The pessimists are wondering if they got it wrong on Asia. Maybe they weren't gloomy enough.
Just in the last week of April, investors had to deal with one bad piece of Asia news after another. Korea's labor strife intensified. Indonesian students stepped up their rioting, and signs pointed to new problems for the International Monetary Fund bailout. New data suggested China's growth was slowing. And Japan's latest stimulus package--well, it's almost better not to ask. It just pushed the Nikkei down further. If Asia keeps deteriorating, economists will have to tear up their predictions that the region will rebound in a year or two. A recovery may instead be three to five years away. That bodes ill for the markets, which are swooning again (table). Worse, it bodes ill for the millions of Asians who may join the ranks of the jobless.
Earlier this year, hope was rising that the worst was over. Optimists pointed to the positive steps being taken. Thailand was restructuring its troubled financial sector. China's leaders had vowed not to devalue the national currency. Korea's new government was pushing through laws to open up the closed industrial system. Even Indonesia's Suharto seemed ready to take his medicine by signing on to a new IMF program. A scenario was emerging in which the region would tackle its banking mess fast, allow widespread corporate restructuring, and turn crisis into opportunity.
Instead, after the relative calm of the last three months, the full force of the economic storm is starting to be felt. Consumption is plummeting. As countries compete with each other to ship goods to the west, export prices are dropping. Unemployment is rising. No one is sure which bank will next need a bailout, whether in Japan, Korea, Indonesia, or Malaysia. Businesses and banks have a new fear, too: that the U.S. will hike interest rates. An increase would undercut fragile stock markets and make it more difficult for stretched borrowers to repay loans.
DISAPPEARING DREAMS. It's hard to find enough good news to restore confidence. Even China, so far largely unscathed by the crisis, is showing weakness, with first-quarter gross domestic product growth at a slower-than-expected 7.2% annual rate. That's down from 8.2% a year earlier--and China needs 8% growth to keep unemployment from rising. Hit by a cyclical downturn as well as the fallout from a massive restructuring of state enterprises, China's economy is likely to decelerate further. "In terms of growth, it's hard to be optimistic," says Morgan Stanley Hong Kong-based economist Andy Xie. A slowdown in China will affect Hong Kong, which is already dealing with an evaporation of retail sales and a soft property sector.
In Korea, President Kim Dae Jung's grand dreams of dramatic reform are disappearing. Korea's industrial production dropped 10% in March, its third consecutive monthly drop, and wholesale and retail sales fell by the same amount. Big gains in export volumes were offset by a 30% erosion in export prices during the first three months of the year. The 6.5% unemployment rate is at a 12-year high. And that's before the chaebol, the sprawling business groups that dominate the economy, have even started major layoffs. "We've just had layoffs at small- and medium-size companies," says Choi Young Il, a researcher at the Korea Labor Institute. The currency has strengthened recently, but watch out: The won is trading at a 13% discount to its current rate in the one-year forward market.
Korea's problems pale next to those of Indonesia, where a third agreement with the International Monetary Fund is in danger of coming unstuck, less than a month after it was signed by Trade Minister Mohamad "Bob" Hasan, a confidante of President Suharto. The IMF contends that pivotal clove and palm oil monopolies, which Hasan pledged to dismantle, continue in slightly disguised forms. The standoff means that the IMF may not disburse any more funds from its promised $43 billion rescue package. With Hasan insisting on Apr. 28 that Indonesia would appeal a World Trade Organization ruling against its Timor car, a political project run by Suharto's son Hutomo Mandala Putra, tensions between Indonesia, its trading partners, and the IMF have risen further.
Meanwhile, demonstrations occur daily in Indonesian cities. Protesters are now using Molotov cocktails. They display a boldness that would have been unthinkable even six months ago, burning effigies of the once revered Suharto and calling for his resignation.
FLEEING JAPAN. No one is rioting in Japan, and to outward appearances the island nation remains prosperous. But Japan is now officially in recession after a second consecutive quarter of economic contraction, and its weakness is a far greater threat to the global economy. Japan's jobless rate took one of its biggest-ever jumps in March, to a record 3.9% from 3.6% in February, and shows no signs of peaking. Bankruptcies are also at all-time highs.
Retail sales fell 14.5% in March, the sharpest slump on record. Hitachi Ltd. just took a loss of nearly $1 billion to restructure its chip business and finance its underfunded pension plan. Some analysts are looking for the yen to drop to 140 to 150 to the dollar by midyear as capital flees Japan in search of higher returns abroad. Giles Ockenden, a Tokyo-based equity strategist for Jardine Fleming Securities Ltd., sees the Nikkei declining to 12,000, from about 15,400 now. Ten months after the crisis started, it seems that Asia is entering a second stage of turbulence.