Wary Asian countries eye brighter economy in 2002, say analysts

Wary Asian countries eye brighter economy in 2002, say analysts

Alan Wheatley, Reuters, Tokyo

Asia's second recession in three years seems to be drawing to a close, but doubts about the vigor of a recovery in exports and the risk of a sharp fall in the yen mean 2002 is shaping up as a modest economic vintage for most of the region.

On an optimistic view, a rebound in U.S. demand for the information-technology products that are the lifeblood of many Asian economies will gradually erase memories of last year's slump in exports, the worst in at least 15 years.

Recent data on Asian trade and U.S. manufacturing orders have left economists increasingly confident that Asia is bottoming out and that year-on-year export growth will resume by the second quarter of this year.

"When the U.S. and the European and Japanese economies start to grow again, hopefully in the second half of 2002, so will Asia," said Takatoshi Ito, an economics professor at Hitotsubashi University in Tokyo who recently completed a spell as a junior finance minister.

With America still to work off the excess IT investment of the internet-bubble era, some banks believe Asia will have to wait until 2003 for a recovery worthy of the name.

Morgan Stanley, for instance, is forecasting a further 10.1 percent drop in U.S. equipment investment this year, which it says will limit gross domestic product growth in non-Japan Asia to 4.5 percent, a modest improvement on this year's 3.7 percent rate. For 2003 the bank has penciled in 5.9 percent growth.

Lehman Brothers is a bit more optimistic, forecasting a pick- up to 5.0 percent in 2002 from 3.5 percent last year thanks in part to the significant monetary and fiscal stimulus already in the pipeline, cheap oil and inventory rebuilding.

But with Asia so sensitive to external events, Lehman economists Rob Subbaraman and Graham Perry said the risks around their forecast were wider than usual.

"We cannot rule out a snapback in global IT demand, propelling regional GDP growth to as high as 6.6 percent, nor can we discount another geopolitical shock or a catastrophe in Japan, crimping growth to just 2.9 percent," they said in a report.

More important than the timing of the eventual recovery, economists say, is whether Asia's policy-makers capitalize on the next upswing to implement the reforms that will reduce their vulnerability to export boom-and-bust cycles.

The failure to harness strong growth during 1999 and 2000 to ram through badly needed banking and corporate reforms meant most countries were unable to rely on self-generated domestic demand to cushion the blow of tumbling exports.

"Asia's structural problems make it highly vulnerable to external shocks," said Michael Spencer, chief Asian economist at Deutsche Bank in Hong Kong.

Writing in the bank's Asia Outlook for 2002, Spencer said Asia's 'vulnerability' will be a boon over the next two years, with a rebound in exports sparking rapid growth in incomes.

"But if governments do not take advantage of this opportunity to complete financial sector restructuring -- of both the banks' and the corporations' balance sheets and operations -- then the next downturn in the industrial country growth cycle will see the same exaggerated recession in Asia," Spencer said.

Breakneck growth rates came easily to Asia's Tiger economies in the early stages of economic development.

But now they have less ground to catch up, future growth will depend increasingly on an ability to innovate and increase productivity, said Shahid Yusuf, a World Bank economist.

That, in turn, means pressing ahead with a host of nitty- gritty reforms such as purging banks of bad loans, strengthening legal systems and spending more on research and education.

"East Asia will have to work a lot harder than it did in the past to achieve the same rates of growth," he said.

Adding to the challenge is the seemingly inexorable ascent of China, which is set to become even more attractive for foreign investors now that it has joined the World Trade Organization.

Morgan Stanley calculates that China gained 0.66 percentage point of Asia's export share a year in the 1990s. It expects the gain to increase this decade to 1.2-1.5 points per annum as China quadruples its exports to $1 trillion a year.

"There is little Southeast Asia can offer that China can't offer at a lower cost," said Jomo Sundaram, a professor in the department of applied economics at the University of Malaya in Kuala Lumpur. "The competitiveness of China -- and of India -- is going to put Southeast Asia in a difficult position."

In the policymaker's nightmare, Asia becomes trapped between the hammer of a low-cost China and the anvil of a Japan so desperate to escape deflation and recession that it engineers a sharp fall in the yen to spur exports and raise import prices.

Andy Xie of Morgan Stanley said a major yen devaluation was the biggest risk to his scenario of an Asian recovery in 2003.

Many economists believe a sharp drop in the yen contributed to Asia's 1997/98 financial crisis by enabling Japanese exporters to gain market share from their Asian rivals.

"As Japan's exports are only 10.7 percent of GDP, the devaluation required to solve its deflation problem would be huge," Xie said in a recent note to clients. "Another round of competitive devaluation would be likely to follow."