Asia Recovery Report 2000

May 2000 Update http://aric.adb.org
Followlng more than a decade of rapld growth, Thalland´s gross
domestlc product (GDP) contracted sharply ln 1997. In that year,
growth slowed ln Indonesla, Republlc of Korea (henceforth Ko-
rea), Malaysla and Phlllpplnes. Shortly thereafter, output began
to contract ln these economles too. By the end of 1998, GDP had
fallen by 13.2 percent ln Indonesla, 6.7 percent ln Korea, 7.5
percent ln Malaysla, 0.5 percent ln Phlllpplnes, and 10.4 percent
ln Thalland. But these decllnes proved short-llved. By early 1999,
economles had stopped contractlng and embryonlc slgns of growth
began to emerge. As 1999 progressed, economlc recovery qulckly
gathered momentum. Korea made the blggest galns, lts GDP grow-
lng by 10.7 percent. Output also expanded ln Malaysla, Phlllp-
plnes and Thalland, growlng at 5.4, 3.2 and 4.2 percent, respec-
tlvely. Whlle Indonesla lagged behlnd ln the recovery process,
output ln 1999 stablllzed and grew by 0.2 percent.
Whlle the reglonal recovery ls tanglble, lt ls not yet complete.
There are varlatlons ln the pattern of recovery across countrles,
and across the components of aggregate demand and supply. As
ls usually the case, recovery ln flnanclal and asset markets has
preceded that ln the real sector. Per caplta real lncomes have yet
to cllmb back to thelr pre-crlsls levels ln Indonesla, Malaysla, Phll-
lpplnes and Thalland.
One way to gauge the extent of the recovery ls to compare per
caplta lncomes, measured ln local currency at constant prices,
wlth thelr pre-crlsls peaks (Flgure 1). For four of the flve affected
countrles, 1997 ls the most recent peak of per caplta GDP. In
Thalland, 1996 ls the peak. By the end of 1999, only Korea had
achleved a level of GDP per caplta that exceeded lts prevlous
peak. In all other economles, GDP per caplta stlll has lost ground
to make up. At the end of 1999, the gap to the prevlous peak was
Asla´s Recovery-
A Reglonal Update
Recovery ln Asset Markets and the
Real Sector
Contents
Asia's Recovery¬
A Regional Update
Recovery ln Asset
Markets and the
Real Sector
Medlum-term Aspects-
Bank and Corporate
Restructurlng &
Longer Term Aspects-
Soclal Recovery,
Governance and
Competltlveness %
Recovery Prospects
and Rlsks
The PRC, Singapore
and Viet Nam Updates %
The PRC %
Slngapore '
Vlet Nam !
Asian Development Bank
Regional Economic Monitoring Unit
6 ADB Avenue, Mandaluyong Clty
0401 Metro Manlla, Phlllpplnes
Telephone
(63-2) 632-5458/4444
Facsimile
(63-2) 636-2183
E-mail
arlc_lnfo@adb.org
How to reach us
The Asia Recovery Report 2000
was prepared by the Reglonal
Economlc Monltorlng Unlt of the
Aslan Development Bank and
does not necessarlly reflect the
vlews of the ADB's Board of
Governors or the countrles they
represent.
ASIA'S RECOVERY-A REGIONAL UPDATE 2
narrowest ln the Phlllpplnes, malnly because GDP dld not fall so
much there. The gap ls larger ln Malaysla, and at lts wldest ln
Indonesla and Thalland. The speed wlth whlch these gaps wlll be
closed depends, of course, on future growth. The tlme needed for
the recovery of per caplta lncomes measured ln US dollar terms
wlll take even longer. Even when these gaps are closed, a process
that could yet take some tlme to complete, lncomes wlll remaln
substantlally below what they would have been had they contln-
ued to grow at pre-crlsls levels.
Asset Market Recovery. Followlng thelr lnltlal preclpltous col-
lapse, exchange rates stablllzed and, ln early 1998, began to re-
cover lost ground (Flgure 2). Subsequently, the volatlllty ln ex-
change rate movements that accompanled thelr collapse and
partlal recovery dlsslpated. Today, ln nomlnal terms, the value of
local currencles has become more stable, but they stlll buy 20 to
35 percent fewer US dollars than before the crlsls ln Korea, Ma-
laysla, Phlllpplnes and Thalland, and about 70 percent fewer dol-
lars ln Indonesla.
Stock markets fell to thelr lowest polnt around mld-1998
(Flgure 3). Slnce then they have recovered and all but the Phlllp-
plne market made strong galns ln 1999. In part, these galns were
drlven by the addltlonal llquldlty generated by current account
surpluses and lower lnterest rates. The earller rebound ln equlty
values has not, however, been malntalned. As of late Aprll 2000,
stock market lndlces ln most affected economles were stlll about
15-40 percent lower than thelr pre-crlsls levels ln local currency
terms and about 45-75 percent off ln US dollar terms. Only ln
Korea have markets recovered almost fully both ln local currency
terms and ln US dollars. But even ln Korea, equltles have per-
formed poorly ln 2000, wlth the KOSPI 200 decllnlng by more
than 30 percent slnce the start of the year.
To some degree, the lnablllty of reglonal equlty markets to sus-
taln 1999´s galns has been a consequence of external factors,
partlcularly rlslng lnterest rates ln the Unlted States and lncreases
ln world oll prlces. But ln some places lt also reflects lnvestors´
concerns over the slow pace of flnanclal and corporate restruc-
turlng. Corporate earnlngs have yet to show conslstent slgns of
renewed vlgor. In recent weeks, the downward drlft ln US equlty
prlces and thelr helghtened volatlllty have negatlvely affected
reglonal markets. In the Phlllpplnes, where equlty values have
been loslng ground slnce mld-1999, recent allegatlons of lnslder
Flgure 1: GDP per Capita
Indices (1996=100)
Note: 1999 data on populatlon are forecasts
by ADB staff.
Sources: ADB, Key Indlcators of Developlng
Aslan and Paclflc Countrles; varlous natlonal
sources.
1996 1997 1998 1999
85
90
95
100
105
110
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
Flgure 2: Exchange Rate Indices
(weekly average, last week of
1997June=100, $/local currency)
Source: ARIC Indlcators.
27 Jun
1997
6 Mar
1998
13 Nov
1998
30 Jul
1999
21 Apr
2000
0
20
40
60
80
100
120
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
ASIA'S RECOVERY-A REGIONAL UPDATE 3
tradlng and stock market manlpulatlon have also undermlned
market confldence. In a generally turbulent envlronment, Malay-
slan equltles have done well; the KLCI has lncreased by 10 per-
cent to date thls year.
In most economles, there are, as yet, few slgns of recovery ln the
markets for physlcal assets. Property markets remaln generally
depressed. Although offlce vacancy rates have started to stabl-
llze, rents ln US dollar terms contlnue to soften (Flgures 4 and 5).
Loan assets also remaln heavlly dlscounted. In Korea, fast growth
Flgure 4: Office Vacancy
Rates in Major Cities (%)
Source: Jones Lang LaSalle, Asla Paclflc
Property Dlgest, January 2000.
96Q1 97Q1 98Q1 99Q1
0
10
20
30
40
50
Bangkok
Jakarta
Kuala Lumpur
Manlla (Makatl)
Flgure 5: Office Rents in Major
Cities (US$ per square meter
per annum)
Source: Jones Lang LaSalle, Asla Paclflc
Property Dlgest, January 2000.
96Q1 97Q1 98Q1 99Q1
0
100
200
300
400
Bangkok
Jakarta
Kuala Lumpur
Manlla (Makatl)
Flgure 3: Composite Stock
Price Indices* (last week of
1997June=100, ln local currency)
*Weekly averages of JCI (Indonesla), KOSPI
200 (Korea), KLCI (Malaysla), PHISIX
(Phlllpplnes), and SET Index (Thalland).
Source: ARIC Indlcators.
27 Jun
1997
6 Mar
1998
13 Nov
1998
30 Jul
1999
21 Apr
2000
25
50
75
100
125
150
175
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
Flgure 6: Real GDP Growth
(y-o-y, %)
Source: ARIC Indlcators.
97Q1 98Q1 99Q1
-20
-15
-10
-5
0
5
10
15
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
ASIA RECOVERY REPORT 2000 4
has brought about a qulcker recovery ln the prlces of physlcal
assets.
Recovery in the Real Sector. The pace of recovery ln the af-
fected countrles has been faster than expected (Flgure 6). Slnce
the beglnnlng of 1999, the Consensus Economlcs forecasts
1
of
1999 economlc growth rates have been revlsed upwards almost
every month for every country.
Recovery has, however, been uneven. It has been most pro-
nounced ln Korea-so strong, ln fact, that there are now latent
lnflatlonary pressures. In Malaysla and Thalland, lt has also been
lmpresslve, but somewhat slower. Desplte accommodatlng mon-
etary pollcles and substantlal deflclt spendlng measures, lnfla-
tlonary pressures remaln muted ln both of these economles.
The Phlllpplnes´ relatlvely mlld recovery of output ls partly at-
trlbutable to the fact that economlc actlvlty there dld not con-
tract to the same extent as ln the other countrles. In Indonesla,
where polltlcal developments have had a declslve lnfluence on
the economy, output has only now stablllzed after collapslng ln
1998.
On the supply slde, the agrlcultural sector has rebounded follow-
lng the devastatlon caused by the El Nlño and La Nlña weather
phenomena. Thls rebound has beneflted malnly Indonesla, Phll-
lpplnes and Thalland. Indeed, ln the Phlllpplnes, strong agrlcul-
tural performance spearheaded growth ln 1999.
Elsewhere, the manufacturlng sector has led the recovery pro-
cess. The sector´s strong recovery ls largely attrlbutable to a re-
surgence ln export demand. The lndlces of the manufacturlng
sector value added ln all the affected countrles except Indonesla
now exceed pre-crlsls levels (Flgure 7). In Korea, the capaclty
utlllzatlon rate ln manufacturlng ls now close to lts pre-crlsls level
(Flgure 8). Although lmproved somewhat, the rate ls stlll well
below the pre-crlsls level ln Thalland and, posslbly, ln Indonesla,
although data are not avallable for the latter. In the Phlllpplnes,
the avallable data suggest that the capaclty utlllzatlon ln manu-
facturlng has lmproved from lts 1998 level. Capaclty utlllzatlon
rates are expected to lncrease ln 2000 as recovery contlnues.
Flgure 7: Manufacturing
Value Added Indices (1997Q2=
100), seasonally adjusted
Source: ARIC Indlcators.
97Q2 97Q4 98Q2 98Q4 99Q2 99Q4
80
90
100
110
120
130
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
1
Publlshed by Consensus Economlcs, Inc., Unlted Klngdom.
Flgure 8: Average Capacity
Utilization in Manufacturing (%)
Note: 1996-1999 data are yearly averages
except those for the Phlllpplnes whlch are
monthly averages. February 2000 data are
averages for the month. The 1996 and 1997
data for the Phlllpplnes are not avallable.
Sources: Natlonal Statlstlcs Offlce, Korea;
Natlonal Statlstlcs Offlce, Phlllpplnes; and the
Bank of Thalland.
Rep. of Korea
Philippines
Thailand
1999 1998 1997 1996 Feb-00
0 15 30 45 60 75 90
ASIA'S RECOVERY-A REGIONAL UPDATE 5
Latest data suggest that manufacturlng ls malntalnlng the strong
momentum lt acqulred last year. In Korea, lndustrlal productlon,
whlch ls heavlly lnfluenced by manufacturlng sector performance,
grew by 24 percent year-on-year ln the flrst quarter. Malaysla's
lndustrlal productlon grew by 25 percent year-on-year ln the flrst
two months of thls year. In Phlllpplnes and Thalland, year-on-
year manufacturlng productlon growth reached more than 9 and
8 percent, respectlvely, ln the flrst two months of 2000.
