Southeast Asia Waits with Fingers Crossed

For the 500 or so investors who gathered at Singapore's Speaker's Corner in an unprecedented protest over the alleged mis-selling of now-worthless financial products linked to Lehman Brothers, the pain of the global banking crisis is real enough. But for the most part, Singapore and the rest of Southeast Asia have escaped relatively unscathed from the mayhem in the West thus far. Whether that can last, however, is problematical.

Stock markets across the region have taken a battering as panicky international and local investors have sucked money out of shares in the midst of the credit crisis to fund operations or stuffed it into the nearest bank with a government deposit guarantee. The rout has continued this week, with benchmark indexes continuing to slump. The MSCI Asia Pacific Index came off 7.8 percent on Thursday and appears set for its biggest decline on record.

Last week Singapore became the first major Asian economy to enter a technical recession after suffering two consecutive quarters of falling growth. But talk to a real estate agent, an investment banker or even a taxi driver about the economy and there is little of the pessimism and fear that you get when asking people in London, Paris or New York about the same subject. The pints of imported lager are still being gulped down with just as much confidence and bravado at Harry’s Bar and the other riverside drinking establishments frequented by expat financiers on their way home from work in Singapore’s central business district.

"You don’t get a sense of panic yet," noted Wai Ho Leong, economist at Barclays Capital in Singapore.

It's very hard, however, to know whether this relaxed atmosphere is a sign of true confidence or complacency. Are Singapore and the rest of Southeast Asia, really in a much better position to weather the global financial storm than in 1997? Or is this merely the calm before the storm? Indonesia and Malaysia, which form Singapore's hinterland, between them produce 85 percent of the world's palm oil and Malaysia, Indonesia and Thailand produce 75 percent of the world's rubber – at a time when commodities markets have been diving precipitately.

Both Malaysia and Singapore are heavily exposed to the electronics markets for computers, semiconductors, computer parts, televisions and other electronics. Ominously, electronics now account for US$30 billion of Malaysia's US$36 billion in exports to the United States, which is falling into recession.

Nonetheless, Asia has not yet been tested in the same way that the US and Europe have been. Across the region, it remains a bastion of foreign exchange reserves – more than US$3 trillion, with US$1.9 trillion in the hands of China alone, and with governments, particularly China, seemingly willing to call on those reserves to preserve the state of their economies. There have been no major financial shocks – bank balance sheets and government reserves were rebuilt n the wake of the Asian financial crisis of 1997-1998 so that there have been no significant bank collapses and no massive government bail-outs.

{mospagebreak}

So far, Asia has only faced the secondary effects of someone else's meltdown but, despite the dramatic governmental interventions of the last week or two, this crisis clearly has some way to run as global investors desert local markets in pulling back money to fund their distressed domestic operations.

For instance, Donald Tsang, Hong Kong’s chief executive, warned this week that the current financial squall is worse than the Asian crisis of 1997 and will take longer to recover from.

"The financial tsunami we now face is a global crisis," he said in his annual policy address. "Its destructive force is much stronger and more widespread than the Asian financial turmoil in 1997. The recovery will take longer, be more difficult and certainly cannot be taken lightly."

However, Tsang insisted that Hong Kong is in much better shape to get through the troubles. "That said, our financial infrastructure is more robust than it was in 1997," he added. Earlier this week, the Hong Kong government, which holds US$112 billion in foreign exchange reserves, said it would bail out any local bank that gets into trouble over the next two years – which analysts interpreted as an attempt to stop accounts flooding out of lesser banks and into the coffers of banking giant HSBC.

Most economists in Singapore agree that the city-state, which holds a whopping US$163 billion in foreign reserves as of January, is in an equally strong position.

"The ripples from the financial crisis will hit some time next year in the first quarter because of slower export growth as spending habits change in the US and Europe," explained Barclays Capital economist Leong. "But Singapore is entering this crisis from a position of strength. The economy had been structurally reformed over the last four years. Singapore has been drawing expat talent for the last few years and unemployment is at an all time low.

"We’re also in middle of largest building boom in our history, with more than S$120bn (US$82bn) worth of industrial, commercial and infrastructure developments on the ground. We have buffers like that."

Since its last recession in the wake of the dotcom bubble, Singapore has indeed reduced its reliance on exports to the US and Europe and increased its trade links with the large and growing consumer markets in China, India and the rest of Asia.

"While I think the idea that Asian economies can ever be 'de-coupled' from what is happening in the US and Europe is complete nonsense, it does seem as if the region in general, and Singapore in particular, are much better prepared for a global downturn," added another regional economist.

A major shock such as a large bank collapsing would no doubt send waves of panic throughout Asia. But Asian banks are much stronger than they were in 1997 and have been careful to avoid taking on the levels of leverage that made the likes of Lehman Brothers and Merrill Lynch so vulnerable. "In 1997, the banking sector was much weaker across the region but capital ratios have been built up since then and there hasn’t been the sort of property/credit bubble seen elsewhere," explained Barclays’ Leong.

This sentiment is echoed by one Singapore-based fund manager who has been investing across Southeast Asia for more than decade. "What a lot of people in Asia who’ve been through the 1997 crisis know is that there’s a huge structural difference between now and then," he said。 "Balance sheets in Asia are quite healthy and not that highly leveraged."

"The US and Europe have to swallow a big nasty pill," he added. "But capital flows to where there's growth and, right now, that's Asia."

For now, he’s certainly right. While central bankers and economists across the region have been edging down their forecasts, most are still planning for steady growth. But these are volatile and turbulent times. It has only taken a few days for the initial euphoria that followed the launch of the banking rescue plans in the US and Europe to fade into deepening gloom. Yet, even as the contagion looks likely to spread further, Southeast Asia’s economies look better prepared than ever before.