The specter of non-performing loans (NPLs) which spooked emerging Asian economies during the 1997-1998 financial crisis is haunting the region again, Standard & Poor's warned yesterday. The global credit rating agency said it was bearish on the short-term outlook for banks in emerging markets, and noted that more advanced economies like Taiwan, Singapore and Hong Kong were also getting affected by NPLs.
"The economies of Indonesia, South Korea, Thailand and, to a lesser extent, Malaysia bore the brunt of the original crisis," S&P said.
"While South Korea and Malaysia are again affected, this time round it is also the higher-value-added economies of Taiwan, Singapore and Hong Kong that are experiencing the sharp end of the US economic slowdown," S&P said.
It said that almost without exception, the levels of NPLs held by emerging Asian banks were "hardening and, in some cases, starting to rise." Among the main victims of the 1997-1998 crisis, Thailand "has made the most disappointing progress in terms of recovery" and the country's banks "are likely to remain mired in problem loans for years to come." It said non-performing assets -- loans overdue for three months, restructured loans and foreclosed properties -- were estimated at 48 percent of total loans at the end of 2000, just a few percentage points below the 53 percent at the end of 1999.
In Indonesia, the transfer of problem loans to the Indonesian Bank Restructuring Agency allowed banks to report an average NPL ratio of just 18 percent in 2000 but a portion of restructured loans is expected to revert to NPLs, and banks now hold a large quantity of government debt paper.
"This ties the banks' fortunes even more closely to that of the highly indebted administration," S&P said.
South Korea's slow pace in reforming "over-leveraged" conglomerates remains a structural impediment for the banking system, with falls in private consumption, fixed investment growth and semiconductor receipts posing problems for the economy and banks, S&P noted.
Malaysia "missed the boat" in terms of resolving NPLs left over from the 1997-1998 crisis, with the gross level of NPLs returning to above 18 percent in the first half of 2001 from 16 percent at the end of 2000. S&P said the Philippines' high dependence on the US economy has caused problems on top of the adverse events before President Gloria Arroyo took over last January from her ousted predecessor Joseph Estrada.
The banking industry's ratio of non-performing assets is estimated at 25 percent, no better than the figure at the end of 1999, and falling growth points to "a further deterioration of loan quality," S&P said. Hong Kong's problems with NPLs are expected to remain manageable and banks are strong capitalized, despite the fact that the economy is nearly in recession, reducing lending opportunities, squeezing interest margins and reducing property values.
"Beyond the short term, the direct and indirect influence of the higher-risk mainland China market on the financial health of local commercial borrowers is a potential concern," it said.
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