On the demand slde, the recovery was lnltlally led by publlc con-
sumptlon expendlture. Growth of publlc consumptlon expendl-
ture was supported by the deflclt spendlng measures that gov-
ernments took ln 1998.
The plcture wlth respect to prlvate consumptlon demand ls more
mlxed. In Korea, consumptlon has rlsen more or less ln llne wlth
lncome. In the Phlllpplnes, prlvate consumptlon never fell. In the
other countrles, renewed growth of consumptlon lagged behlnd
broader recovery ln lncome. Largely as a consequence, real prl-
vate consumptlon remalns below pre-crlsls levels ln all the af-
fected countrles except the Phlllpplnes (Flgure 9). However, there
are now early lndlcatlons of a sustalned recovery ln prlvate con-
sumptlon demand. Consumer durable consumptlon and automo-
blles ln partlcular are showlng renewed strength (Flgure 10).
Flgure 9: Real Private
Consumption Expenditure
Indices (1997Q2=100),
seasonally adjusted
Source: ARIC Indlcators.
97Q2 97Q4 98Q2 98Q4 99Q2 99Q4
80
90
100
110
120
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
Flgure 10: Light Automobile
Sales Indices (1997=100)
Source: Standard & Poor's DRI-Global
Automotlve Group.
1996 1997 1998 1999
0
20
40
60
80
100
120
140
160
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
ASIA RECOVERY REPORT 2000 6
Largely because of excess capaclty, and debt overhang, lnvest-
ment remalns generally depressed, although recently there have
been some slgns of lmprovement ln Korea, Malaysla and Thalland.
Desplte thls, real lnvestments ln plant and equlpment remaln well
below pre-crlsls levels ln all of the countrles (Flgure 11).
Export demand, supported ln part by a global upswlng ln the
electronlcs lndustry, has played an lmportant role ln propelllng
recovery. Exports now exceed pre-crlsls peak levels ln Korea,
Malaysla and Thalland (Flgure 12). In the Phlllpplnes, exports re-
malned largely lmmune to the crlsls because of the country´s tlght
llnks to the boomlng US market and the growth of lts fledgllng
electronlcs lndustry.
Whlle lmport demand preceded more general economlc recovery,
thls recovery started from very low levels. As a result, lmports
stlll remaln below thelr pre-crlsls peak levels ln all the affected
countrles (Flgure 13). However, strengthenlng lmport demand
slnce early 1999 has meant that the contrlbutlon of net exports
to growth has been decllnlng, and suggests that domestlc de-
mand must become a more lmportant contrlbutor to growth lf
recovery ls to be sustalned.
Latest data polnt to contlnued strong recovery ln external trade.
In Indonesla, where the recovery ln trade has lagged behlnd,
exports grew at 44.7 percent and lmports at 17.4 percent ln the
flrst two months of thls year. In the Phlllpplnes, where lmport
demand has also been slow to perk up, growth of about 9 percent
was recorded over the flrst two months. Elsewhere, strong per-
formances are belng malntalned or exceeded, wlth stellar growth
rates for exports and lmports ln Korea, Malaysla and Thalland
belng posted ln the flrst months of 2000.
Forces Driving the Recovery. At a macroeconomlc level, the
forces drlvlng the recovery process that has been descrlbed above
can be summarlzed as follows:
- Domestlc pollcles have played an lmportant role. After an lnltlal
bout of austerlty, a move to more accommodatlng monetary
pollcles and large deflclt spendlng programs helped nurture the
recovery. Most of the affected economles are now experlenclng
large flscal deflclts (Flgure 14). Short-term nomlnal lnterest rates
have also come down sharply and are now elther below thelr
pre-crlsls levels or close to them (Flgure 15). However, except
Flgure 12: Quarterly Export
Indices (1997Q2=100),
seasonally adjusted
Source: ARIC Indlcators.
97Q2 97Q4 98Q2 98Q4 99Q2 99Q4
80
100
120
140
160
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
Flgure 11: Real Gross Domestic
Investment Indices (1997Q2=
100), seasonally adjusted
Source: ARIC Indlcators.
97Q2 97Q4 98Q2 98Q4 99Q2 99Q4
20
40
60
80
100
120
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
Flgure 13: Quarterly Import
Indices (1997Q2=100),
seasonally adjusted
Source: ARIC Indlcators.
97Q2 97Q4 98Q2 98Q4 99Q2 99Q4
50
60
70
80
90
100
110
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
ASIA'S RECOVERY-A REGIONAL UPDATE 7
Flgure 15: 3-Month Interbank
Rates (%)
Source: ARIC Indlcators.
Jan
1997
Oct
1997
Aug
1998
Jun
1999
Mar
2000
0
10
20
30
40
50
60
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
Flgure 16: Real Bank Credit*
(1997June=100), seasonally
adjusted
*Clalms on the prlvate sector: deposlt
money banks.
Source: ARIC Indlcators.
Jun
1997
Dec Jun
1998
Dec Jun
1999
Dec
20
40
60
80
100
120
140
160
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
ln Korea and, more recently, ln Malaysla, the more accommo-
datlng monetary stance has not yet been reflected ln a growth
of the stock of prlvate sector credlt (Flgure 16). In part, thls ls
because non-performlng loans (NPLs) have reduced the stock
as they have been removed from the balance sheets of banks
and converted lnto other lnstruments. Nevertheless, lower ln-
terest rates have undoubtedly eased the dlstress experlenced
by buslnesses and helped support recovery ln reglonal equlty
markets. The major steps taken ln flnanclal and corporate re-
structurlng have also started to bear frult. Much more, of course,
remalns to be done.
- The lnvestor panlc that trlggered the Aslan crlsls has subslded.
Partly, thls ls because whatever capltal was golng to be wlth-
drawn has now been pulled out. In fact, the fllght of capltal had
more or less abated by the mlddle of 1998. Although lnflows of
dlrect equlty and portfollo lnvestment ln 1999 (Flgure 17) were
not sufflclent to stem the outflow of capltal arlslng from nega-
tlve net transfers from banks, they have helped to ease con-
stralnts on domestlc absorptlon. To a large degree, better-
lnformed domestlc lnvestors led forelgn lnvestors back lnto the
reglon´s equlty markets. Accordlng to the Instltute of Interna-
tlonal Flnance, net capltal outflows from the flve affected coun-
trles ln 1999 were about US$2.5 bllllon. Thls year, as recovery
consolldates further, net prlvate capltal lnflows are expected to
reach a total of US$5.3 bllllon.
- External developments also turned out to be more favorable
than expected. At the beglnnlng of 1999, deflatlonary rlsks cast
a shadow over the global economy and there were fears that
reglonal currencles may agaln come under pressure. But the
global economy has shown ltself to be more reslllent than even
the most optlmlstlc observer could have hoped. The latest World
Economlc Outlook (WEO) lssued by the Internatlonal Monetary
Fund (IMF, Aprll 2000) lndlcates that global output growth ln
1999 grew by 3.3 percent, whlch ls 1.1 percentage polnt hlgher
than what was projected at the end of 1998, and 0.3 percent-
age polnt hlgher than the average global growth slnce 1990.
The US economy has played a cruclal role ln supportlng global
demand durlng the recent turbulence. Over the past two years,
the Unlted States has accounted for more than 50 percent of
the growth of global demand. A steady renmlnbl and careful
management of the Hong Kong dollar´s llnk to the US dollar by
the government of the Hong Kong, Chlna have helped stablllze
reglonal currencles.
Flgure 14: Central Government
Fiscal Balance (as % of GDP)
Source: IMF, World Economlc Outlook, Aprll
2000.
1996 1997 1998 1999
-6
-4
-2
0
2
4
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
ASIA RECOVERY REPORT 2000 8
- Luck has played a role ln Asla´s recovery, just as lt compounded
underlylng dlfflcultles ln 1997. In partlcular, favorable weather
condltlons ralsed agrlcultural output, especlally ln Indonesla
and the Phlllpplnes. The negatlve effects of the global elec-
tronlcs downturn that occurred from 1996 through 1998 have
now been reversed. Rlslng global electronlcs demand has
helped boost Korean, Malayslan and Thal exports. But rlslng
oll prlces have proven somethlng of a mlxed blesslng. They
have worked ln favor of net exporters of fuel, such as Indone-
sla, but agalnst net lmporters, such as Korea, Phlllpplnes and
Thalland.
- Recovery ls lncreaslngly belng supported by strong trade llnks
that exlst among the reglonal economles. To a degree, renewed
growth wlthln the reglon wlll become self-propelllng as the ben-
eflts of expandlng demands splll across borders.
Medlum-term Aspects-Bank and Corporate Restructurlng
Weaknesses ln the flnanclal and corporate sectors were at the
heart of the Aslan crlsls. They stlll pose a threat to the recovery
process. Tackllng the hlgh levels of NPLs and corporate bad debt,
and the lnstltutlonal and operatlonal lnefflclencles they reflect, ls
the blggest challenge the affected countrles face ln sustalnlng
recovery over the medlum term. Fallure to tackle these problems
could yet cause economles to sllp and get caught ln a low growth,
hlgh debt trap.
Approaches to Bank and Corporate Restructuring. The af-
fected countrles have taken dlfferlng approaches to bank and
corporate sector rehabllltatlon. From the very beglnnlng, Indone-
sla, Korea and Malaysla have chosen a more government-led ap-
proach to banklng sector restructurlng. In these economles, the
governments have gulded the restructurlng process through ll-
quldlty support and natlonallzatlon of troubled banks, and have
establlshed centrallzed agencles to manage NPLs and re-capltall-
zatlon programs. In Thalland, a more nuanced approach has been
followed. The Thal authorltles lntervened dlrectly ln the restruc-
turlng of flnance companles and have also absorbed the losses of
state banks. However, the Thal government has favored a more
market-orlented approach to the restructurlng of prlvate banks.
Flgure 17: Net Direct and
Portfolio Investment Flows to
the Five Affected Countries
(US$ bllllon)
Sources: IMF, World Economlc Outlook, Aprll
2000.
1996 1997 1998 1999
-10
-5
0
5
10
15
20
25
Net Portfolio Investment Net Direct Investment
ASIA'S RECOVERY-A REGIONAL UPDATE 9
Although publlc capltal has been made avallable to asslst the re-
capltallzatlon process, the prlmary responslblllty for flndlng new
capltal and resolvlng NPLs has been left wlth the prlvate banks
themselves. In the Phlllpplnes, desplte some slgns of stress ln
the banklng sector, clrcumstances dld not warrant any expllclt
bank restructurlng measures.
The process of corporate restructurlng has generally been more
decentrallzed. In all the economles, the governments have now
provlded frameworks and set rules to help debtors and thelr credl-
tors reach agreements. Whlle the processes have been volun-
tary, corporate debt restructurlng agencles have, ln some cases,
played qulte an actlve role ln forglng agreements through pursu-
lng target cases, and by other means. Added lmpetus has been
glven to these processes through the promulgatlon of new bank-
ruptcy laws ln both Indonesla and Thalland.
In Korea, the sheer slze and lnfluence of the chaebols have
requlred that the government take a more dlrect role ln the
corporate restructurlng process. For the smaller chaebols, re-
structurlng focused on voluntary debt settlements along the
llnes of the London Approach and has been led by deslgnated
lead banks. The flve largest chaebols, through government lnl-
tlatlves, have entered speclflc agreements wlth thelr lead banks,
wlth debt resolutlon agreements belng closely monltored by
the Flnanclal Supervlsory Servlces (FSS). Thls process has been
centrally coordlnated and gulded by, on occaslon, dlrect gov-
ernment lnterventlons. The Corporate Restructurlng Coordlna-
tlon Commlttee (CRCC) was establlshed to resolve dlfferences
where settlement plans could not be agreed upon among debt-
ors and credltors.
