Asian states' fight to lure foreign funds under way
Asian states' fight to lure foreign funds under way
SINGAPORE (Reuters): As imports rise and erode external surpluses, Asian countries are eyeing every opportunity to lure overseas capital to sustain growth.
But investment flows to the region are patchy at best and analysts say banking and corporate reform remain key to determining a country's success in attracting capital.
The jury is still out as to whether rising imports really indicate a pick-up in domestic demand or if a tail-off in exports is due to what could well be a slowdown in the U.S market.
Nevertheless, the battle for new inflows is on.
"Increasingly, capital inflows will need to come on board to replace diminished foreign exchange earnings and that will be determined by domestic factors," said Graham Perry, Southeast Asia analyst at Lehman Brothers in Tokyo.
A recent Reuters survey shows trade surpluses of Asian economies, which exported their way out of the 1997 financial crisis, are on their way down.
Despite a general view that the dwindling surpluses might signify a pickup in domestic demand which could replace export- oriented growth, a few analysts argue the optimism could be exaggerated and even misplaced in some cases.
They say the recovery remains hugely dependent on exports and fiscal pump priming and Asian governments will need to become more competitive to cover the shortfall in earnings.
"Data indicate investments, consumer spending and confidence remained low in most Southeast Asian countries. Real recovery can't take place without meaningful recovery in these areas," said Dominique Dwor-Frecaut, director of Asia research at Barclays Capital.
Although several countries in Asia are running current account surpluses, foreign investments are still crucial for overall growth, analysts said.
On a macro level, the surpluses mean these countries have enough savings to cover investments. But in reality their financial sectors are unable to do that.
Figures from the International Monetary Fund show net private capital outflows from Asia last year of some $27 billion. And this was despite the re-emergence of foreign direct investment.
Even though that was an improvement from outflows of $43 billion in 1998, it's a far cry from $104 billion of net inflows seen in 1996 before the crisis erupted.
Economists and pundits have highlighted three major areas of reform governments must focus on to attract more capital: financial and corporate restructuring, good governance and legal frameworks that are conducive to foreign investment.
Their success so far has been mixed, with South Korea, Taiwan and Malaysia faring much better than laggards Thailand, the Philippines and Indonesia.
"Certainly you can say that there is a lost opportunity for the Philippines in particular, Thailand to a certain extent and it is still lost in Indonesia to step up after the crisis and say we too can eventually enter into this league," said David Fernandez, regional economist at JP Morgan in Singapore.
In Thailand, debt restructuring has been slowed by the fact that the legal definition of bankruptcy is based on the book value of assets rather than on the ability of companies to service debt.
Its banking sector remains saddled with hefty non-performing loans which were around 36.5 percent of total lending at end-May. Some analysts caution that headline falls in NPLs were caused more by creative accounting than an actual pick-up in successful corporate debt restructuring.
Merrill Lynch estimates that around 1.1 trillion baht worth of NPLs, equal to 20 percent of GDP, are unrestructurable. And this could hold back foreign investments.
Asia Pacific-based fund managers remain mostly bearish on the region's economic prospects but hold out hope for Chinese growth and equity markets, according to the Merrill Lynch Gallup survey released on Tuesday.
The report showed that while just 32 percent of fund managers were expecting the Asian-Pacific economy to be stronger excluding China and Japan, a full 72 percent see a stronger Chinese economy in the year ahead.
"June industrial production, released after the survey closed, appears to support the view that China is recovering," said Trevor Greetham, Merrill Lynch global strategist.
"This may explain why fund managers remain strong buyers of Chinese stocks but have turned sellers of Malaysia, more of a global play," he added.