Challenge to bank-led economic structure<\/p>\n
By James T. Areddy<\/p>\n
HONG KONG (Dow Jones): The Asian rebound in spite of anemic
\nlending has cast doubt on the notion that the region's economies
\nare primarily bank-led.<\/p>\n
For example, even as Singapore authorities were announcing
\nrecently that bank lending had fallen again in February, a
\nSingapore government minister was tipping the market that
\neconomic growth will come in firmly at the top end of
\nexpectations this year.<\/p>\n
Since economies are growing but banks aren't lending across
\nthe region, many are questioning whether banks will really matter
\nas much to Asia's economies as they did in the past.<\/p>\n
Adrian Foster, an economist who watches Southeast Asia for
\nNomura International (Hong Kong) Ltd., said he thinks it's
\ndoubtful the region has so quickly been able to wean itself from
\na historical over-dependence on bank credit.<\/p>\n
\"Maybe this is the start of it, but in the meantime, it's a
\ncyclical recovery, not a structural change,\" he said.<\/p>\n
Nevertheless, Foster conceded the situation has persisted long
\nenough to have him scratching his head. \"It's getting to the
\npoint now that the bank lending has to pick up,\" he added.<\/p>\n
The region's financial problems in 1997-1998 were in part
\ntraced to a heavy reliance on banks for credit, as opposed to
\nmore market-based and sophisticated mechanisms, such as bonds.
\nThose might have better reflected the risks building up in the
\nregion and kept credit growth in check.<\/p>\n
When the financial turmoil began in 1997 and corporate
\nbankruptcies multiplied, the halt in bank lending that resulted
\nprompted forecasts of a deep economic freeze in the affected
\nnations.<\/p>\n
In fact, many banks remain constrained by bad debts and are
\nunable to lend, while others retain a risk-averse, bunker-
\nmentality.<\/p>\n
Yet, economic fortunes have been improving for more than a
\nyear.<\/p>\n
Singapore's economy is growing even though its lending isn't,
\nso the fuel is obviously coming from elsewhere. In spite of the
\ngovernment's indication recently that growth will likely be 6.0
\npercent to 6.5 percent this year, firmly at the top end of its
\nearlier growth forecast, bank lending was down another 1.8
\npercent in February from the year before, to S$147.19 billion
\n($1=S$1.7178).<\/p>\n
The fall wasn't as bad as the 2.4 percent drop recorded in
\nJanuary, but total lending nevertheless eased 0.3 percent between
\nJanuary and February.<\/p>\n
Even in Thailand, which before the crisis had about the
\nhighest bank-participation, or \"intermediation,\" rates in the
\nregion, and still has one of the most troubling bad-loan levels,
\nthe economy is on pace for at least 5.0 percent growth in 2000
\nafter last year's 4.2 percent expansion.<\/p>\n
Some analysts note the figures on lending look anemic because
\nnew lending has been masked by continued bank write-offs, which
\nhave tended to be larger on balance. \"There has been some lending
\ngoing on if you look behind the numbers,\" said Vincent Milton, a
\nThai bank analyst at Fitch IBCA Ltd. in London.<\/p>\n
But most importantly, the cyclical turn up for Asian economies
\nhas come from fiscal stimulus and exports, which draw funding
\nthat doesn't show up prominently in the bank numbers, if at all.<\/p>\n
As well, companies were forced by the recession to carve out
\nefficiencies, such as better inventory control, that don't
\nrequire new money but can improve profits, Foster noted.<\/p>\n
Meanwhile, companies are also getting more funding from the
\nstock market. Hong Kong companies this year have sold almost as
\nmuch equity as they did in all of 1998, according to a report
\nfrom Salomon Brothers Hong Kong Ltd. recently.<\/p>\n
And the newest growth drivers, such as in the technology
\nsectors, also tend to demand less capital upfront than the
\nproperty developers, whose big losses are primarily responsible
\nfor bank skittishness in places such as Thailand, Singapore and
\nHong Kong.<\/p>\n
Plus, since banks are reluctant to fund startups, \"the whole
\nregion will see a kind of de-banking,\" according to Dong Tao, an
\neconomist at Credit Suisse First Boston Hong Kong Ltd. \"More and
\nmore companies will go to the capital and equity markets.\"<\/p>\n
The growth of local-currency corporate bond issuance in
\nThailand and South Korea offers evidence of disintermediation,
\nwith funding taking place away from the banks.<\/p>\n
\"I think there is some slow, slow movement\" in the direction
\nof expanding the credit base beyond banks, according to Paul
\nDickie, a former Asian Development Bank staffer who is currently
\nteaching in New Zealand.<\/p>\n
While the crisis has done something to push the development of
\nbond markets and alternative sources of financing, \"it's a very
\nhard transition to make,\" he said.<\/p>\n
The International Monetary Fund (IMF) sees money entering
\neconomies from sources other than banks. In a February report on
\nThailand, it noted, \"the disintermediation process under way
\n(has) meant that the increased caution of banks in their lending
\ndecisions (has) not been a binding constraint on economic
\nrecovery.\"<\/p>\n
A big part of the reason why is that Thailand's recovery
\nhasn't been driven by domestic demand, the IMF said.<\/p>\n
And the organization goaded the government to push
\nrestructuring of the banking system harder.<\/p>\n
\"Directors stressed that broad based economic recovery (will)
\nentail higher credit demand -- especially from newly emerging and
\nsmaller borrowers -- and that it was essential that the health of
\nthe financial system be restored as quickly as possible.\"<\/p>",
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