Asia pressured to adopt reforms in private sector

Asia pressured to adopt reforms in private sector

MANILA (AFP): The economic slowdown in the United States will force Asian nations to implement reforms in the private sector which many of them had tried to evade for the last three-and-a- half years, the World Bank says.

Driven by the booming U.S. economy, much of Asia has been growing strongly after being mired in a recession following a financial crisis which erupted in mid-1997.

But with growth slowing in the world's biggest economy, Asia's economic expansion will also be hit.

Against such a scenario, the region had little alternative but to speed up reforms to strengthen the economy and enhance investment flows, World Bank Group managing director Peter Woicke told AFP at the end of a seven-nation regional tour.

"The biggest issue in Asia which has to be addressed in most of the countries is really the willingness to restructure companies," said Woicke, also the executive vice-president of the International Finance Corporation (IFC), a World Bank arm promoting private sector investment in developing countries.

The Asian financial crisis exposed the weaknesses of the region's companies which foundered as a result of overborrowing in foreign currencies.

Experts had recommended painful restructuring of these companies so that the banks which lent them money could also tackle the resultant problem of snowballing non-performing loans.

But many Asian nations circumvented the restructuring process and delayed corporate governance and other financial reforms because their economies had started growing again rapidly after the financial crisis.

What Asian companies needed now was not more borrowings or lendings but more equity, Woicke said.

"In order to get the equity, companies have to restructure so that banks can face up to the problem of NPLs (non performing loans)," he said. "But everything is at a standstill because they don't want to restructure."

Delayed restructuring of companies has dampened the capital ratios of banks, which are reeling from bad loans.

This deprived banks from providing loans to genuinely healthy companies, dampening investments and curtailing growth. "This vicious circle has got to be broken," Woicke said."

He said the booming economy of the United States had helped absorb much of Asia's exports and pulled the region out of recession shortly after the financial crisis.

But U.S. economic growth has abruptly slowed with predictions of a deepening downturn.

"But sad as it is, I think it (the U.S. slowdown) is going to foster the reform process in Asia," Woicke said, citing Indonesia, Thailand and South Korea in particular.

"I think for a while there was the view in these countries that you can grow out of this restructuring problem by having fast growth again. But this is not feasible or doable," he said.

Woicke said the reform situation in Southeast Asia particularly "is not as good as I would like to see it" and warned that if the region did not buck up, it could lose to China the battle of wooing long term foreign investments.

"Clearly, the (Southeast Asian) countries are not seeing enough long term investments. We see interest to invest in these countries but it is still much less than it was three, four or five years ago," he said.

On the other hand, Woicke said quite a lot of investments were going into China where "the government has changed completely to emphasize the importance of the private sector.

"I find it fascinating as local companies are now keen to adopt corporate governance, environmental knowledge. In China, things are moving relatively rapidly today and I think this is also a challenge to Southeast Asia," he said.