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Asia prospers despite setbacks
ASIAN investments have experienced a
sharp fall in many countries since the 1997 economic crisis even
though large current account surpluses are contributing to big
increases in savings.
These trends would be of serious concern to countries like South
Korea, Malaysia and Thailand but has also been affecting China,
which has begun to take a tougher and more selective attitude to
foreign investments.
According to the International Monetary Fund, private investment
has declined by between five and 18 percentage points of gross
domestic product (GDP) in Hong Kong, South Korea, Singapore,
Malaysia and Thailand, when comparing 1992-96 with 2000-04.
The IMF says Asia’s investment decline has been severe compared
with
other regions in the past 15 years, although similar to Latin
America in the 1980s debt crisis.
It seems that one of the reasons for the big drop in investments
has been a tendency for Asian companies generally to have become
more financially conservative because of some of the risks they
faced during the 1997-98 economic collapse.
According to a paper, “Asia’s Investment Puzzle”, by the deputy
chief of the IMF’s Asia and Pacific Department, Charles Kramer,
the increased conservative stance of these companies, which
generally boast of low leverage and high liquidity, may reflect a
preparedness to buy back shares or take other measures to fend off
takeovers.
This has happened at a time when company balance sheets generally
are at least as strong as they were in the early 1990s.
However, Mr Kramer says there may be weaknesses in some sectors
such as small and medium-sized enterprises that have been a
notable drag on investments, one notable
example of this being South Korea.
He suggests that there may be fairly complex reasons in these
countries for the increased perception of risk in the face of more
flexible exchange rates, a more robust financial services sector
and greatly increased foreign exchange reserves.
Companies could, for example, now be more realistic than prior to
1997 but the change may also reflect changes in patterns of trade
and investment and “the shift of production toward higher-end
electronics markets, one of the most volatile sectors of the
global economy”.
Mr Kramer also noted that the downturn in investment has reflected
a collapse in real estate spending, following a boom and a decline
in equipment investment.
Investment in construction fell by 10 percentage points of GDP in
Thailand as the once booming real estate market contracted.
The big drop in equipment and construction investment was also
notable in South Korea, where it fell from a peak of 14% of GDP in
1996.
Although investment rates are below long-run levels, there is some
debate about whether it is now “too low” but Asia’s investment
rate remains above those in other regions.
China’s huge success in attracting foreign direct investment (FDI)
– there has been a ten-fold increase since the early 1990s – has
raised the question of whether this success may be reducing or
diverting investments from other countries.
According to Mr Kramer, recent studies have not found any evidence
that China is diverting FDI from other Asian countries and it was
even possible that FDI flows into some Asian countries could be
positively related to flows into China.
One of the reasons for this is that growth in China’s domestic
market and in its exports has created demand for products from
other countries and new opportunities for trade and investment.
“With the shift of lower value-added manufacturing activities in
sectors such as textiles in China, some Asian countries now must
compete for market share in higher-end electronics markets, where
investment is riskier because of constantly changing technology
and consumer tastes,” Kramer notes.
He says the medium term outlook for investment varies
considerably, remaining broadly flat in the newly industrialised
economies of Singapore, Taiwan and South Korea and staging a
modest recovery (but below pre-crisis peaks) in Indonesia,
Malaysia, the Philippines and Thailand.
In India, by contrast, the investment ratio is forecast to rise
well above mid-1990s levels.
The policy environment in these countries can continue to be
advanced in the following ways, according to Kramer:
l Prudent monetary and fiscal policies;
l Structural improvements in the investment environment at a
microeconomic level, notably in governance frameworks; and,
l Financial systems should be deepened and broadened.
Despite the continuing doubts and uncertainties, the once troubled
Asian economies have fully recovered from the 1997-98 crisis and
have regained their status as the fastest growing region in the
world.
According to the IMF, Asian countries now make up four of the
world’s 12 largest economies – Japan, China, India and South
Korea.
Asia accounts for more than 35% of world GDP and contributes close
to 50% of world growth.
Another IMF paper, “Asia’s Winds of Change,” has said that in
stark contrast to the rest of Asia, China investment rate has been
high and rising, reaching about 40% of GDP in 2005.
“But because the saving rate has increased even faster – to about
47% of GDP in 2005 – China’s current account surplus has increased
considerably.
“The steady rise in savings rates reflects increases in
government, enterprise and household savings, which now account
for about 30% of disposable income.”
 
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