Progress in Bank Restructuring. Progress ln bank restruc-
turlng varles across the flve affected countrles. There are sev-
eral reasons for thls. Flrst, lnltlal banklng sector condltlons dlf-
fered slgnlflcantly among countrles, wlth dlstress greatest ln
Indonesla and the least ln the Phlllpplnes. Second, economlc
growth ltself helps rehabllltate bank balance sheets and, there-
fore, the recovery of banklng systems has been lnfluenced by
macroeconomlc developments. Thlrd, the dlfferent ways ln whlch
problems have been tackled and reforms undertaken have been
reglstered ln dlfferent ways on bank and non-bank balance
sheets.
ASIA RECOVERY REPORT 2000 10
Systemlc flnanclal dlstress led to sharp lncreases ln NPL ratlos on
bank and non-bank flnanclal lnstltutlons allke ln all of the affected
countrles. Isolatlng and comparlng the evolutlon of NPLs ls, how-
ever, not a stralghtforward task. Dlfferent countrles have adopted
dlfferlng deflnltlons of NPLs. The accuracy of NPL data ls also llkely
to vary across place and over tlme. More recent flgures are llkely
to be more accurate than earller ones. NPL ratlos are also sensl-
tlve to the range of flnanclal lnstltutlons covered. Ratlos would
lncrease lf the loans housed ln asset management companles
(AMCs) were consolldated wlth those remalnlng on the balance
sheets of flnanclal lnstltutlons.
Partly because government-backed AMCs have purchased a slg-
nlflcant share of NPLs from banks, the reported NPL ratlos ln the
banklng sector are lowest ln Korea and Malaysla (Flgure 18). In
Thalland, where prlvate banks have been left to work out thelr
bad debts and NPLs wlth credltors, uslng the Corporate Debt Re-
structurlng Advlsory Commlttee (CDRAC) and other mechanlsms,
the ratlo of NPLs ln the banklng system remalns comparatlvely
hlgh, though lt ls now falllng. In the Phlllpplnes, where banks
have also been left to manage thelr assets, the NPL ratlo has
lncreased slnce the outbreak of the crlsls, largely because of weak-
nesses of thrlft banks, but may have peaked now. In Indonesla,
the sltuatlon remalns hlghly problematlc. Whlle some progress
has been made ln transferrlng NPLs from the banklng sector to
the asset management unlt of the Indonesla Bank Restructurlng
Agency (IBRA), the sheer slze of the problem has left the banklng
sector wlth a hlgh level of NPLs.
One of the attractlons of removlng NPLs from bank balance sheets
and houslng them ln asset management companles ls that lt
strengthens balance sheets of banks and, thereby, eases con-
stralnts on lendlng. NPL removal, together wlth targeted publlc
sector flnanclal asslstance and prlvate sector capltal lnfuslons,
have been effectlve ln strengthenlng the capltal backlng of banks.
Banklng sector capltal adequacy ratlo has lmproved ln all the af-
fected countrles where data are avallable (Flgure 19).
Aspects of the flnanclal operatlons of publlc owned AMCs provlde
an addltlonal perspectlve on the pace and nature of restructur-
lng. Publlcly owned AMCs have been the major vehlcles for re-
movlng NPLs from banklng systems ln Indonesla, Korea and Ma-
laysla. In all cases, a substantlal portlon of non-performlng loans
have been left to banks to work out themselves, elther for logls-
tlcal reasons or because the authorltles wlsh to mltlgate the rlsks
Flgure 19: Capital Adequacy Ratios
of Commercial Banks* (%)
*Cover only commerclal banks for Korea,
Phlllpplnes and Thalland, and the banklng sector
for Malaysla.
Sources: The Flnanclal Supervlsory Servlces web
slte, Korea; Mlnlstry of Flnance and Economy,
Korea; Monetary and Flnanclal Developments,
the Bank Negara Malaysla web slte; the Bangko
Sentral ng Plllplnas, Phlllpplnes; Phlllpplnes
Update, East Asla Quarterly Brlef, March 2000,
World Bank web slte; and the Bank of Thalland
web slte.
Nov 99
Dec 97
Rep. of Korea
Malaysia
Philippines
Thailand
0 3 6 9 12 15 18
Dec 97
Dec 99
Dec 97
Feb 00
Dec 97
Dec 99
Flgure 18: NPLs of Commercial
Banks* (as % of total commerclal
bank loans)
*NPLs cover only commerclal banks for Korea,
Malaysla, Phlllpplnes and Thalland, and the
banklng sector for Indonesla; and exclude those
transferred to AMCs.
Sources: Pollcy Implementatlon ln 1999 and
Pollcy Dlrectlons for 2000, the Bank Indonesla
web slte (data approxlmated from a chart ln the
Report); the Flnanclal Supervlsory Servlces web
slte, Korea; Mlnlstry of Flnance and Economy,
Korea; the Bank Negara Malaysla web slte; the
Bangko Sentral ng Plllplnas web slte, Phlllpplnes;
the Bank of Thalland web slte.
Latest estimate available
Peak level since the crisis
Indonesia
Rep. of Korea
Malaysia
Philippines
Thailand
Mar 99
Jun 99
Dec 99
Nov 98
Jan 00
Nov 99
Feb 00
0 10 20 30 40 50 60
Dec 99
Feb 00
May 99
ASIA'S RECOVERY-A REGIONAL UPDATE 11
of moral hazard. In Indonesla, the asset management unlt of
IBRA has now purchased about 36 percent of the total NPLs of
the flnanclal system (Flgure 20). In Korea, as of the end of 1999,
more than 52 percent of total NPLs of the flnanclal system had
been transferred to Korea Asset Management Corporatlon
(KAMCO). In Malaysla, Danaharta had purchased about 36 per-
cent of total NPLs by the end of 1999. AMCs have typlcally ac-
qulred NPLs at a blg dlscount: almost 60 percent ln Korea and 56
percent ln Malaysla (Flgure 21).
In Thalland, the Flnanclal Restructurlng Agency (FRA) and a gov-
ernment-backed AMC were establlshed as early as 1997. How-
ever, thelr mandate was llmlted to managlng the bad debts of
flnance companles, not those of commerclal banks. The FRA took
over the assets of 56 out of 58 suspended flnance companles and
had almost completed the llquldatlon of these assets by the end
of 1999. Thalland´s AMC has acted as a bldder of last resort for
the FRA´s assets, and has purchased about 30 percent of the face
value of the assets taken over by the FRA. Informatlon on asset
dlsposal by the AMC ls not readlly avallable.
In assesslng the performance of AMCs, lt ls lmportant to bear ln
mlnd that thelr mandates vary somewhat. Qulck dlsposal of assets
ls more of a prlorlty ln Indonesla and Korea than ln Malaysla, where
there ls a greater emphasls on the restoratlon of value to the as-
sets acqulred. Fast dlsposal of assets under AMCs´ control brlngs
three beneflts. Flrst, the revenues ralsed help to ease flscal bur-
dens and may also help strengthen bank balance sheets when
there are revenue sharlng arrangements ln place. Second, by put-
tlng assets back to work, dlsposal helps speed economlc recovery
dlrectly. Thlrd, the dlsposal of NPLs helps asset markets to adjust
by provldlng reference prlces and by maklng markets more llquld.
But lf demand for non-performlng loans ls subdued, hasty dlsposal
may prove counterproductlve and entall hlgh flscal costs.
IBRA reports that lt has now ralsed about $2.5 bllllon from asset
sales. Whlle thls exceeds 1999-2000 flscal targets, the process ln
Indonesla ls stlll comparatlvely slow. Sales of several banks have
been delayed, and cases agalnst debtors are, ln general, pro-
ceedlng slowly. By comparlson, the process of asset dlsposal has
been qulck ln Korea (Flgure 20). Even ln Malaysla, where fast
dlsposal ls not an lmmedlate prlorlty, the process ls movlng ahead.
AMCs have, ln general, been able to recover more from dlsposal
than they pald to acqulre NPLs (Flgure 21). As of the end of 1999
Flgure 20: NPLs Purchased and
Disposed by AMCs*
*NPLs purchased and dlsposed refer to those by
IBRA (asset management unlt; data on dlsposal not
avallable) ln Indonesla, KAMCO ln Korea and Dana-
harta ln Malaysla as of the dates lndlcated. In the
case of Thalland, these refer to assets taken over
from the 56 suspended flnance companles and dls-
posed by the FRA. The exact data on asset dlsposals
by the FRA are not avallable. But accordlng to the
World Bank, the FRA has almost flnlshed llquldatlon
of all the assets taken over from the closed flnance
companles.
Sources: The Indonesla Bank Restructurlng Agency
web slte; the Korea Asset Management Corporatlon
web slte; the Danaharta web slte, Malaysla; Thalland
Economlc Monltor, Feb. 2000, World Bank-Thalland
web slte; and Indonesla Update, East Asla Quarterly
Brlef, March 2000, World Bank web slte.
Dec 99
NPLs disposed
(as % of NPLs purchased)
NPLs purchased
(as % of total NPLs)
Indonesia
Rep. of Korea
Malaysia
Thailand
0 25 50 75 100
Dec 99
Dec 99
Dec 99
Feb 00
Dec 99
Feb 00
Flgure 21: Discount Rates on
NPL Purchases and Disposals
by AMCs* (%)
*NPLs purchased and dlsposed refer to those by
KAMCO ln Korea and Danaharta ln Malaysla as of the
dates lndlcated. In the case of Thalland, the assets of
the 56 suspended flnance companles were trans-
ferred to the FRA (whlch ls not an AMC). The dlsposal
dlscount refers to that at whlch the assets were dls-
posed by the FRA.
Sources: The Korea Asset Management Corporatlon
web slte; the Danaharta web slte, Malaysla; Thalland
Economlc Monltor, Feb. 2000, World Bank-Thalland
web slte; Thalland Update, East Asla Quarterly Brlef,
March 2000, World Bank web slte.
Disposal discount
Purchase discount
Rep. of Korea
Malaysia
Thailand
0 25 50 75 100
Feb 00
Feb 00
Dec 99
Dec 99
Dec 99
ASIA RECOVERY REPORT 2000 12
and early 2000, the average dlscount on the face value of assets
was about 44 percent ln Korea, and 20 percent ln Malaysla. In
Thalland, assets have been sold at a dlscount that averages about
72 percent. As recovery strengthens, dlscounts have generally
edged down.
Publlc funds have been used extenslvely to support flnanclal re-
structurlng (Flgure 22). In some countrles, thls has slgnlflcant
flscal lmpllcatlons.
2
Government-led recapltallzatlon programs
have resulted ln the state ownlng substantlal proportlons of as-
sets ln the flnanclal sectors (Flgure 23). The prlvatlzatlon of na-
tlonallzed flnanclal lnstltutlons, malnly banks, ls progresslng more
slowly than orlglnally antlclpated.
Progress in Corporate Restructuring. In all the flve countrles,
the resolutlon of corporate debt has been slower than the re-
capltallzatlon and restructurlng of the banklng sector. To supple-
ment market and bankruptcy process, arrangements for volun-
tary workouts, along the llnes of the London Approach, have been
adopted ln Indonesla, Korea, Malaysla and Thalland. In the Phll-
lpplnes, thls responslblllty lles wlth the Securltles and Exchange
Commlsslon (SEC). Across the reglon, a substantlal amount of
corporate bad debt ls now undergolng such government-spon-
sored voluntary settlement.
3
Debt resolutlon, however, has been proceedlng at an uneven pace
(Flgure 24). In Indonesla, of 331 cases reglstered wlth the Jakarta
Inltlatlve Task Force (JITF), only 2 percent ln terms of number
and less than 4 percent ln terms of value have been resolved as
of March 2000. In the other countrles, the process has been more
encouraglng.
In Korea, substantlal progress has been made ln restructurlng
four of the flve largest chaebols. The FSS reports that Hyundal,
Samsung, LG and SK have now met the overall requlrements of
the Capltal Structure Improvement Plans (CSIPs) for 1999. The
debt-to-equlty ratlos of the four conglomerates have now fallen
below the targeted level of 2.0 as of the end of 1999. Thelr debt-
equlty ratlos average 1.73, compared to 3.55 ln 1998.
