Cooling U.S. Economy Spells Trouble for Asia

HONG KONG —  Barely three years after Asia began climbing out of its financial crisis, the region’s economies once again seem headed for trouble.

While no one is predicting a repeat of the dramatic crash of 1997, the picture is not pretty. Steep stock market declines, weakening currencies and mounting political uncertainties in several countries all now drag on Asia’s industrial growth.

Lingering bad debt from the 1997 crisis--a debt equal to 20% of the region’s total output--merely adds to the difficulties.

But Asia’s most serious potential problem brews over the horizon, outside the region: the slowdown of the U.S. economy after nearly a decade of unprecedented growth. That spells trouble in capital letters for a part of the world where prosperity lives--or dies--on the ability to export aggressively.

Any significant cutback in U.S. demand for Asian imports, especially for information technology products such as semiconductors and other computer-related hardware, would seriously affect the region as a whole, analysts on both sides of the Pacific believe.

Recent evidence indicates that is now starting to happen. U.S. computer and chip giants such as Dell, Intel and Apple have reported sales well below projections or have scaled back their estimates for 2001. Gateway, the fourth-largest U.S. computer manufacturer, followed suit last week with a blunt warning that its fourth-quarter sales are falling far short of earlier estimates.

Analysts note that companies that over-ordered components in expectation of stronger demand are likely to cut back even more sharply.

With global growth of computer sales slumping much more than U.S. experts had predicted, the prospects for maintaining demand for components seem increasingly bleak.

As the dizzying growth in technology cools, so too does the need for all those electronic products from Asia.

“Retailers are cautious, and that will make things frost over in Asia,” said Stephen Dube of Wasserstein Perella Securities in New York.

Some Countries Especially Vulnerable

Countries such as Singapore, Taiwan, Malaysia and South Korea, all with strong high-tech industrial sectors, are especially vulnerable to such a slowdown. In South Korea, for example, information technology products accounted for nearly two-thirds of the country’s third-quarter growth in exports.

Although political instability in the region has played a role in weakening the currencies of some Asian nations, financial analysts believe recent sharp declines in both the South Korean won and the new Taiwan dollar are at least partly intentional as both governments fight to make their exports cheaper, and thus more attractive, to a shrinking number of buyers.

“Asia is facing a second shock that, unlike the crisis three years ago, is an [external] blow to . . . the region,” concluded Geoffrey Barker, chief international economist at Hongkong & Shanghai Banking Corp. in Hong Kong. He said the bank’s latest forecast for Asia’s exports “points to a significant deceleration in growth within the next three months, and overseas leading indicators suggest rapid deterioration thereafter.”

The stakes are high for the United States, and especially California. In today’s closely intertwined world economy, a weakening in Asia also means a smaller appetite for American products--notably technology goods, of which California is a major supplier.

Although California officials reported last week that the state’s top 26 export markets all showed positive growth during the first nine months of the year--with 24 of them posting double-digit gains--an Asian slowdown would mean a very different picture for next year.

The impact of such a change on the state’s economy would be significant: California’s exports to Asia’s 10 largest economies added up to $40.6 billion over the first nine months of this year--equal to 43% of the state’s total.

Adding to Asia’s gloom, the world’s two biggest economies--the United States and Japan--have both adjusted growth prospects downward in recent days.

The U.S. Commerce Department on Wednesday revised the country’s third-quarter growth from an estimated 2.7% to 2.4%--the lowest increase in four years. On the same day, Japan reported industrial output for October rose at an anemic 1.5%, less than half the level expected.

For Asia’s economies, none of this news is good.

“We’re in the process of revising our forecasts [downward] now,” declared Dong Tao, senior regional economist for Credit Suisse First Boston in Hong Kong.

Some analysts now predict dramatic growth declines for next year in at least several Asian economies.

Hongkong & Shanghai Banking, for example, estimates Hong Kong’s gross domestic product growth will sink from nearly 10% this year to below 4% in 2001; South Korea’s growth will be cut in half, from 8% to 4% over the same period; and Singapore’s will fall by nearly that much--from 9% to 5%. The region’s weaker economies will also suffer, with Indonesia’s output growth falling from an estimated 4% this year to 2.5% next, and the Philippines from 3.3% to just 2% in 2001.

