Bangkok--Dec 27--Aziam Burson-Marsteller
The economies in Asia ex-Japan have reformed significantly since
the 1997-98 financial crisis: the region’s financial and corporate sectors
are much healthier; the external positions are rock solid; and GDP in all
countries has recovered beyond pre-crisis levels.
But some old habits die hard. The region did not give up its
export-orientated growth model, which has produced massive current account
surpluses for seven years running, helped by artificially undervalued
currencies. But now even that is starting to change.
Spurred by external pressures and growing self-confidence within
the region, Asian central banks finally are starting to let their currencies
appreciate. We judge that the moves so far are only the tip of the iceberg,
however. Our outlook is that 2005 will be the biggest inflection point for
the region since the Asian crisis — in various ways, it will be like the
Asian crisis in reverse. We forecast significant Asian currency appreciation,
low interest rates, robust domestic demand, and shrinking current account
surpluses.
Fundamentals are much improved.
The region has very low external vulnerability: all countries are
running current account surpluses, and foreign exchange (FX) reserves are
more than adequate. But also, after seven years of reforms, the region’s
corporate and financial sectors, although not tip-top, are in much better
shape. The profitability and balance sheet position of Asia Inc. has improved,
with aggregate debt-to-equity ratios down sharply and now broadly in line with
international norms. And with Asian banks focusing more on credit risk, the
average capital adequacy ratio for the region has risen to about 8%, while
the average non-performing loan ratio has dropped to about 10% (progress has
been uneven though, with financial sectors still weak in China, Thailand and
the Philippines). Overall, the reforms are bearing fruit: capex looks set to
contribute more to Asia ex-Japan’s aggregate GDP growth in 2004 than in any
year since the Asian crisis; and the banks are lending again, notably to
households.
A household credit culture is emerging. Spurred by financial
liberalization (especially the proliferation of credit cards) and interest
rates at, or close to, record lows, Asian households are acquiring an appetite
to borrow. This was overdone in Korea, resulting in a credit card crisis in
2002, but in most Asian countries, the household sector still remains
underleveraged (the flipside of high saving rates).
A rising middle class. We estimate that, weighted by the size of
the economy, average GDP per capita for Asia ex-Japan rose to US$7,470 in
2004 from US$5,770 in 1998. Rising personal incomes are leading to a “take
off” in demand for durable goods, especially in China, where the number of
mobile phones per 100 urban households has jumped to 109, from 3 in 1998.
Chinese tourists are also visiting the region in droves. In 2003, 20m mainland
Chinese traveled overseas, surpassing the number of Japanese overseas tourists
for the first time; the number was likely over 24m in 2004.
Demographic “sweet spot”. Unlike in most other parts of the world,
the share of Asia ex-Japan’s population that is of working age is still on a
steep upward trend. Compared with their thrifty parents, Asia’s younger
generation is starting to enjoy a more laissez-faire lifestyle, leaving the
nest earlier, and spending more on travel and leisure.
Rapid urbanization. About 40% of East Asia’s population lives in
urban areas, which is quite low (the urbanization rates are about 75% in
Latin America and the US, and 60% in Europe and Central Asia). But
urbanization in Asia ex-Japan is accelerating; if properly managed, it should
lead to economies of scale and higher productivity, thereby boosting profits
and incomes. The World Bank estimates that the region’s urban population will
grow by half a billion people in the first quarter of this century.
GDP Growth forecasts for 2005
Bullish Lehman Brothers Market Consensus Difference
(percentage points)
Hong Kong 5.5 4.5 1
Indonesia 5.8 4.9 0.9
Taiwan 5 4.2 0.8
South Korea 4.9 4.1 0.8
Malaysia 6 5.3 0.7
Thailand 6 5.6 0.4
China 8.3 8 0.3
Neutral
Singapore 4.5 4.4 0.1
Bearish
The Philippines 3.7 4.2 -0.5
Real GDP (% growth y-o-y) CPI (% growth y-o-y)
Latest* 2004 2005 2006 Latest* 2004 2005 2006
China 9.1 9.2 8.3 8.5 2.8 4.1 3.5 2.5
Hong Kong 7.2 8 5.5 4.8 0.2 -0.4 2.5 4.5
Indonesia 5 4.9 5.8 6.5 6.2 6.2 6.4 5.5
Malaysia 6.8 7 6 6 2.1 1.5 3 3.5
Philippines 6.3 5.9 3.7 4 8.2 5.9 7.5 7.5
Singapore 7.5 8 4.5 4.3 2 1.7 1.8 1.5
South Korea 4.6 4.3 4.9 5.5 3.3 3.8 3.4 3
Taiwan 5.3 5.7 5 5 1.5 1.9 3 2.5
Thailand 6 6 6 6 3 2.8 3 2.5
Asia ex-Japan 7.1 7.2 6.5 6.7 2.9 3.4 3.5 3
* GDP data are for 3Q
* CPI data are for November, except Hong Kong, Malaysia and Singapore
(October) All forecasts are modal forecasts ( the most likely single outcome) End.