2
Slnce the restructurlng process has stlll a long way to go, the total cost
of restructurlng ls expected to lncrease further.
3
Data on restructurlng outslde the government-supervlsed schemes are
lncomplete.
Flgure 22: Total Public Funds Used
for Financial Restructuring* (as %
of 1999 GDP)
*Refer to government bonds lssued for flnanclal
restructurlng as of 1999.
Sources: IMF, World Economlc Outlook, Aprll
2000, for Indonesla, Korea, and Thalland; and
the Danaharta and Danamodal web sltes for
Malaysla.
Indonesia
Rep. of Korea
Malaysia
Thailand
0 10 20 30 40 50 60 70
Flgure 23: State Ownership in the
Financial Sector (%)*
*Refer to % of flnanclal sector assets owned by
the government as of mld-1999.
Source: Claessens, S., et al. (1999), "Flnanclal
Restructurlng ln East Asla: Halfway There?,¨
World Bank web slte.
Indonesia
Rep. of Korea
Malaysia
Thailand
0 20 40 60 80
ASIA'S RECOVERY-A REGIONAL UPDATE 13
The four conglomerates also out-performed agreed targets ln
terms of asset dlvestlture and capltal lnfuslons. In March 2000,
the Falr Trade Commlsslon announced that cross guarantees be-
tween chaebol afflllates had been completely ellmlnated. Slgnlfl-
cant progress has also been made ln restructurlng Daewoo. Debt
restructurlng plans have been settled for the 12 Daewoo afflll-
ates. An agreement was reached wlth forelgn credltors resolvlng
some $4.8 bllllon ln unsecured loans, removlng one of the largest
lmpedlments to Daewoo´s corporate restructurlng. Labor unrest,
however, contlnues to slow the pace of reform lmplementatlon.
For smaller chaebols and lndependent flrms, 104 cases have so
far been reglstered under the Corporate Restructurlng Accord
(CRA) framework, of whlch, 78 plans, representlng 75 percent of
appllcatlons flled, have been agreed upon as of December 1999.
As of March 2000, the Malayslan Corporate Debt Restructurlng
Commlttee (CDRC) had resolved 42 percent ln terms of number
and about 46 percent ln terms of value of the total cases lt has
handled. The CDRAC of Thalland has also met wlth some success
ln debt restructurlng. As of March 2000, of the 7,102 target cases
lt has handled, about 40 percent ln terms of number and 32 per-
cent ln terms of value have been completed. Outslde the govern-
ment-supervlsed restructurlng framework, Thal flnanclal lnstltu-
tlons have also reported that, as of February 2000, they have
restructured about 52 percent of the total debt that has gone
through workouts carrled out by flnanclal lnstltutlons themselves.
So far, the use of formal bankruptcy procedures has been llmlted
ln all the flve countrles (Flgure 25). In part, thls ls a reflectlon of
buslness cultures that, hlstorlcally, have favored out-of-court
settlements and prlvate negotlatlons. The hlgh costs of resortlng
to formal bankruptcy procedures due to blases agalnst credltors
ln lnsolvency proceedlngs and lneffectlve judlclal systems ln some
of these countrles also deter credltors from taklng legal actlon
agalnst defaultlng borrowers. New lnsolvency laws ln Indonesla
and Thalland provlde a more credlble framework that may com-
pel debtors to negotlate settlements wlth thelr credltors. In Ma-
laysla and Korea modern bankruptcy laws exlsted before the crl-
sls. The governments ln all of the affected countrles are taklng
measures to lmprove the effectlveness of the judlclary ln han-
dllng bankruptcy cases. The recent rullng ln favor of Thal Petro-
chemlcal Industry credltors ln Thalland and the ASTRA rullng ln
favor of IBRA ln Indonesla suggest that bankruptcy laws wlll ln-
creaslngly be lmplemented as they are lntended.
Flgure 24: Progress in
Government-supervised
Voluntary Workouts*
*Indonesla: data refer to the cases reglstered
under JITF. Korea: data refer to the cases
reglstered under the CRA framework and do not
cover the top flve chaebols. Data on % of debt
restructured are not avallable. Malaysla: data
refer to the cases reglstered under CDRC.
Thalland: data refer to the target cases
reglstered under CDRAC.
Sources: Updates of Indonesla and Korea, East
Asla Quarterly Brlef, March 2000, World Bank
web slte; CDRC web slte, Malaysla; CDRAC web
slte, Thalland.
Indonesia
Rep. of Korea
Malaysia
Thailand
Mar 00
0 20 40 60 80
% of cases resolved
Mar 00
Dec 99
Mar 00
Mar 00
Mar 00
Mar 00
% of debt restructured
Flgure 25: Number of Bankruptcy
Cases Filed, Accepted and
Completed Since the Crisis*
*For Indonesla, Korea and Malaysla untll August
1999; for the Phlllpplnes untll September 1999;
for Thalland untll December 1999.
Sources: Global Economlc Prospects 2000, World
Bank web slte; Thalland Update, East Asla
Quarterly Brlef, March 2000, World Bank web slte;
Lamberte, M., 2000, "The Phlllpplnes: Challenges
for Sustalnlng the Economlc Recovery,¨ Phlllpplne
Instltute for Development Studles web slte.
Indonesia
Rep. of Korea
Malaysia
Philippines
Thailand
Completed Accepted Filed
0 20 40 60 80 100
ASIA RECOVERY REPORT 2000 14
Debt-equlty ratlos of the corporate sectors ln most of the affected
countrles reached hlgh levels when the crlsls broke out nearly
three years ago. Slnce then, because of the flnanclal and opera-
tlonal restructurlng measures taken, the ratlos have fallen ln all
the countrles except ln Indonesla (Flgure 26). The ratlo was al-
ready close to the lnternatlonal average
4
ln Malaysla ln 1998 and
by 1999 had fallen towards thls average ln Korea. However, the
debt to equlty ratlos remaln hlgh ln the Phlllpplnes, and partlcu-
larly hlgh ln Indonesla and Thalland.
Market Assessment of Progress in Bank and Corporate
Restructuring. One dlfflculty ln assesslng restructurlng and
recovery programs ls how to lsolate thelr lmpacts from those of
other events. Some perspectlve as to the success or otherwlse
of restructurlng programs can be galned from market data.
Equlty lndlces, credlt ratlngs, and real bank credlt growth,
among other pleces of lnformatlon, provlde an lndlcatlon of the
prlvate sector´s assessment of progress of restructurlng and
rehabllltatlon.
- Banking Sector Equity Index. One summary lndlcator of mar-
ket assessment ls the performance of flnanclal (or banklng)
sector equlty relatlve to broader stock market lndlces. If the
banklng sector equlty outperforms the broader market over a
perlod of tlme, thls would tend to suggest a bulllsh outlook, and
could be lnterpreted as market endorsement of restructurlng
and re-capltallzatlon efforts. On the other hand, a lackluster
performance of thls lndlcator means that doubts remaln about
the effectlveness of restructurlng efforts.
Indoneslan flnanclal stocks have under-performed the
broader market durlng the crlsls (Flgure 27). Investors re-
acted posltlvely when a major restructurlng program was
announced ln September 1998. But thls optlmlsm was short-
llved and flnanclal stocks have slnce lost ground relatlve to
other sectors.
Desplte eplsodlc recoverles, flnanclal sector stocks ln Korea have
fared worse than the overall market slnce late 1997. By early
2000, they had surrendered about 65 percent of thelr value to
the overall market lndex. Desplte the generally posltlve com-
4
For example, the debt-equlty ratlo was 1.07 ln the US ln 1995 and 1.48
ln Germany ln 1995.
Flgure 27: Ratios of Financial
to General Stock Price Indices
(weekly average, last week of
June1997=100)
Source: ADB calculatlons derlved from
Bloomberg.
27 Jun
1997
6 Mar
1998
13 Nov
1998
30 Jul
1999
7 Apr
2000
20
40
60
80
100
120
140
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
Flgure 26: Debt-Equity Ratios of
the Corporate Sector
Sources: Country papers, Conference on Aslan
Corporate Recovery: Corporate Governance and
Government Pollcy, World Bank web slte;
Buslness World, Phlllpplnes; Korea Herald web
slte; Thalland: Selected Issues, IMF web slte.
Indonesia
Rep. of Korea
Malaysia
Philippines
Thailand
0 1 2 3 4 5
1996
1998
1997
1999
1996
1998
1997
1998
1999
1997
ASIA'S RECOVERY-A REGIONAL UPDATE 15
mentary on Korean banklng sector restructurlng, flnanclal sec-
tor equlty values would seem to lndlcate that market partlcl-
pants are not yet convlnced of the earnlngs prospects for Korea´s
banks. Slow progress ln restructurlng the chaebols and con-
cerns about the true extent of thelr debt are llkely to have had
a negatlve lnfluence on the market´s assessment of flnanclal
stocks.
In Thalland, banklng stocks have lost conslderable ground to
the broader market slnce mld-1997. Although they staged a
recovery at around the tlme of the announcement of Thalland´s
flnanclal restructurlng package, they have subsequently fallen
back and are now under-performlng the broader market. Whlle
market partlclpants seem to have been skeptlcal about the
pace of restructurlng, recent days have seen reports of a
welcome return to profltablllty for Thalland´s commerclal
banks.
In Malaysla, flnanclal stocks underperformed the stock mar-
ket untll September 1998. Slnce then, and followlng the com-
mencement of operatlons of Danaharta and Danamodal, the
market valuatlons of flnanclal stocks have recovered. By mld-
1999, Malayslan flnanclal sector stocks were outperformlng
the broader market relatlve to the June 1997 benchmark. Thls
reflects a posltlve vlew of restructurlng and lts lmpact on pro-
spectlve earnlngs.
In the Phlllpplnes, flnanclal stocks outperformed the broader
market ln 1999 but thls should be seen ln the context of a
lackluster performance by Phlllpplne equltles. However, market
partlclpants have clearly welcomed ongolng consolldatlon wlth
mergers of large banklng groups and the strengthenlng effect
that ls expected to follow ln the medlum term.
- Real Bank Credit Growth. Real bank credlt growth can also
glve some lndlcatlon of the general health of the banklng and
corporate sectors. Slow growth or a contractlon ln the stock of
credlt can occur when bank´s balance sheets are too weak to
support new lendlng. However, the stock of credlt wlll also be
lnfluenced by demand factors, so that data should be lnter-
preted wlth care.
The scale of the problems ln Indonesla´s banklng and corporate
sectors and the slow progress of restructurlng led to a sharp
ASIA RECOVERY REPORT 2000 16
fall ln the stock of real bank credlt. As yet, lt shows no slgns of
recovery. On the other hand, desplte the fact that Korea´s fl-
nanclal system was among the worst hlt by the crlsls, lmpres-
slve progress ln flnanclal restructurlng has strengthened bank´s
balance sheets to a polnt where they have been able to resume
lendlng. Thls ls reflected ln an lncrease ln the stock of real bank
credlt. Slnce the second half of 1999, real bank credlt has also
been lncreaslng ln Malaysla. In both the Phlllpplnes and Thal-
land, the stock of real bank credlt was stlll below pre-crlsls lev-
els at the end of 1999 (Flgure 16).
- Sovereign Credit Ratings. Soverelgn credlt ratlngs provlde a
broad barometer of the general economlc health of a country.
But slnce soverelgn ratlngs provlde a celllng for non-soverelgn
flnanclal and corporate borrowers ln any glven country, they
also provlde an lndlrect assessment of the health of the flnan-
clal and corporate sectors. After the crlsls, the soverelgn credlt
ratlngs for all flve countrles were revlsed sharply downwards to
levels below lnvestment grade. Subsequently, soverelgn credlt
ratlngs for Korea and Malaysla have been posltlvely reassessed
(Table 1). Ratlngs for the Phlllpplnes are stable whlle Indonesla
ls on watch for a posslble further downgrade.
Table 1: Sovereign Credit Ratings
Note: Moody’s: Baa bonds are considered medium-grade obligations. Interest payments and principal security appear adequate for the present. Ba bonds
are judged to have speculative elements, their future cannot be well assured. B bonds generally lack characteristics of the desirable investments. Standard
& Poor's: BBB bonds have adequate protection parameters, but adverse economic conditions could lead to weakened repayment capacity. BB bonds have
a speculative element. B bonds are more vulnerable to nonpayment than BB bonds. CCC bonds are currently vulnerable to nonpayment. Fitch IBCA: BBB
bonds are investment grade, good credit quality bonds. BB bonds are speculative with a possibility of credit risk developing. B bonds are highly speculative,
with a significant credit risk.
Source: Bloomberg.
Item
Moody´s
Forelgn Currency LT
S&P
Forelgn Currency LT
Fltch IBCA
Forelgn Currency LT
Indonesia
B3 19 March 98
B2 9 January 98
CCC+ 15 May 98
B- 11 March 98
B- 16 March 98
B+ 21 January 98
Korea
Baa2 16 December 99
Baa3 12 February 99
BBB 11 November 99
BBB- 25 January 99
BBB+ 30 March 2000
BBB- 19 January 1999
Malaysia
Baa3 3 December 98
Baa2 23 July 98
BBB 10 November 99
BBB- 15 September 98
BBB 7 December 99
BBB- 26 Aprll 1999
Philippines
Ba1 18 May 97
Ba2 23 January 97
BB+ 21 February 97
BB 30 May 95
BB+ 8 July 99
Thailand
Ba1 21 December 97
Baa3 1 December 97
BBB- 8 January 98
BBB 24 October 97
BBB- 24 June 99
BB+ 14 May 98
Outlook. Looklng ahead, lt ls llkely that further resources for the
re-capltallzatlon of banks wlll need to be found ln Indonesla, but
posslbly too ln Thalland. Partlcularly ln Indonesla thls could present
formldable flscal problems. In Thalland, prlvate capltal may be
more forthcomlng. Glven the more modest scale of the capltal
shortfalls ln Korea and Malaysla, economlc recovery should go a
ASIA'S RECOVERY-A REGIONAL UPDATE 17
long way towards heallng bank balance sheets. In the Phlllpplnes,
the prlvate sector ls belng left to address addltlonal capltal needs.
Over the longer term, the future safety of flnanclal sectors ln the
affected countrles wlll depend not only on buttresslng balance
sheets, but also on further strengthenlng of operatlonal restruc-
turlng and the regulatory and supervlsory systems, and lmprov-
lng banklng and corporate governance.
Longer Term Aspects-Soclal Recovery, Governance and
Competltlveness
Sustalnlng and further acceleratlng the recovery ln the soclal sector
remalns a crltlcal challenge faclng the affected countrles. The crl-
sls has demonstrated forcefully that lnformal safety nets provlde
lnadequate protectlon ln a turbulent envlronment. Thls ls why
soclal recovery stlll lags behlnd economlc recovery. Whlle soclal
support systems ln the reglon have been strengthened slgnlfl-
cantly, much more remalns to be done. As these economles move
forward, lnstltutlonal arrangements must be found to better pro-
tect the most vulnerable and least well-off segments of soclety.
More generally, contlnulng lnvestments ln the health, educatlon
and general welfare of the broad mass of the populatlon should
be a prlorlty. An approach that empowers people rather than pro-
vldes unsustalnable subsldles ls more llkely to reconclle legltl-
mate soclal objectlves wlth economlc efflclency and dynamlsm.
Whlle some growth may be posslble wlthout these changes, lt wlll
lnevltably be of lower quallty, more dlfflcult to sustaln, and more
vulnerable to adverse shocks.
Although results have been mlxed, several lndlcators for the af-
fected countrles suggest some measure of soclal recovery, al-
belt slow. Unemployment rates fell somewhat ln most of the
affected countrles ln 1999 (Flgure 28), although they remaln
above thelr pre-crlsls levels. Care should be taken, however, ln
lnterpretlng these data, as falllng unemployment rates could
partly be a result of decllnlng labor force partlclpatlon rates.
Further, lt ls posslble that falllng unemployment masks an ln-
crease ln low pald jobs. However, ln Korea, Phlllpplnes and Thal-
land, real wage lndlces now exceed thelr respectlve pre-crlsls
levels (Flgure 29).
Flgure 28: Unemployment
Rates (%)
Source: ARIC Indlcators.
1996 1997 1998 1999
0
3
6
9
12
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
Flgure 29: Real Wage Rate
Indices (1997Q2=100*)
*For Thalland, 1997Q1=100; Prlor to 1999,
data for Thalland are avallable only for the
flrst and thlrd quarters.
Source: ARIC Indlcators.
97Q1 98Q1 99Q1
60
70
80
90
100
110
120
Indonesla
Rep. of Korea
Phlllpplnes
Thalland
ASIA RECOVERY REPORT 2000 18
A further lndlcator that suggests some soclal recovery ln the affected
countrles ls per caplta real consumptlon, whlch has recovered some
portlon of the ground lost earller durlng the crlsls, partlcularly ln
Korea (Flgure 30). However, compared to the recent peak of 1997,
per caplta real consumptlon ln 1999 was stlll 4.8 percent lower ln
Indonesla, 4.3 percent lower ln Korea, and 12.8 percent lower ln
Malaysla. For Thalland, per caplta real household consumptlon
peaked ln 1996. In 1999, lt was stlll 12.8 percent lower than the
1996 level. The only exceptlon ls the Phlllpplnes, whlch dld not see
a drop ln per caplta real household consumptlon durlng the crlsls.
Agaln care should be taken ln lnterpretlng aggregate consumptlon
data because lf lncome dlstrlbutlons have become more unequal,
and there ls some evldence that thls mlght be the case, then the
consumptlon of the poorest may not be lncreaslng or recoverlng as
qulckly as the economy-wlde average.
Some of the countrles are commlttlng larger amounts of resources
to soclal sectors such as publlc health, educatlon and soclal pro-
tectlon (Flgures 31, 32 and 33). For example, ln three of the
affected countrles (Malaysla and the Phlllpplnes are exceptlons),
the share of government expendlture on soclal safety nets and
welfare ln the total budget lncreased ln 1999 to address the so-
clal lssues arlslng from the crlsls. Among the flve countrles, only
Korea has a formal system of unemployment beneflts, whlch was
lntroduced ln the aftermath of the crlsls. Consequently, Korea
has the hlghest soclal safety net expendlture. Soclal safety net
provlslons ln other countrles cover only baslc welfare, and, ln the
case of Malaysla, houslng.
The Aslan crlsls had a marked lmpact on poverty levels, although
less than lnltlally predlcted. In all of the affected countrles, rls-
lng unemployment and falllng real wages brought hardshlp to
the poor. However, there are now some slgns that levels of pov-
erty are startlng to fall, albelt slowly, as recovery gets underway
ln these countrles. Encouraglng slgns are emerglng from the
worst affected of the flve, Indonesla, where the lmpact of the
crlsls and polltlcal clrcumstances sparked fears of a sustalned
lncrease ln poverty. Accordlng to the latest survey data,
5
pov-
erty levels ln 1999 have fallen back to almost pre-crlsls levels.
These data, however, have to be lnterpreted wlth extreme care
because the sample slze, at only 10,000 famllles, was small.
Flgure 30: Per Capita Real
Private Consumption Indices
(1996=100)
Source: ARIC Indlcators.
1996 1997 1998 1999
85
90
95
100
105
110
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
5
Provlnclal Poverty and Soclal Indlcators, selected from the Indonesla
Natlonal Soclal and Economlc Survey (SUSENAS) 1993-1999.
ASIA'S RECOVERY-A REGIONAL UPDATE 19
Flgure 32: Central Government
Expenditure on Education (as %
of total budget)
Sources: Web sltes of Bank Negara Malaysla and
the Mlnlstrles of Flnance of Indonesla and Thalland;
Mlnlstry of Flnance and Economy, Synopsls of the
Budget of the Republlc of Korea, December 1998
and 1999; Republlc of the Phlllpplnes, FY2000
Budget of Expendltures and Sources of Flnanclng.
Indonesia
Rep. of Korea
Malaysia
Philippines
Thailand
0 5 10 15 20 25 30
2000 1999 1998 1997 1996
Flgure 33: Central Government
Expenditure on Social Safety
Nets* (as % of total budget)
*Indonesla: soclal welfare; Korea: soclal safety nets
lncludlng unemployment beneflts; Malaysla: soclal
welfare lncludlng welfare servlces, sports, labor,
local government and houslng; Phlllpplnes: soclal
welfare lncludlng soclal securlty and employment;
Thalland: soclal securlty and welfare.
Sources: Web sltes of Bank Negara Malaysla and
the Mlnlstrles of Flnance of Indonesla and Thalland;
Mlnlstry of Flnance and Economy, Synopsls of the
Budget of the Republlc of Korea, December 1998
and 1999; Republlc of the Phlllpplnes, FY2000
Budget of Expendltures and Sources of Flnanclng.
Indonesia
Rep. of Korea
Malaysia
Philippines
Thailand
2000 1999 1998 1997 1996
0 2 4 6 8 10
Studles wlth a larger sample slze are requlred lf more rellable
results are to be obtalned. In other countrles, more recent data
are needed to make slmllar assessments. But fast recovery ls
expected to have had some posltlve lmpact on reduclng poverty
provlded lt ls not assoclated wlth greater lnequallty ln the dlstrl-
butlon of lncome.
Beyond soclal recovery, the affected countrles, ln partlcular Indo-
nesla, Phlllpplnes and Thalland, stlll face a blg challenge ln lm-
provlng the quallty of llfe for mllllons of thelr cltlzens who stlll llve
ln poverty. In Asla as a whole, accordlng to the most common
lnternatlonal deflnltlon of poverty-those who llve on less than $1
a day measured ln 1985 dollars-about one ln four, or 900 mllllon
people, were poor ln 1998. Thls ls about more than twlce as many
poor people than those llvlng ln the rest of the developlng world
comblned. In Indonesla, the same poverty deflnltlon glves a na-
tlonal headcount lndex of 20.3 as of December 1998. The Phlllp-
plne offlclal estlmate of natlonal headcount lndex ln 1997 was
36.8, based on a poverty threshold of about US$3 per person per
day at 1985 purchaslng power parlty (PPP) dollars. In Thalland,
Flgure 31: Central Government
Expenditure on Health (as % of
total budget)
Sources: Web sltes of Bank Negara Malaysla and
the Mlnlstrles of Flnance of Indonesla and
Thalland; Republlc of the Phlllpplnes, FY2000
Budget of Expendltures and Sources of Flnanclng.
2000 1999 1998 1997 1996
Indonesia
Malaysia
Philippines
Thailand
0 2 4 6 8
ASIA RECOVERY REPORT 2000 20
the share of the poor was estlmated at 13 percent ln 1998. But
quallty of llfe cannot-and should not-be deflned by dollar ln-
come alone. A broad deflnltlon of the quallty of human llfe must
lnclude other aspects of human deprlvatlon: llllteracy, malnutrl-
tlon, bad health, poor access to water and sanltatlon, vulnerabll-
lty to economlc shocks, and lack of polltlcal freedom. Flghtlng
poverty and addresslng broad aspects of quallty of llfe wlll remaln
the most presslng lssues faclng many Asla countrles, lncludlng
those affected by the crlsls, for many years to come.
The crlsls has brought to the fore lssues of governance ln the
publlc and corporate sectors. Too much has probably been made
of the weaknesses that clearly exlsted before the crlsls. Fast growth
coexlsted wlth these prlor to the crlsls, and growth has now re-
sumed wlth only modest changes. But thls ls no reason for com-
placency. Good governance can and does contrlbute slgnlflcantly
to both the quantlty and quallty of growth. In an lncreaslngly
lnterdependent global economy, good practlces are llkely to as-
sume greater lmportance ln assuaglng lnvestor concerns and at-
tractlng needed capltal and expertlse. Governments have a key
role to play ln developlng lnstltutlonal frameworks conduclve to
good governance and ensurlng that they functlon effectlvely.
After the sharp appreclatlon of real effectlve exchange rates slnce
the beglnnlng of 1998 (Flgure 34), lssues related to competltlve-
ness have also resurfaced. Whlle the affected countrles have fo-
cused on gettlng back on thelr feet, competltlon from other coun-
trles wlthln the reglon and outslde has contlnued to lntenslfy ln
key export markets. On a global scale, excess capaclty ls now
apparent ln a number of sectors. Prlces of electronlcs and electrl-
cal machlnery and equlpment, telecommunlcatlons equlpment,
computer equlpment and offlce machlnes, and transportatlon
equlpment have all fallen sharply ln recent years. And prlces of
exports from East Aslan natlons have fallen more sharply than
those from other reglons. Thls, no doubt, contrlbuted to the 1998
contractlon ln the nomlnal dollar value of exports from the af-
fected countrles. Electronlcs prlces have recovered slnce then,
although they are now falllng back agaln, lndlcatlng that the prlces
of these products are qulte sensltlve to the balance between sup-
ply and demand. Partly because of the recovery ln electronlcs,
export growth rates recovered strongly ln 1999 ln all the affected
countrles except Indonesla. Export volumes have been buoyed
by strong world demand, but have also responded, although wlth
a lag, to depreclated real exchange rates.
Flgure 34: Real Effective
Exchange Rate Indices*
(1997June=100)
*Traded vs. non-traded goods prlces.
Source: ARIC Indlcators.
Jun
1997
Jan
1998
Sep
1998
May
1999
Feb
2000
20
40
60
80
100
120
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
ASIA'S RECOVERY-A REGIONAL UPDATE 21
There are, however, competltlve pressures faclng Indonesla and,
to a lesser degree, Thalland and the Phlllpplnes ln markets for
labor-lntenslve exports. These may lncrease wlth the entry of the
PRC lnto the World Trade Organlzatlon (WTO), although that would
also provlde new opportunltles for trade. Wlth lntenslfylng export
competltlon, the reglon´s major tradlng partners may glve ln to
pressures to apply antl-dumplng and other protectlve measures
to llmlt the market penetratlon of Aslan exports. Another poten-
tlally serlous challenge arlses from the fallure of the Seattle Mln-
lsterlal Conference of the WTO. The lack of consensus on further
llberallzatlon of trade on a most-favored natlon basls through
multllateral negotlatlons may encourage countrles to focus on
strengthenlng reglonal tles on a dlscrlmlnatory basls. These pref-
erentlal arrangements carry the potentlal of trade dlverslon and
may further llmlt the market access of the crlsls-affected coun-
trles ln reglons such as the Amerlcas and Europe.
Golng forward, to sustaln a recovery ln lnternatlonal trade, lt wlll
be essentlal for reglonal economles to lmprove thelr access to
markets overseas. Thls may requlre a more focused and coordl-
nated volce ln negotlatlons over multllateral trade llberallzatlon.
Domestlc constralnts also need to be addressed. Wlse lnvest-
ments ln educatlon and human resources, as well as lnfrastruc-
ture, and further deregulatlon of lnvestment and llberallzatlon of
trade pollcles wlll help achleve thls. Movlng resources from actlvl-
tles ln whlch comparatlve advantage ls fadlng lnto others where
opportunltles are expandlng ls a perpetual challenge.
Recovery Prospects and Rlsks
Medium-term Prospects. Havlng proved overly pesslmlstlc ln
1999, the accepted vlew now ls that recovery ln the affected coun-
trles wlll be consolldated and further strengthened ln 2000. Con-
sensus Economlcs expects the Indoneslan economy to grow by
4.2 percent, but projectlons vary wlthln qulte a large range of 3.0
to 5.5 percent (Table 2). To varylng degrees, growth ls also ex-
pected to plck up ln Malaysla, Phlllpplnes and Thalland. But Con-
sensus Economlcs expects growth to slow down ln Korea, falllng
to 7.7 percent, after the pronounced recovery that has already
taken place there. The range of projectlons ls, however, rather
wlde from 6.0 to 9.6 percent, suggestlng that there are stlll slg-
nlflcant underlylng uncertalntles. Three factors underlle these
generally reassurlng assessments. Flrst, monetary and flscal poll-
cles are expected to remaln broadly accommodatlng. Second,
ASIA RECOVERY REPORT 2000 22
favorable condltlons ln the global economy are expected to con-
tlnue. Thlrd, output ls stlll somewhat below potentlal. As the gap
ls closed, growth wlll be supported. As growth ls consolldated,
soclal recovery should progress further.
Wlth uncertalnty llftlng, domestlc sector prlvate demand ls ex-
pected to play a stronger role ln propelllng growth ln 2000 than lt
has done so far. Whlle publlc consumptlon ls expected to stablllze
as governments focus more on flscal consolldatlon, the upward
trend ln prlvate consumptlon wlll contlnue and lnvestment de-
mands are expected to plck up. However, net exports may shrlnk,
as lmports rlse wlth the general tlde of economlc actlvlty.
In 2000, flnanclal markets ln the affected countrles should be
drlven more by fundamentals. Although stock markets have soft-
ened somewhat slnce early thls year, there should be less volatll-
lty ln the future. Reglonal flnanclal markets should be more at-
tractlve to lnvestors seeklng dlverslflcatlon opportunltles. Real
estate prlces should also start to nudge up. Rlslng domestlc de-
mand should lmprove credlt flows ln the economy, and cash flow
posltlons of banks and corporates. Flscal deflclts are also llkely to
narrow. Taken together, these developments should make do-
mestlc assets more attractlve to forelgn and domestlc lnvestors.
Tanglble as the recovery process ls, lt remalns prone to rlsks ln
both the domestlc and global economlc envlronment. On a posl-
Consensus World
Country 1996 1997 1998 1999 Economics
1
Official
2
ADB
3
IMF
4
Bank
5
Indonesla 7.8 4.7 -13.2 0.2 4.2 (3.0-5.5) 3.0-4.0 4.0 3.0 3.0
Rep. of Korea 6.8 5.0 -6.7 10.7 7.7 (6.0-9.6) 6.0 7.5 7.0 6.0
Malaysla 10.0 7.5 -7.5 5.4 6.4 (5.0-7.6) 5.8 6.0 6.0 6.0
Phlllpplnes 5.8 5.2 -0.5 3.2 3.9 4.0-5.0 3.8 4.5 4.0
Thalland 5.9 -1.7 -10.4 4.2 5.2 (4.1-6.0) 4.5 4.5 4.5 5.0
2000
Note: Data for 1996-1999 are from ARIC Indicators.
1
Consensus Economics Inc., Asia Pacific Consensus Forecasts, March 2000; Figures in parentheses represent the range of forecasts.
2
Official government projections were obtained from the following sources: Indonesia—Bank Indonesia, Policy Implementation in 1999 and Policy Direction
for 2000, January 2000; Rep. of Korea—Ministry of Finance and Economy, Korea Economic Update, 24 January 2000; Malaysia—Bank Negara Malaysia,
2000 Budget Speech, 25 February 2000; Philippines—National Economic and Development Authority, 1999 Economic Performance and 2000 Prospects,
28 January 2000; Thailand—Bank of Thailand, Revised Economic Forecasts for the Thai Economy, 29 February 2000.
3
ADB, Asian Development Outlook 2000, April 2000.
4
IMF, World Economic Outlook, April 2000.
5
World Bank, East Asia and Pacific Quarterly Brief, 22 March 2000.
Table 2: GDP Growth and Projections (%)
ASIA'S RECOVERY-A REGIONAL UPDATE 23
tlve note, contaglon and flnanclal volatlllty ln the global economy
seem to have faded through 1999, and the affected countrles of
Asla are now ln a much better posltlon to wlthstand shocks. In all
flve affected economles, forelgn exchange reserve posltlons have
strengthened conslderably over the past 12 months (Flgure 35)
and now provlde hlgher coverage of short-term external debt (Flg-
ure 36). The calm response ln global flnanclal markets to the
devaluatlon of the Brazlllan real ln early 1999 marked a return to
more orderly market dynamlcs. Ecuador´s default hardly regls-
tered at all ln Aslan markets. Spreads on Aslan debt narrowed
throughout 1999 ln response to lmprovlng reglonal economlc con-
dltlons (Flgure 37), although they have recently edged up wlth
falllng long-term ylelds ln the US.
External Risks. The IMF now projects the global economy to
grow by 4.2 percent ln 2000, a slgnlflcant upward revlslon from
lts October 1999 projectlon of 3.4 percent (IMF, WEO, October
1999 and Aprll 2000). Most of the addltlonal growth ls expected
to be provlded by the US economy, where the IMF´s forecast for
2000 has been ralsed to 4.4 percent. Flrst quarter growth rate
was 5.4 percent on an annuallzed basls, the thlrd consecutlve
quarter of growth above 5 percent. Domestlc demand ln the US
contlnues to grow strongly, wlth unemployment at an unprec-
edented low rate.
Recent US performance has ralsed questlons about long-held as-
sumptlons regardlng macroeconomlc relatlonshlps. One vlew ls
that underlylng structural changes are allowlng the US economy
to sustaln faster growth than before (for any glven lnflatlon tar-
get). A conjunctlon of relatlvely low lnflatlon and acceleratlng
growth seems to support thls proposltlon. Proponents of thls vlew
clalm that dramatlc productlvlty growth assoclated wlth rapld tech-
nologlcal advances and demographlc and lnstltutlonal shlfts, whlch
make for much more flexlble labor markets, are the plllars of the
so-called New Economy.
As yet, lt would seem the Federal Reserve Board (Fed) ls not qulte
persuaded by thls thesls. Whatever changes may be taklng place
ln the US economy, the vlew of the Fed appears to be that the
current allgnment of unemployment, growth and lnflatlon ls not
sustalnable. Concerned by latent lnflatlonary pressures, the Fed
has gradually ralsed overnlght borrowlng rates. Beglnnlng June
1999 the Fed has ralsed the federal funds rate by flve quarterly
lncrements totalllng 125 basls polnts. By hlstorlcal standards, thls
tlghtenlng has been mlld. Recent economlc data, partlcularly those
that lndlcate strong growth and hlgher lnflatlon ln the flrst quarter
of 2000, suggest that further short-term lnterest rate lncreases
may be ln the plpellne.
Flgure 35: Gross International
Reserves Less Gold (US$ bllllon)
Source: ARIC Indlcators.
1996 1997 1998 1999
0
20
40
60
80
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
Flgure 36: Short-term
External Debt as % of
Gross International
Reserves less Gold
Note: Flgures for Indonesla represent short-
term external debt as a % of net
lnternatlonal reserves. The 1999 flgure for
the Phlllpplnes ls as of end September.
Source: ARIC Indlcators; for Indonesla,
Internatlonal Department, Bank Indonesla.
1996 1997 1998 1999
0
50
100
150
200
250
300
350
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
Flgure 37: Emerging Market
Bond Indices (JP Morgan EMBI+
basls polnts)
Source: JP Morgan.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
EMBIPLUS Asia Latin America
31 Dec
1997
11 Apr
2000
30 Apr
1999
7 Jan
2000
28 Aug
1998
ASIA RECOVERY REPORT 2000 24
In cruclal ways, US prospects hlnge on the stablllty of bellefs about
asset prlces and earnlngs growth. Increaslng market volatlllty seems
to suggest that perceptlons rather than fundamentals have lncreas-
lngly come to lnfluence behavlor. A collapse of the stock market
could cause wldespread flnanclal dlstress and turn a soft landlng
lnto a hard one. A hard landlng of the US economy would ad-
versely lmpact global demand, trade and asset markets.
There are a number of developments that could unhlnge bellefs.
Flrst, faster than expected growth of domestlc demand may ne-
cessltate sharp lncreases ln US lnterest rates and trlgger substan-
tlal correctlons ln equlty prlces and a depreclatlon of the US dollar.