Not everyone believes Asia’s decline will be that steep.

“Everyone’s developing their crash scenarios, but as long as data still points to a ‘soft landing’ for the U.S. economy, the region is going to come through this without major damage,” said Tim Condon, chief economist in Asia for ING Barings.

Most agree that only China, with its huge domestic market in the midst of transforming to a more open, Western-style economy, will continue to perform strongly through the first half of next year. But even China’s buoyant domestic demand and the expected lowering of trade barriers that will come with Beijing’s imminent entry to the World Trade Organization are not likely to be enough to override the impact of major slowdowns elsewhere, analysts believe.

Political instability in several Asian countries has dealt a triple blow to local economies. It has weakened confidence among local investors already shaken by the downturn of world markets that began last spring. It has dampened the appetite for foreign investment, long considered a crucial ingredient for growth. And it has sharply diminished the prospects that governments will risk what little political capital they have left to push unpopular reform measures to modernize banking systems and reduce the mountains of bad debt that remain from the 1997 crisis.

Only with the elimination of that debt can enough money be available to fuel the next cycle of Asian growth when it comes, analysts say.

Indonesia Lurches From Crisis to Crisis

Indonesia, Southeast Asia’s biggest country, is one example of the turmoil.

The Jakarta equities market is off by nearly 40% since the start of the year and the nation’s currency, the rupiah, is down 20% as President Abdurrahman Wahid searches for some semblance of stability. Among his latest challenges: reviving confidence in the country’s central bank, accused of widespread misuse of emergency international loan funds. The bank’s acting governor and four of his deputies resigned two weeks ago; its governor, Syahril Sabirin, accused of corruption, languishes in detention. There are no obvious replacements in sight.

As Wahid’s government lurches from one crisis to another, nearly $1.5 billion in private foreign capital fled the country during the first half of this year. Only strong harvests and the country’s improved oil revenue have prevented greater economic trouble, analysts believe.

In the Philippines, the economy has been slowed by fallout from the impeachment of flamboyant President Joseph Estrada amid accusations that he pocketed more than $10 million in gambling and tobacco taxes. Much as in Indonesia, that fallout has included a plunging currency, a stock market in the doldrums and deflated investor confidence.

The influx of foreign capital has slowed to a trickle--from a peak of $1.5 billion in 1998 to only $118 million during the first half of this year.

In both the Philippines and Taiwan, where President Chen Shui-bian has been under such attack that the opposition has launched a recall campaign against him, the business communities have tried to defuse the atmosphere, albeit with mixed results.

In late November, a group of leading Taiwanese businessmen headed by the formidable chairman of Formosa Plastics Group, Wang Yung-ching, issued a strongly worded public statement aimed at politicians of all stripes that boiled down to just three words: Knock it off. A perceptible decline in rhetoric has followed.

With less success, a group of leading business executives joined a protest of destitute provincial farmers in Manila last month, calling on Estrada to resign before the scheduled start of his trial in the Philippine Senate this week.

Elsewhere, political problems are less dramatic, yet still troubling. In Thailand, for example, Prime Minister Chuan Leekpai’s government has worked hard to reduce corruption and the huge overhang of bad loans that still amount to nearly a third of outstanding debt in the country, but observers believe he has exhausted his political capital.

Despite the chaotic conditions in the region, some analysts see a positive dimension--that in each country, the leaders are democratically elected and, in each case, their main opponents are acting within the rule of law.

“In the short term, it looks awful, and there will be pain,” noted Reuban Mondejar, a respected City University of Hong Kong academic.

“But if this is a price for more stable governance for Asia during the next cycle of growth, then there will be real benefits out of all this for the longer term.”

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Times staff writer Joseph Menn in San Francisco contributed to this report.

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Trouble Ahead

Slumping U.S. demand for computers and other high-tech gear is now being reflected in reduced orders for electronic products from Asia, whose economic recovery has relied heavily on exports to the American tech market. U.S. electronics orders from Taiwan, South Korea and Singapore:

Year-to-year percentage changes in three-month moving average:

Taiwan/South Korea/Singapore exports

U.S. electronics orders

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Source: HongKong & Shanghai Banking Corp.