Asia has a US$2 trillion problem: bad loans at banks that will keep the region from a sustainable economic rebound.
In Thailand, one-fifth of all loans are in default; in Indonesia, about one-third; and in the Philippines a quarter, according to estimates from governments and analysts. Banks in Asia will have to work through these loans before lending afresh. Until that happens, the region may not see annual growth rates of about 8 percent chalked up in the early 1990s.
Four years to the day after Thailand devalued the baht, a move that sparked a regional recession, Asian economies are again reeling.
While policymakers have been quick to lay the blame for current economic woes on falling exports to the US, the real root of their problem lies closer to home.
"Bad loans are going to affect growth for years," said Tatha Ghose, chief economist for Asia at Dresdner Kleinwort Wasserstein [Asia] Ltd. in Hong Kong, who says the full impact of the problem has yet to hit and will shave at least 2 percentage points off economic growth. "When the current downturn is over and people need to invest again, financial systems will be bottlenecked because banks won't be able to provide finance." Economies from Japan to Thailand and Singapore to the Philippines shrank in the first quarter. Korea today said economic growth slow by more than half this year to 4 percent. Indonesia and Malaysia expect their economies to slow.
That's a far cry from the past two years. Booming exports to the US helped pull Korea, Indonesia and Thailand out of the recession of 1997-1998. Those three countries needed US$80 billion of IMF loans to avoid defaulting on debt.
The return to rapid growth papered over the need to clean up the mess left behind and allowed governments to avoid the social and economic upheaval of closing down deadbeat borrowers.
Companies also balked at getting into shape.
Take Hynix Semiconductor Inc. The company, once part of Hyundai Group, formerly Korea's largest conglomerate before it had to be broken up to avert collapse, last month had to sell US$1.25 billion of shares at a 25 percent discount in a bid to avoid bankruptcy.
"A faster-than-expected economic recovery in 1999 made many companies complacent -- they started to think, perhaps we can deal with the problems later, rather than now," said K.C. Park, the chief financial officer of Hynix. "In a way, we were not an exception." The money from the share sale will help it satisfy conditions imposed by creditors to reschedule US$4.4 billion of debt due this year.
Korean banks and other lenders are carrying about US$45 billion of bad loans, equal to almost one-tenth of all lending, the Financial Supervisory Commission said today. That's the lowest ratio since Korea started releasing bad loan data in December 1998.
Japan is a prime example of the economic damage that can be wrought when loans go sour.
An 11-year economic slump has left lenders with as much as US$1.1 trillion of bad and risky loans, according to government estimates, equal to almost a quarter of the GDP in the world's second-biggest economy.
Bank lending in Japan has fallen from year-ago levels for almost five years, and the economy is probably back in recession barely two years after the previous one ended.
Two years after spending US$65 billion to bail out banks, the government is pledging to use a state-backed body to buy bad loans from banks and provide a ?2 trillion (US$16 billion) guarantee to a fund that will buy shares owned by banks.
RSS