How the financial crisis could strengthen the Asian economies

It might be imagined that only the very brave or the very stupid would see a silver lining in the financial crisis which is overwhelming the countries of East Asia.

As markets in the Far East begin another week of uncertainty, some economists in the region argue that the negative sentiment has been overdone and that the turmoil may even make these countries stronger.

Any nation with the combination of an export-driven economy and a currency whose convertible value has plunged almost in half can hardly fail to become super-competitive. As this applies to Indonesia, Malaysia, the Philippines and Thailand, the four countries hit hardest by the financial turmoil, it must be good news.

They are part of an export boom which outstripped the rest of the world some three times or more and led to the kind of double economic digit growth not seen elsewhere in the first half of the decade nor, for that matter, at any other time in history.

According to World Bank figures, between 1990and 1995 Indonesia's export volume grew on average by over 21 per cent per year, while the value of those exports grew by just 11.5 per cent.

In Malaysia, the volume growth was 17.8 per cent and the value growth just 8.6 per cent. The Philippines did less well, expanding export volumes by an average 10.2 per cent, which in value terms amounted to almost 4 per cent. Thailand's exports rose 21.6 per cent in volume and 18.6 per cent in value, a far better performance than any of its neighbours.

One reason for Thailand's better-than-average record was that its currency maintained a consistently modest exchange rate with major customer nations.

The other countries saw their currencies rise and exports fall after 1995. Now all four countries share the same advantage, only more so. They can even afford price rises in their own currencies which will still translate into price falls for overseas customers.

The negative side of the picture is that falling currencies produce high interest rates and raise the cost of imports, both of which pressures lead to higher inflation. Inflationary fears are behind the scramble by economists to produce downward revisions of GDP growth estimates. The Bank of America, for example, is marking down its 1998 collective growth estimate for the Asean nations of south-east Asia from 7.5 per cent to 5.9 per cent.

However, this may prove to be a short-term phenomenon while in the medium to longer term these economies are going to benefit greatly from an end to the grossly overblown asset values, mainly in the property market, which were the product of relatively cheap credit and cash searching for a home.

The distortion of asset values led to distortions in the economy, producing unnecessarily high costs and, as we have seen, ruinous damage to finance houses who lent money recklessly.

The crash is shaking the dubious finance houses out of the system - just this weekend it was announced that the Indonesian government was closing down 16 insolvent banks.

A wave of bank closures has already swept through Thailand, while in the Philippines, which came under IMF strictures before these two countries, banks are in good shape, having the lowest ratio of liabilities relative to equity of any country in the region.

The IMF is now pouring money into both Thailand and Indonesia, and although it is far from a perfect arbiter of economic probity, many of the measures it is forcing on these countries are precisely those which internal critics have been urging without response for some time.

In Malaysia, which is under no IMF strictures, the government itself has realised that many of its grandiose projects will have to go and that a bout of austerity may be no bad thing.

In other words, the financial crisis could bring these economies back down to earth. The fantastic valuations of Far East stock markets will fade, asset values will start resembling reality and, despite the setbacks, these economies, even in the short term, are likely to continue growing at a faster rate than economies elsewhere in the world.

Paul Schulte, the chief strategist at ING Barings Securities in Hong Kong believes that the markets are finally getting back to "decent valuations" and sees the share slump as a rational reaction to the exaggerated expectations which built up among investors.

"The herd is behaving rationally for a change," he said.

However, it may take a while to persuade the international fund managers that they should return to Far East markets, particularly as the near- term outlook is for more turbulence. "People just want to take their bat and ball and go home," Mr Schulte said.

They may be right to stay away. The shocks delivered to the financial system have been sudden and sharp but the policymakers in East Asia are still reluctant to take many of the hard decisions which are needed to reform their financial markets.

The deflation of asset values will be hard to swallow and the dangers of inflation are ever present. However, to write off the world's fastest growing economies as a spent force seems a tad premature.

PROMOTED VIDEO
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
Travel
travel
Life and Style
The veteran poverty campaigner Sir Bob Geldof issues a stark challenge to emerging economies at the Melbourne HIV/Aids conference
health
Arts and Entertainment
Benedict Cumberbatch and John Malkovich talk Penguins of Madagascar at Comic-Con
comic-con 2014Cumberbatch fans banned from asking about Sherlock at Comic-Con
Arts and Entertainment
Chris Pratt stars in Guardians of the Galaxy
filmGuardians Of The Galaxy should have taken itself a bit more seriously, writes Geoffrey Macnab
News
Sir Chris Hoy won six Olympic golds - in which four events?
news
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
ebookA unique anthology of reporting and analysis of a crucial period of history
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

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Graduate Recruitment Resourcers - Banking Technologies

£18000 - £25000 per annum + OTE £40,000: SThree: Huxley Associates are looking...

Associate Recruitment Consultant - IT

£20000 - £25000 per annum + OTE £40,000: SThree: Computer Futures has been est...

Business Analyst

£300 - £350 per day: Orgtel: Job Title: Business Analyst Rate: £300 - £350 per...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform