US downturns hits Asian Tigers

By MOIN SIDDIQI

The main concern for international investors is to what degree the Asian tiger economies are likely to suffer as a consequence of the USA’s economic slow-down. As it is, the medium term outlook is bleak with Asian currencies still slipping, industrial production declining, private demand remaining sluggish, banking systems weak, and political risk in Indonesia and Philippines continuing to be high.

For starters, the US slow-down will have a direct impact on trade levels. Asia is the world’s most export-orientated region. In East and South-East Asia, exports constitute 40% of GDP.

Buoyed by US demand

Asia functions essentially as the workshop for many international high-tech companies producing semi-conductors, memory chips, peripherals and other computer hardware, as well as low-end electronics. Information technology (IT) equipment accounts for over half of the total exports from Philippines, Malaysia, and Singapore, and in excess of one-third in Taiwan and South Korea. In Thailand the figures represent 26% of total exports and in Hong Kong 22%.

Together, these countries supply as much as 40% of the world’s electronics markets.

Since the Asian financial turmoil, export-growth underpinned by extremely competitive currencies after devaluation and a buoyant world economy, had played a key role in Asia’s impressive recovery. A global boom in the IT sector in 1999 and 2000, led by the US, had created strong markets for Asian electronics exports.

SE Asia’s exports to America last year rose by about $40bn. Rapid expansions in US electronics orders in 1999 and early 2000 had boosted export growth in South Korea, Taiwan and Singapore by 20-30% during the period.

Standard & Poors, the US ratings agency, comments: ?Since the financial crisis in 1997, buoyant US demand has kept many companies afloat in Asia, helping them fund their working capital and investment requirements.?

An exceptionally tight correlation exists between US high-tech industries and export growth in Asia. America alone accounts for 50% of global IT spending and investment per annum. Among the Asian economies with higher trade links to US, as measured by their total exports to GDP ratio, are Hong Kong (26.2%), Singapore (26%), Malaysia (24%), Philippines (14%), Taiwan (11.4%), Thailand (11%), South Korea (7.1%) and Indonesia (6%).

But the situation has been changing alarmingly. Asia is now taking a severe knock from the US slow-down and continuing economic woes in Japan. Countries like Malaysia which ship half their exports to the US and Japan, are getting very worried. Since the beginning of 2001, a steep fall in US business investment has reduced demand for IT equipment. The slow-down in US technology spending has now also spread to Western Europe.

Asia’s export-growth, the major engine of economic expansion over the past two years, is clearly faltering. Deutsche Bank in Hong Kong estimates that export volumes across the region could plunge by a hefty 40% in 2001.

Sharp decline

The sharp decline in market valuations of prime IT companies like Hewlett-Packard and Microsoft have led to cancellation of their investment plans. This, in turn, will reduce future Asian export orders. According to a survey by Merrill Lynch, the US investment bank, about one-third of US and European companies have recently frozen their IT budgets.

High inventories and weak global demand are depressing the price of consumer electronics, computer chips and telecoms equipment.

GDP growth rates for the region (excluding China) are set to halve this year to between 2.5-5%, down from a robust 7% last year. Goldman Sachs, the US brokerage, estimates that if America dips into a brief recession like in 1990-91, overall growth in the newly industrialised economies of Taiwan, Hong Kong, South Korea and Singapore, could fall to 2.3% and a paltry 1.3% in Southeast Asia (Indonesia, Malaysia, Thailand and Philippines).

However, the future looks more promising.

The International Monetary Fund, in its latest World Economic Outlook report (May 2001) anticipates a US up-turn in the second-half of this year, thanks to the Federal Reserve’s monetary policy, ie lower interest rates. This should have a beneficial effect on export markets across the world as America is the world’s largest importer. But few, if any, industry experts are projecting strong recoveries in global IT spending and investment in the short term.

Even if America avoids a full-blown recession, Asia is set for a period of subdued economic growth and declining exports for at least the next year.

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