Is Asian recovery on shaky ground?

Is Asian recovery on shaky ground?

MANILA (Xinhua): While Asian economies are showing signs of a strong recovery, problems such as heavier corporate debts, rising bad loans and larger government deficits have aroused fears for a new round of financial crisis in the region.

This contradictory phenomenon started recently in the course of the regional economic turnaround.

During the first half of this year, Asian economies had been recovering very fast. After registering a 4.6-percent growth in the gross national product (GDP) in the first quarter from a negative 5.8 percent last year, South Korea's economy was expected to rise by 9 percent in the second quarter, the country's central bank predicted Monday.

In Singapore, which suffered a recession in the fourth quarter of 1998, GDP also grew 6.7 percent in the second quarter, from 1.2 percent in the first three months of this year.

But at the same time, problems like private debts have caused alarm in the region. For example, financial woes of Daewoo in South Korea aroused fears that the group's debt could spark another economic crisis in the country.

Noting such a contradictory phenomenon, some economists wonder if the Asian economic recovery is on shaky ground and could last long.

The Daewoo case has made economists more suspicious about a real recovery in the region. Daewoo, South Korea's second largest conglomerate, has the country's largest private sector debt overhang. The company owes 60 trillion won (about US$50 billion), or around 13 percent of South Korea's GDP, while its exports account for 13 percent of the country's total.

Because of the important role Daewoo plays, the government admitted that the group's financial woes will be likely to have some negative impact on the country's overall economy.

"We should not under-estimate the importance of Daewoo," said Eugene Yun, managing director of a Seoul-based investment consulting firm Blue Nile Partners. But he added:" It is unlikely to trigger a second crisis (in South Korea)."

The debt problem is also confronting other Asian economies. A debt mountain of some $180 billion owed by private companies and the government is threatening to disrupt Thailand's recovery from recession, economists warned.

If the debt is not managed properly, analysts said, it could delay the country's revival after a two-year slump.

Another serious problem hindering Asia's full economic recovery is non-performing loans, which have already amounted to over $1 trillion in the region.

In the five crisis-hit countries -- Thailand, Malaysia, Indonesia, the Philippines and South Korea, non-performing loans have risen to 15 percent to 60 percent at present.

While banks, in fear of increasing bad loans, are reluctant to extend new loans to companies, companies are becoming more difficult in expanding business, and as a result, they could hardly repay their loans. That has made the situation from bad to worse.

At the end of May, non-performing loans of Thailand's financial sector were around 2.73 trillion baht ($73.39 billion), or 47.72 percent of the total lending.

The huge bad loans are preventing banks to lend normally to fuel the economic recovery in the region, and governments will have to spend more to bail out the financial sector, analysts said.

The third problem which may affect a lasting recovery is the larger government deficits. In the early 1990s, the five crisis- hit nations ran balanced or surplus budgets. But their average budget deficits will increase to 5-6 percent of GDP in 2000, due to heavier government deficit spending to stimulate growth.

It is estimated that 80 percent of Asia's growth this year and the lion's share of its stock rebound come from government stimulus.

But Asian governments cannot continue for too long to increase deficit spending to promote recovery.

"Thais don't feel the pinch now because the government is using an expansionary fiscal policy to cushion the impact of the crisis. But it will eventually have to tighten it ... most likely from 2001," said Supavud Saicheua, head of economics and strategy at Merrill Lynch.

"By then, the government might have to earmark up to 10 percent of the budget to service debt, and will have very little money left for investment," he said.

However, all these problems are unlikely to stop the recovery process in Asia, where the financial market has already stabilized and the general growth trend seems irreversible. Many economists do not agree that the Asian recovery is on shaky ground

So long as Asian governments find effective remedies, they still could achieve a lasting recovery despite these problems, analysts said.