Challenge to bank-led economic structure

Challenge to bank-led economic structure

By James T. Areddy

HONG KONG (Dow Jones): The Asian rebound in spite of anemic lending has cast doubt on the notion that the region's economies are primarily bank-led.

For example, even as Singapore authorities were announcing recently that bank lending had fallen again in February, a Singapore government minister was tipping the market that economic growth will come in firmly at the top end of expectations this year.

Since economies are growing but banks aren't lending across the region, many are questioning whether banks will really matter as much to Asia's economies as they did in the past.

Adrian Foster, an economist who watches Southeast Asia for Nomura International (Hong Kong) Ltd., said he thinks it's doubtful the region has so quickly been able to wean itself from a historical over-dependence on bank credit.

"Maybe this is the start of it, but in the meantime, it's a cyclical recovery, not a structural change," he said.

Nevertheless, Foster conceded the situation has persisted long enough to have him scratching his head. "It's getting to the point now that the bank lending has to pick up," he added.

The region's financial problems in 1997-1998 were in part traced to a heavy reliance on banks for credit, as opposed to more market-based and sophisticated mechanisms, such as bonds. Those might have better reflected the risks building up in the region and kept credit growth in check.

When the financial turmoil began in 1997 and corporate bankruptcies multiplied, the halt in bank lending that resulted prompted forecasts of a deep economic freeze in the affected nations.

In fact, many banks remain constrained by bad debts and are unable to lend, while others retain a risk-averse, bunker- mentality.

Yet, economic fortunes have been improving for more than a year.

Singapore's economy is growing even though its lending isn't, so the fuel is obviously coming from elsewhere. In spite of the government's indication recently that growth will likely be 6.0 percent to 6.5 percent this year, firmly at the top end of its earlier growth forecast, bank lending was down another 1.8 percent in February from the year before, to S$147.19 billion ($1=S$1.7178).

The fall wasn't as bad as the 2.4 percent drop recorded in January, but total lending nevertheless eased 0.3 percent between January and February.

Even in Thailand, which before the crisis had about the highest bank-participation, or "intermediation," rates in the region, and still has one of the most troubling bad-loan levels, the economy is on pace for at least 5.0 percent growth in 2000 after last year's 4.2 percent expansion.

Some analysts note the figures on lending look anemic because new lending has been masked by continued bank write-offs, which have tended to be larger on balance. "There has been some lending going on if you look behind the numbers," said Vincent Milton, a Thai bank analyst at Fitch IBCA Ltd. in London.

But most importantly, the cyclical turn up for Asian economies has come from fiscal stimulus and exports, which draw funding that doesn't show up prominently in the bank numbers, if at all.

As well, companies were forced by the recession to carve out efficiencies, such as better inventory control, that don't require new money but can improve profits, Foster noted.

Meanwhile, companies are also getting more funding from the stock market. Hong Kong companies this year have sold almost as much equity as they did in all of 1998, according to a report from Salomon Brothers Hong Kong Ltd. recently.

And the newest growth drivers, such as in the technology sectors, also tend to demand less capital upfront than the property developers, whose big losses are primarily responsible for bank skittishness in places such as Thailand, Singapore and Hong Kong.

Plus, since banks are reluctant to fund startups, "the whole region will see a kind of de-banking," according to Dong Tao, an economist at Credit Suisse First Boston Hong Kong Ltd. "More and more companies will go to the capital and equity markets."

The growth of local-currency corporate bond issuance in Thailand and South Korea offers evidence of disintermediation, with funding taking place away from the banks.

"I think there is some slow, slow movement" in the direction of expanding the credit base beyond banks, according to Paul Dickie, a former Asian Development Bank staffer who is currently teaching in New Zealand.

While the crisis has done something to push the development of bond markets and alternative sources of financing, "it's a very hard transition to make," he said.

The International Monetary Fund (IMF) sees money entering economies from sources other than banks. In a February report on Thailand, it noted, "the disintermediation process under way (has) meant that the increased caution of banks in their lending decisions (has) not been a binding constraint on economic recovery."

A big part of the reason why is that Thailand's recovery hasn't been driven by domestic demand, the IMF said.

And the organization goaded the government to push restructuring of the banking system harder.

"Directors stressed that broad based economic recovery (will) entail higher credit demand -- especially from newly emerging and smaller borrowers -- and that it was essential that the health of the financial system be restored as quickly as possible."