Chaos in Far East escalates as IMF cuts growth forecast

World stock markets are braced for another turbulent trading period as the Far Eastern crisis deepens. Growing concerns come as the International Monetary Fund forecasts that Asia's woes will slow world growth next year. Diane Coyle, Economics Editor, and Andrew Yates report.

The financial chaos escalated over the weekend as three more of South Korea's publicly quoted companies were declared bankrupt, with another, Chun Kwang Industrial, the animal feed manufacturer, indicating that it too will be seeking court protection from its creditors. More than 15,000 Korean companies are reported to have failed this year.

South Korea's finance ministry admitted yesterday that it would have to increase a state fund established to buy bad loans to 20 trillion won ($12.4bn) from the current eight trillion won.

An official at the ministry's industrial finance division said: "We plan to speed up the process of cleaning up bad loans with the financial system as we promised the International Monetary Fund." Analysts estimate that the nation's bad loans figure has risen to over 35 trillion won.

Kim Dae-jung, South Korea's president-elect, faces an uphill struggle to rebuild confidence in the country's ailing economy. "Pressure on interest rates is mounting and the financial bottleneck is battering manufacturers as well as financial firms. The markets' future looks grimmer than ever," said one local economist.

Analysts are forecasting the situation in Thailand will deteriorate as the country becomes gripped by recession. The plunge in the Indonesian rupiah and a rapid rise in foreign debt levels is also likely to push more local companies into bankruptcy.

The IMF admits that it underestimated the severity of the Asian financial crisis. The repercussions of events in the Far East "have proven much deeper and more extensive than seemed likely only a few months ago," says the interim World Economic Outlook published yesterday by the IMF. It has reduced the fund's forecast for world economic growth next year to 3.5 per cent, 0.8 per cent lower than the forecast issued two months ago.

But the new report goes to some lengths to stress that most of this pain will be felt in Asia itself, provided governments adopt sensible policies in reaction to events. Saying that the rest of the world will "experience a dampening of foreign demand", the IMF has shaved just 0.2 per cent of its forecasts for US and UK growth, and less from its predictions for other European economies.

It even portrays the crisis as a welcome antidote to inflationary pressure in Britain and America. Among the advanced economies, it is other Asian countries like Hong Kong and also Australia and New Zealand that will suffer most.

The document says the impact on advanced economies outside Asia will most probably be "relatively moderate and temporary". Although it cautions that there remains a risk that the outlook will yet turn bleaker, it says: "The global growth rate projected for 1998 is even now slightly above the average experience of the past two decades," and "notably higher" than during the 1990-93 slowdown.

The report also predicts that - as long as the necessary reforms are introduced - the Asian economies will start to recover in 1999 thanks to their underlying strengths. It does concede a worst-case scenario, if the crisis persists and in the unlikely event that governments fail to cut interest rates in response to the downturn.

This would knock a further 1 per cent off growth in the industrial countries, taking it to 2.5 per cent in 1998 rather than the 3.5 per cent forecast in the new report.

Intended as a corrective to some of the more apocalyptic predictions about the impact of the crisis, the IMF's Economic Outlook expresses the greatest concern about Japan and Korea. Its forecast for Japan's GDP growth next year has been halved to just 1.1 per cent. The fund blames the Japanese government for introducing a much tougher budget policy during 1997, reversing tax cuts before the economic recovery had put down roots.

The prediction for Korea's growth in 1998 has also been slashed, from 6 per cent to 2.5 per cent. Many economists would, still see this is too optimistic.

The new IMF forecast

Country 1997 (est) % 1998 (new forecast) % Revision

World 4.1 3.5 -0.8

Advanced 3.0 2.5 -0.4

economies

US 3.8 2.4 -0.2

Japan 1.0 1.1 -1.0

UK 3.5 2.4 -0.2

S.Korea 6.0 2.5 -3.5

Asian NICs 6.2 3.6 -2.4

Asean 4* 4.0 1.7 -3.7

* Thailand, Indonesia, Malaysia, Philippines

Source: IMF World Economic Outlook

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
film
Arts and Entertainment
Preening: Johnny Depp in 'Mortdecai'
filmMortdecai becomes actor's fifth consecutive box office bomb
News
peopleWarning - contains a lot of swearing
Travel
travel
Arts and Entertainment
arts + ents
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Day In a Page

Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project