Report Card On Asia

How well--or badly--is each nation doing?

Amid the rubble of a cataclysmic year, Asia's economies are finally showing signs of life. At the Chow Tai Fook jewelry store in Hong Kong's Central district, where sales have languished for months, customers are back, snapping up gold and diamonds. The main streets of Seoul, nearly deserted in January, now hum with traffic. On weekend nights, revelers throng the dance floor of Jamz, Jakarta's hippest disco.

A full-fledged recovery in Asia is still many months away, as output continues to contract and layoffs, bankruptcies, and political tensions rise. But barring any more big shocks to the world financial system, there is clear evidence that the region's harrowing economic free fall is nearing bottom. Asian currencies have stabilized, foreign reserves have swelled, and interest rates have dropped. For the first time since July, 1997, Asia's limping Tigers see a ray of hope for a return to health.

It is time, therefore, for a mid-crisis exam. The result is our Asian Report Card, which grades countries on how well they have implemented critical reforms. We look beyond market upticks to measure progress in bank recapitalization, corporate restructuring, consumer sentiment, political reform, and openness to foreign investment. The countries that score well have the best shot at attracting capital, a vital task. Just to recapitalize their banks, Asian nations must raise $900 billion. And Asia won't be able to rely solely on high domestic savings to fuel growth.

SPOTTY. Of the crisis countries, highest marks go to the Philippines and Thailand, which have done the best job of political reform and adhered most closely to the International Monetary Fund's painful remedies. But Asia's overall performance is spotty. We give out few As--and loads of Cs and Ds. Although each country has set up mechanisms to clean up and recapitalize its banks, the region--including Japan--is still chafing under a staggering $1.7 trillion in nonperforming loans. Only after this debt overhang clears will banks be able to reignite Asia's economies by unleashing new credit.

The task of restructuring the wrecked corporate sector, meanwhile, has barely begun. True, there have been notable asset sales and mergers. An estimated $60 billion in merger-and-acquisition deals will be completed in 1998. But that's not enough. While there have been some notable asset sales, most Asian corporate chieftains remain largely unwilling to sell assets for prices that suitors are willing to pay. Many insolvent conglomerates have yet to even agree with creditors on debt-workout programs. Industries ranging from automobiles to chemicals to electronics will remain hobbled by inefficiency, overcapacity, and weak prices. Some 47% of industrial capacity in Thailand is idle. In the auto sector alone, Southeast Asia is using a paltry 25% of factory capacity.

The biggest drag on Asia's prospects for recovery is Japan. Its mandarins admit to about $600 billion in bad bank loans. Yet outside estimates go well past $1 trillion. Tokyo's rescue package sets aside $500 billion in public funds to take over insolvent banks, inject capital into weaker ones, and cover all depositors. But the plan doesn't address the problems of lenders that remain less profitable than their major U.S. and European counterparts. And Japan hasn't begun to address the bigger issue of industrial restructuring.

Without a strong contribution from Japan, Asia's walking wounded have to rely on their own resources far more than they would like. Thailand gets a B+ on financial reform for making the most progress in clearing bad debts. Walk into a Bangkok bookstore and you can buy bilingual guides to property for sale at government auctions. What's more, the government this year has sold off $900 million in finance company loans and other assets to foreign investors, who paid as much as 60% of book value. Thailand's policymakers have also allowed foreigners to buy stakes in financial institutions. Early this year, for instance, ABN Amro paid $195 million for a 75% stake in Bangkok-based Bank of Asia. Yet one statistic shows how far Thailand still has to go: Nonperforming loans now come to some $45 billion, or 35% of gross domestic product.

South Korea is giving off similarly mixed signals. So far, the government has bundled and sold only $300 million of the $30 billion in bad loans it has assumed from its banks. And South Korea still has some $50 billion in dud loans to deal with after that. Some major business groups are selling assets: Ssangyong, once the country's sixth-largest chaebol, has virtually liquidated itself. But investors are waiting for the top five chaebol to join the party. So far, their restructuring has been mostly talk. Yet at least some failed banks are up for sale. And because of falling imports, Korea now boasts a record $45 billion in foreign reserves, up from virtually nothing last year.

TOUGH TASKS. Politics also plays a big role in determining a country's grade. That is a major reason why the Philippines scores high in BUSINESS WEEK's survey. Dismissed by many in business circles as an intellectual lightweight when he came into office in June, President Joseph E. Estrada has not deviated from the reform policies of his predecessor, Fidel V. Ramos. He also resisted pressure to help labor unions during their strike against Philippine Airlines Inc. Nor did Estrada bail out his tycoon friend Lucio Tan, the airline's owner. Now, investors feel more assured that Estrada will move swiftly to contain the crisis if it worsens in his country.

In contrast, Indonesia's new President B.J. Habibie, who succeeded toppled strongman Suharto, is tainted by his close association with his predecessor. Until Indonesia holds elections in mid-1999, the risk of continued political turmoil--if not anarchy--remains high. That makes it hard for Indonesia to lure back the ethnic Chinese businessmen and billions in capital that fled the country after this spring's riots. That said, Habibie is making some progress. His administration has recently sped up efforts to restructure the debt-laden corporate sector. Yet the task ahead is mind-numbing. "Every bank in the country is insolvent," says the head of a leading Wall Street M&A practice.

EMPTY BUILDINGS. No nation has done more to wound itself through bad policy than Malaysia. Prime Minister Mahathir Mohamad has cut the country off from the world's capital markets and stifled reform by jailing his former Deputy Prime Minister, Anwar Ibrahim. And he's making the country's debt burden, already some 170% of GDP, even heavier. So many loans are under water that the banking system needs $16 billion to recapitalize. Yet the central bank is encouraging banks to make more loans. Malaysia scores poorly in restructuring as well, where bailouts of politically favored conglomerates are the rule.

The woes of the weaker nations will drag down the potential high performers. In Hong Kong, consumer confidence has evaporated, with devastating effect on retailers. "It is hard to imagine sales increasing," says a glum Peter Lau, chairman of regional clothing chain Giordano International Ltd., which has stores throughout the region. One sign of the times: PricewaterhouseCoopers has expanded its liquidation practice fourfold.


One country not featured in these tables could affect them all: China. Premier Zhu Rongji seems poised to reach his target of 8% growth this year through massive state investment to stimulate the economy. But by some estimates, China still has $250 billion in bad loans. As Zhu opens the credit spigots, he risks weakening banks even further. There's also still a risk that Beijing could devalue the Chinese currency, thereby initiating a fresh crisis.

Taken together, these report cards do offer some hope for investors--but only some. If Asia's governments concentrate on making their financial systems strong and their corporate sectors efficient, they'll stand a good chance of coming out of this financial crisis in healthy shape. But countries that go for short-term remedies could well end up looking like today's Japan, with stagnant growth and deep regrets of missed opportunities. Staying with the program can be painful. But those that do will lead the pack.

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