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."