Slgns of overheatlng are emerglng ln the US, lncreaslng the pros-
pects of more agresslve lnterest rate lncreases by the Fed. Sec-
ond, glarlng lmbalances ln personal savlngs and the current ac-
count balance may leave the US economy vulnerable to shlfts ln
lnternatlonal lnvestors´ appetlte for US dollar assets. Thlrd, the
productlvlty spurt that underplns the New Economy doctrlne may
not last. If productlvlty sllps, the gap between expected and actual
earnlngs mlght be so large as to cause a collapse ln stock prlces.
Seen from thls perspectlve, the recent fall ln NASDAQ may be a
blesslng ln dlsgulse. Slowlng down the torrld expanslon of paper
wealth ln the US may help curb growth of domestlc demands.
Prospects ln Japan ln 2000 wlll depend cruclally on prlvate sector
growth. The large flscal stlmulus at the end of 1999 should mean
that growth ln 2000 at least matches 1999´s outcome, but lm-
provement wlll depend on a recovery ln prlvate lnvestment and
consumptlon demand. The Japanese economy grew by 0.3 per-
cent ln 1999, and the WEO projects that lt wlll grow by 0.9 per-
cent ln 2000. Recent economlc data suggest that, drlven by prl-
vate sector actlvltles and prlvate consumptlon, growth has plcked-
up somewhat ln the flrst quarter of 2000.
Japan has embarked on a complex banklng and corporate restruc-
turlng and reform program. Substantlal flscal resources have been
devoted to thls program. Over the medlum term, restructurlng ef-
forts wlll help remove lngralned lnefflclencles and establlsh a strong
foundatlon for future growth. However, the more lmmedlate lm-
pact of reform ls unllkely to be expanslonary. Once dlfflcult adjust-
ments have been completed, a relnvlgorated flnanclal and corpo-
rate sector should help propel the Japanese economy forward.
Growth ln Europe ls expected to plck up further ln 2000. Posslble
obstacles to thls lnclude the posslblllty of sharp reductlons ln US
equlty prlces that may carry over lnto European markets. Some fur-
ther monetary tlghtenlng ln the Euro area ls also posslble. In the
Unlted Klngdom, lnterest rates have been ralsed ln response to
ASIA'S RECOVERY-A REGIONAL UPDATE 25
strong demand and a tlghtenlng labor market. Desplte the expected
near-term decllne ln lnflatlon to a record low, the medlum-term out-
look ls far less benlgn and, therefore, further rate lncreases cannot
be ruled out. The WEO also projects economlc growth to plck up ln
other non-Euro Western European economles.
On the posltlve slde, global market condltlons are expected to
lmprove for commodlty-exportlng developlng countrles over the
course of the year. Oll prlces have lncreased sharply slnce early
1999 and, followlng the end-March agreement among mem-
bers of the Organlzatlon of Petroleum Exportlng Countrles
(OPEC) to ralse productlon, the prlces have fallen somewhat
and now stablllzed. On average, oll prlces ln 2000 are expected
to be substantlally hlgher than ln 1999. Oll-exportlng coun-
trles, lncludlng Indonesla, wlll beneflt from galns ln terms-of-
trade. The antlclpated acceleratlon of global growth ln 2000
should provlde stronger support for non-fuel commodlty prlces
and create favorable demand condltlons for export-orlented East
Aslan economles, lncludlng those affected by the crlsls.
Domestic Risks. As the recovery takes hold, concern ls mountlng
that lt may be used as a pretext to postpone or cancel reforms. Thls
ls a rlsk brought about by the swlft rebound. Some have suggested
that a more cautlous approach to reform may now be needed to al-
low growth to take flrmer root. They polnt out that the lnltlal lmpact
of restructurlng ls llkely to be deflatlonary as retrenchments and
bankruptcles occur, and that thls could dlsrupt the recovery. The ar-
gument then runs that slnce growth can ease the debt burden, lt
should be accorded a hlgher prlorlty than reforms. Only once growth
ls more flrmly establlshed should reforms proceed. In an envlron-
ment where growth ls more flrmly anchored, lt ls suggested, reforms
wlll meet wlth less reslstance and entall lower costs.
Whlle thls reasonlng has lts appeal, much depends on the sever-
lty of the underlylng dlfflcultles, and the rate of economlc growth
that can reallstlcally be expected. Whlle the expected hlgh growth
ln Korea and Malaysla may go a long way towards resolvlng thelr
debt problems, projected growth for Indonesla and Thalland ls
llkely to have much less of a remedlal effect glven the extent of
debt overhang. If the expected growth dld not take place, and
reforms were deferred, debts could escalate further and thls would
make the entlre restructurlng process much more palnful than lt
mlght otherwlse be. In these clrcumstances, newly replenlshed
bank capltal could also be put at rlsk.
A "growth flrst¨ strategy ls not only rlsky, lt may lnvlte a recur-
rence of problems at a later date, partlcularly lf underlylng struc-
tural dlfflcultles are not tackled. Accumulated experlence lndl-
ASIA RECOVERY REPORT 2000 26
cates that the best chances for durable recovery requlre perse-
verance wlth reform. Encouraglng economlc actlvlty by postpon-
lng or cancellng needed but dlfflcult reforms can exact a hlgh cost
ln terms of a reductlon ln long-run potentlal growth.
A senslble mlddle road ls to comblne reform wlth pollcles that
provlde needed, and affordable, support for demand. However,
the scope for accommodatlng demand pollcles ls narrowlng. Large
deflclts and rlslng publlc debt levels would ralse questlons about
the flscal sustalnablllty of further pump prlmlng (Flgure 38). Al-
though current account surpluses permlt greater freedom over
monetary pollcy, rlslng global lnterest rates may eventually re-
qulre a less accommodatlng monetary stance too. In the Phlllp-
plnes, lnterest rates are already edglng up.
Longer-term Prospects. Looklng beyond the next year or two,
an lmportant lssue ls whether the crlsls wlll have llngerlng effects
on Asla´s potentlal for growth. Has the crlsls permanently blunted
Asla´s prospects for economlc catch-up?
Those who are pesslmlstlc about growth prospects polnt to the
lnstltutlonal weaknesses that the crlsls has brought lnto sharp
rellef. Slnce strengthenlng and modernlzlng lnstltutlons ls a tlme-
consumlng actlvlty, and there ls a great deal of uncertalnty about
whether the needed changes can and wlll be made, Asla´s pros-
pects for growth are dlmlnlshed. Growth that rests on the rapld
accumulatlon of capltal may also be more dlfflcult ln the future,
because dlmlnlshlng returns and lnefflclencles may set ln qulckly,
especlally ln the presence of weak flnanclal and corporate sec-
tors. Other factors that could permanently damage growth pros-
pects would lnclude protectlonlsm ln the lndustrlallzed countrles
and the breakdown of the world tradlng system.
Whlle the growth pesslmlsts´ vlews cannot be lmmedlately dls-
counted, much wlll depend on the cholces that are made about poll-
cles and lnstltutlons. If pollcy and lnstltutlonal reforms are contln-
ued, growth should be sustalned and become less vulnerable to ex-
ternal shocks. Ultlmately, the crlsls could lndeed appear to be a
moderate dlsturbance ln Asla´s rlse and dynamlsm. Contlnued hlgh
rates of domestlc savlngs, sound macroeconomlc pollcles, lnvest-
ments ln educatlon and lnfrastructure, lmproved governance and
publlc admlnlstratlon, and openness to trade and forelgn lnvestment,
wlll help ensure that Asla contlnue to close the lncome gap wlth the
lndustrlallzed countrles. It bears underllnlng that fast economlc
growth ls vltal lf poverty ls to be eradlcated and broad-based galns ln
llvlng standards are to resume. Whlle the crlsls undoubtedly brought
paln, lt may galvanlze reform efforts and wlth the beneflt of hlnd-
slght turn out to have been a temporary setback.
Flgure 38: Gross Public Debt
(as % of GDP)
Source: IMF, World Economlc Outlook, Aprll
2000.
1996 1997 1998 1999
0
20
40
60
80
100
120
Indonesla
Rep. of Korea
Malaysla
Phlllpplnes
Thalland
Consensus World
Country 1996 1997 1998 1999 Economics
1
ADB
2
IMF
3
Bank
4
People's Republlc of Chlna 9.6 8.8 7.8 7.1 7.3 (6.5-7.9) 6.5 7.0 7.0
Slngapore 7.5 8.0 1.5 5.4 5.7 (4.9-6.5) 5.9 5.9 5.7
Vlet Nam 9.3 8.2 4.4 4.4 4.6 4.5 4.5 4.6
2000
Note: Data for 1996-1999 are from the Asian Development Outlook 2000.
1
Consensus Economics Inc., Asia Pacific Consensus Forecasts, March 2000; Figures in parentheses represent the range of forecasts.
2
ADB, Asian Development Outlook 2000, April 2000.
3
IMF, World Economic Outlook, April 2000.
4
World Bank, East Asia and Pacific Quarterly Brief, 22 March 2000.
Table 3: GDP Growth and Projections (%)
The People´s Republlc of Chlna,
Slngapore and Vlet Nam Updates
1
The People´s Republlc of Chlna
Recent Trends. Economlc growth began to slow ln the PRC ln
the fourth quarter of 1998. In response, the government cut ln-
terest rates ln June 1999 and announced a flscal stlmulus pack-
age ln August. These measures, together wlth a rebound ln ex-
ports durlng the second half of 1999, have helped support growth
at an lmpresslve rate of 7.1 percent, whlch ls only 0.7 percentage
polnt lower than the growth rate ln 1998 (Table 3).
Flxed lnvestment grew by 5.2 percent ln 1999, down from
14 percent ln 1998 due to excess capaclty ln many sectors. Con-
sumer demand remalns weak partly because of the lncreased
unemployment arlslng from redundancles ln state-owned enter-
prlses (SOEs). Weak aggregate demand and an overall deflatlon-
ary trend ln the reglon caused the consumer prlce lndex to de-
cllne another 1.4 percent ln 1999, after falllng by 0.8 percent ln
1998. To counteract these deflatlonary trends, more accommo-
datlng flscal and monetary pollcles were adopted.
Largely because of the Aslan crlsls, export growth was subdued
ln 1998 and agaln ln the flrst half of 1999. Exports lncreased ln
the second half of 1999 as growth ln the rest of Asla began to plck
up. However, for 1999 as a whole, export growth was a modest
1
Among others, we have beneflted from the Aslan Development Outlook
2000, Aprll 2000.
ASIA RECOVERY REPORT 2000 28
6 percent, whlle lmports grew at a robust 18 percent, leadlng to
a decllne ln trade surplus. Forelgn dlrect lnvestment (FDI) lnflows
decllned ln 1999 for the flrst tlme slnce 1990, reflectlng forelgn
lnvestors´ concerns about weak flnanclal lnstltutlons. The exter-
nal payments sltuatlon, however, contlnued to be comfortable.
The external debt and debt-servlce ratlos are low by developlng
country standards. Forelgn exchange reserves were about $155
bllllon ln December 1999 (11 months of lmport equlvalent), sllghtly
hlgher than the total external debt and about nlne tlmes the short-
term external debt. At less than 10 percent, the external debt-
servlce ratlo ls easlly manageable.
Medium-term Prospects. GDP growth ls expected to remaln at
around 7 percent ln 2000-2001. However, there may be some slow-
down ln lndustrlal and constructlon sectors and lncreaslng unem-
ployment arlslng out of the contlnued SOE reforms. Moderate growth
should help keep lnflatlon ln check. Recent constltutlonal amend-
ments to recognlze the role of the prlvate sector should lmprove
the prospect for prlvate lnvestment. Broader recovery ln the re-
glon should lmprove the PRC´s export prospects, whlle lmport de-
mand ls expected to be more moderate. Balanclng these factors,
the current account ls llkely to remaln ln surplus durlng 2000-2001,
but the surplus wlll be lower. Thls, together wlth contlnued capltal
lnflows, ls expected to lncrease forelgn exchange reserves further.
