore gain from a loosening up, greater competition in general and greater consumption. The sluggishness in Indonesia and regional terrorist problems remain negatives at the present time affecting growth. Thailand Growth in 2003 is expected to increase further to 5.5-6 percent. The country continues to run a current account surplus of over 5 percent of GDP and the budget deficit - that had seemed threatening at one time - seems to be contained at 3 percent of GDP. The stock market, which was one of the best performing Asian markets in 2002, continues to represent good value and is expected to outperform many of its regional competitors in 2003 again. Philippines Until President Macapagal's surprise withdrawal from the 2004 re-election stakes this week, the Philippines were threatened by eighteen months of dubious economic populism. Now, however, she has a chance to effect responsible policies in the national interest. Critical to this would be raising tax revenues that have collapsed since Estrada became President in 1998, but this means making the wealthy pay the taxes they are supposed to pay and not small bribes to the revenue officers to avoid that responsibility. But such governance and cultural changes take a considerable time. The situation is quite critical since the public sector debt is growing rapidly. The Communist rebels are active once again and Muslim terrorists are also active in their regions. The country suffers from a severe lack of infrastructure, and because of the low tax revenues and the high interest payments on its public debt lacks the wherewithal to invest. Growth was officially around 3.8 percent in 2002, but that was based on good harvests rather than investment. Growth in 2003 is expected to be less than 3 percent. And the country's critical dependence on the remittances of its emigrants would be threatened by a wider Middle East war. There are few new sources for this manpower and a large-scale reflux of emigrants would be a very adverse development for the country. Indonesia The corporate sector is slowly recovering and some capital flight seems to be reversing as attractive government assets are placed up for sale. The Government remains weak however and corruption remains an endemic problem.
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