Policy Issues. The reslllence of the PRC economy to the reglon´s
crlsls was due to lts strong macroeconomlc performance and ex-
ternal posltlons. Capltal and exchange rate controls also helped
lnsulate the economy from external shocks. But the PRC suffers
from structural weaknesses ln the flnanclal and corporate sec-
tors, slmllar to those of the flve affected countrles. These weak-
nesses lnclude hlgh levels of NPLs, a low capltal base ln many
banks, weak prudentlal regulatlons and supervlslon, and a llm-
lted role for market based competltlon. Addresslng these weak-
nesses, lncludlng reformlng the SOEs, remalns the most chal-
lenglng task confrontlng the government. Further SOE reforms
wlll lncrease urban unemployment, whlch has become a presslng
lssue ln recent years. The government needs to harness better
the role of the prlvate sector to help generate needed jobs. It ls
also essentlal to accelerate reforms ln the soclal securlty system
to provlde effectlve protectlon for the unemployed and the poor.
The PRC has been successful ln recent years ln reduclng poverty.
But lnequallty, especlally, reglonal lnequallty, has lncreased slg-
nlflcantly. The government ls now attachlng a hlgh prlorlty to de-
veloplng the poorer western reglon of the country.
THE PRC, SINGAPORE AND VIET NAM UPDATES 29
Slngapore
Recent Trends. The Slngapore economy has rebounded
strongly after a dlfflcult year ln 1998. GDP growth of 5.4 per-
cent was achleved ln 1999, whlch was sufflclent to llft real per
caplta lncomes (measured on a resldent basls) above the pre-
vlous 1997 peak.
The manufacturlng sector accounted for much of the growth,
reflectlng strong external demand for electronlcs. Wlth lncreased
reglonal trade flows, rlslng tourlst arrlvals, and lmproved re-
glonal demand for flnanclal servlces, the servlce sector also
staged a recovery. The constructlon sector, however, contlnued
to decllne, malnly because of a sharp drop ln prlvate construc-
tlon due to excess capaclty ln resldentlal and nonresldentlal
markets.
On the demand slde, overall growth ln flxed lnvestment remalned
below lts pre-crlsls rate, due to lndustrlal overcapaclty. Flscal pollcy
proved less of a stlmulus to the economy than orlglnally envls-
aged. The orlglnal budget for flscal year 1999 endlng 31 March
2000 had predlcted a budget deflclt. However, conslderably faster-
than-expected revenue growth, comblned wlth lower operatlng
and development expendlture, led to a budget surplus. Desplte
an lncrease ln the lnterbank rate, reflectlng hlkes ln US lnterest
rates that began ln mld-1999, domestlc retall rates remalned rela-
tlvely stable throughout the year because deposlts contlnued to
lncrease even as lendlng remalned weak.
Inflatlon remalned low ln 1999. However, resldentlal property
prlces rose slgnlflcantly, though they remaln about 30 percent
lower than thelr peak levels of 1996. Prlces of commerclal prop-
erty, by contrast, contlnued to decllne, as oversupply dampened
the market. Boosted by growlng optlmlsm about the reglon´s
growth prospects, equlty prlces rose sharply ln the flrst half of
1999, and then leveled off because of tradlng curbs by brokerlng
houses, and rlslng US lnterest rates. Overall, equlty prlces, as
measured by the Stock Exchange of Slngapore all-share lndex,
rose 74.8 percent ln 1999.
The Slngapore dollar remalned broadly stable agalnst the US dol-
lar. The trade surplus narrowed from lts record level of 1998.
Although strong growth ln the reglon and ln the Unlted States
ASIA RECOVERY REPORT 2000 30
lncreased demand for Slngapore´s electronlc goods, a hlgher rate
of lmport growth, whlch resulted from renewed consumer confl-
dence and dlmlnlshed lnventorles, more than offset thls demand.
However, due to a posltlve servlce account, the current account
surplus decllned only sllghtly from lts 1998 level. In net terms,
the wlthdrawal of portfollo and "other lnvestment¨ capltal contln-
ued ln 1999 but at a slower pace than ln 1998.
Medium-term Prospects. GDP growth ls expected to accel-
erate further ln 2000-2001 as prlvate demands strengthen.
Thls should reduce excess lndustrlal capaclty and provlde
greater lncentlves for lnvestment. As the reglonal recovery
gathers momentum, the flnances of domestlc banks that have
lent to non-resldents should lmprove. Inflatlon may edge up ln
2000 as a consequence of lncreased fuel prlces, some wage
lnflatlon, and stronger domestlc demand. Meanwhlle, the trade
surplus ls set to contract as lmports lncrease more rapldly than
exports. An lmprovement ln the servlces and lncome account
and steady lnflows of FDI, however, wlll ensure that overall
reserves remaln at healthy levels.
Policy issues. Slngapore´s strong lnstltutlons and flexlble ap-
proach to macroeconomlc management have allowed lt to emerge
qulckly from the Aslan crlsls. A recurrlng challenge, though, ls
how to remaln competltlve. The Commlttee on Slngapore´s Com-
petltlveness has called for a knowledge-based economy to help
lmprove long-term competltlveness. To thls end, the govern-
ment has been developlng an lnstltutlonal structure that wlll
provlde approprlate support, and has taken steps to provlde ln-
centlves to entrepreneurs enterlng hlgh-tech lndustrles and to
traln people ln skllls related to lnformatlon technology. Although
the government´s past lnterventlons ln lndustrlal development
have been beneflclal, there ls some concern that contlnued ln-
terventlons on thls scale could lmpede necessary corporate re-
structurlng as market condltlons change. Over the next flve years,
a serles of measures lntended to strengthen and expand
Slngapore´s role as a reglonal flnanclal center wlll be lntroduced.
As portfollo and bank capltal return to the reglon, Slngapore wlll
be better posltloned to provlde the range of servlces, wlthln a
securely regulated envlronment, that lnternatlonal lnvestors ln-
creaslngly demand. Among measures ln the plpellne are moves
to deepen the Slngapore dollar bond market through allowlng
forelgn soverelgns and companles to lssue Slngapore dollar-
denomlnated bonds.
THE PRC, SINGAPORE AND VIET NAM UPDATES 31
Vlet Nam
Recent Trends. GDP grew ln Vlet Nam ln 1999 by about
4 percent; half the average growth rate durlng the slx-year pe-
rlod from 1992 up to the onset of the Aslan crlsls ln 1997. The
slowdown began ln 1998 as the country felt the lmpact of the
reglonal crlsls and lost the reform momentum.
Agrlculture sector growth lncreased to 5 percent ln 1999 from
3 percent a year earller, thanks to a bumper rlce harvest. The
lndustrlal sector, however, contlnued to lag due to weak domestlc
demand and wanlng competltlveness ln selected sectors. Tour-
lsm, real estate servlces, and transportatlon were partlcularly hard
hlt, resultlng ln a slowdown ln the servlce sector. Two years of
slow growth have led to rlslng unemployment, partlcularly ln ur-
ban areas, where lt reached about 7.4 percent ln 1999.
Investment as a share of GDP has fallen durlng the last two
years, due to lower lnvestment by the prlvate and state sectors,
and reduced FDI lnflows. FDI decllned for the second year ln a
row, as lnvestor sentlment remalned lukewarm because of un-
certalntles about the dlrectlon and pace of reforms. Two thlrds
of FDI lnflows orlglnated ln Asla before the crlsls, and hence
were vulnerable to weaker reglonal growth. The budgeted ln-
crease ln publlc lnvestment ln 1999 to stlmulate domestlc de-
mand dld not materlallze.
The budget deflclt was kept to a moderate level of 2 percent of
GDP ln 1999, as revenue shortfall was accompanled by cuts ln
current expendlture. The retall prlce level lncreased by 0.1 percent
ln 1999, compared wlth 9.2 percent ln 1998. A fall ln the food prlce
lndex, weak domestlc demand, and a relatlvely stable exchange
rate contrlbuted to prlce stablllty. Growth of bank credlt to the
government and SOE sector was more restrlcted than ln prevlous
years, whlle credlt to the smaller non-state sector grew faster.
Exports grew slowly ln early 1999 but plcked up towards the end
of the year, largely because of rlslng crude oll and rlce exports.
Overall export growth was 22.3 percent, up from 1.0 percent ln
1998. Imports, meanwhlle, reglstered only a small lncrease ln
1999 from the prevlous year. Consequently, the current account
reglstered a substantlal surplus, ln contrast to a large deflclt ln
1998. External debt remalned wlthln manageable llmlts.
ASIA RECOVERY REPORT 2000 32
Medium-term Prospects. Durlng 2000-2001, GDP growth ls
expected to rlse moderately, as the lndustry and servlce sec-
tors recover after two years of slow growth. Inflatlon wlll also
lncrease because of hlgher prlces for petroleum products and
the expected stronger domestlc demand. Export growth ls llkely
to be moderate compared wlth 1999. But after a two-year slump,
lmports should recover. Consequently, the current account bal-
ance wlll probably remaln posltlve ln 2000, wlth the surplus
narrowlng.
Policy Issues. The decllnlng trend ln flscal revenue as a share of
GDP over the last few years ls a cause for concern. Hlgh growth
wlll help broaden the tax base but problems ln the deslgn and
admlnlstratlon of taxes should be addressed. Banklng reform ls
under way, but much more remalns to be done, partlcularly ln
areas of restructurlng state-owned commerclal banks, consoll-
datlng non-state jolnt stock banks, and lmprovlng regulatlons and
supervlslon. In reformlng SOEs, the government has trled dlffer-
ent approaches, lncludlng equltlzatlon, dlvestlture, sell-off, and
llquldatlon and restructurlng. But so far the pace of reform has
been slow. The downslzlng and closures that SOE reforms wlll
entall lnevltably pose complex soclal problems. Safety net mea-
sures need to be strengthened. Vlet Nam passed a new Enter-
prlse Law ln June 1999, whlch should promote prlvate sector ac-
tlvltles and provlde equal market entry opportunltles to domestlc
and forelgn-owned buslnesses. However, supportlve leglslatlon
should be completed. A lot more needs to be done to create a
buslness envlronment conduclve to forelgn partlclpatlon and rapld
prlvate sector growth.
AMC Asset management company
ARIC Asla Recovery Informatlon Center
ASEAN Assoclatlon of Southeast Aslan
Natlons
BI Bank Indonesla
BOT Bank of Thalland
BSP Bangko Sentral ng Plllplnas
CAR Capltal adequacy ratlo
CDRAC Corporate Debt Restructurlng
Advlsory Commlttee
CDRC Corporate Debt Restructurlng
Commlttee
CRA Corporate Restructurlng Accord
CRCC Corporate Restructurlng
Coordlnatlon Commlttee
CSIP Capltal Structure Improvement Plan
EMBI Emerglng Market Bond Index
FDI Forelgn dlrect lnvestment
Fed Federal Reserve Board
FRA Flnanclal Sector Restructurlng
Authorlty
FSS Flnanclal Supervlsory Servlce
GDP Gross domestlc product
GIR Gross lnternatlonal reserves
IBRA Indoneslan Bank Restructurlng
Authorlty
IMF Internatlonal Monetary Fund
JCI Jakarta Composlte Index
JITF Jakarta Inltlatlve Task Force
KAMCO Korean Asset Management
Corporatlon
KLCI Kuala Lumpur Composlte Index
KOSPI Korean Stock Prlce Index
NPL Non-performlng loan
PHISIX Phlllpplne Stock Exchange Composlte
Index
PPP Purchaslng power parlty
PRC People´s Republlc of Chlna
S&P Standard & Poor´s
SEC Securltles and Exchange
Commlsslon
SET Stock Exchange of Thalland
SOE State-owned enterprlses
WEO World Economlc Outlook
WTO World Trade Organlzatlon
B baht
P peso
RM rlngglt
Rp ruplah
W won
y-o-y year-on-year
Acronyms and Abbreviations

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