Speech by Deputy Prime Minister BG Lee Hsien Loong, at the Merill Lynch Asia Pacific Investor Conference 1999, London
Investor Opportunities in the Asia Pacific Region
Date: 13 Apr 1999
1 The Asian crisis has totally changed the regional landscape. For a decade until 1997, the Asian economies grew steadily and impressively. This prolonged boom had sound fundamental under-pinnings. The countries maintained high savings and investment rates. Education levels were rising. Economic policies generally became more liberal, outward oriented, and welcoming to foreign investments. This transformation was real, and not a mirage or bubble. Asia was well set to takeoff.
2. Unfortunately, the sustained boom generated a euphoria that caused countries, investors and lenders to overreach themselves. Investors and lenders poured billions into Asian countries, bidding up asset prices, underestimating country risks, and relying more on political connections than financial soundness.
3 Just as indiscriminate optimism contributed to the excesses of the boom, so did blanket pessimism exacerbate the crash. Investors and lenders did not distinguish sufficiently between different countries. When problems arose in Thailand, they stampeded for the exits across the board, creating a self-justifying panic.
4 Now that the crisis is subsiding, investors are beginning to return to Asia. They will need to be more informed and discriminating, to distinguish the opportunities from the pitfalls, in order to avoid the previous mistakes and do better. They must know the prospects for the region as a whole, as well as how specific countries are faring.
REGION AS A WHOLE
5 From the broad perspective of the whole of Asia, the signs suggest that the worst is past. A strong US economy makes a global recession unlikely. Most hot money has already fled the region in the initial panic, which limits the extent of any further contagion. Sovereign risk premiums in Asia have come down, reflecting less aversion to risk and more realistic assessments of prospects.
6 However, each country's recovery depends not just on the external backdrop, but more importantly on how it tackles its own problems. Asian countries differ significantly in the problems they face, and in their policy responses. Some will recover sooner than others.
7 China's economic health has a major effect on the whole region. China's reforms and opening up were a contributing factor in the Asian boom. Confidence in the region, and attitudes of outside investors towards the region, would be severely shaken if China were to become politically and economically unstable.
8 Had China's economy stalled last year, during the most difficult phase of the crisis, and China been forced to devalue the renminbi, it would almost certainly have triggered off a new round of contagion. Fortunately this did not happen. China continued to grow, albeit more slowly. This year China's economy continues to decelerate, but it is still growing.
9 China's top leaders have staked their personal word on China not devaluing the renminbi. Nor is there any likelihood that China will go back on its market reforms. The Chinese economy does face daunting structural problems. The NPLs in their banking sector are much larger than NPLs in all the Asean countries put together. The state-owned enterprises need structural reform, which will put millions out of work and cause difficult social problems.
10 But China has a strong economic team under Premier Zhu Rongji. It has struck a delicate balance between pressing on with reforms and managing the social and political side effects.
11 The fact that China made a serious effort to settle with the US its terms for joining the WTO, after 13 years of negotiations, is a good sign. Regrettably, domestic political considerations in the US prevented a deal from being struck during Premier Zhu Rongji's visit. This failure is bound to cause a loss of momentum, but I hope it will not lead to recriminations and frictions which set back the process, and that the political climate in the US will allow the Clinton Administration finally to reach an agreement with China soon.
SOUTH KOREA AND THAILAND
12 Thailand and South Korea are currently front runners on the path to recovery. In both countries the need for reform is acknowledged and endorsed at the highest levels of government. Both have consulted closely with the IMF in setting economic policies. Both are tackling not only short term problems like debt rescheduling, but longer term reforms like the industrial structure of the chaebols in Korea, and bankruptcy legislation in Thailand. When I visited Thailand a fortnight ago, I found their ministers resolute in tackling their problems, and clear about what needed to be done.
13 These measures are yielding fruit. Flows of foreign direct investment to Thailand and Korea have resumed. Ratings agencies have upgraded their sovereign and foreign currency debt ratings. Currencies have stabilised for more than a year and interest rates are down to pre-crisis levels.
14 However, both countries still have much more to do, to complete the restructuring and lay the basis for long term growth. Corporate restructuring is not just a management issue, but a social one. It will profoundly change the way the country's whole business and even political elite operates. Recapitalising Thai and Korean banks involves not just finding new money, but accepting that banks that have been founded, owned and managed by Thai and Korean families, and are closely linked to the establishment, will now come under foreign control.
15 These are not light or straightforward changes for any country. It is unlikely that Asian countries will all become textbook models of openness, transparency, and laissez faire. Few Western countries attain this ideal state. Asian societies will retain their distinctiveness. Their cultures, values, and political norms will differ both from each other and from Western societies. But Asian economies can and must become more open and transparent than before. As one Thai official is reported to have said, Thailand will not become like Germany, but it can become like Spain.
16 Malaysia has taken its own path. Overall its economy is in much better shape than the other countries. Its problems are also not quite the same, because although Malaysian companies had borrowed excessively, they had done so from domestic, not external, sources.
17 Malaysian leaders are convinced that the country's problems were not caused by any policy errors or inherent weaknesses, but by hedge funds and speculators, who attacked the currency and stock markets in order to reap immoral profits. Its recovery strategy proceeded from this premise. Malaysia rejected the IMF orthodoxy and went its own way by imposing capital controls. It hoped thereby to hinder speculative attacks, block capital flight, shield the economy from volatile global capital markets, and rescue companies and banks in distress.
18 Malaysia has bought itself time to tackle its problems by imposing capital controls. Its government has been working out the bad assets of the banks. The economy is stabilising, with strong balance of payments surpluses and growing foreign reserves. Analysts' sentiments have become more positive. But some analysts remain sceptical whether the problems have been solved or merely postponed, as the cost of recapitalising banks and companies will be high. Given these calmer conditions, Malaysia has partially relaxed its capital controls.
19 Indonesia faces the most daunting difficulties. Its challenges are not just economic, but also social and political. There are ethnic, religious and separatist tensions and riots. The violence has occurred not only in the provinces - East Timor, in the Maluku islands, in West Kalimantan and Aceh - but also in Java, and even in Jakarta.
20 Indonesia's government has to establish law and order, meet the basic needs of the population for food and safety, and respond to urgent political pressures to settle old scores and make a fresh beginning. It must restore the confidence of investors, both domestic and foreign, that their investments are welcome and their personal safety will not be at risk. Only then can it get the economy restarted and the country gradually put right.
21 Despite these complex problems, Indonesia is adhering to its IMF reform programme. Loan disbursements are on schedule, the banking reform programme has been formalised and corporate debt is being restructured.
22 Political and social stability are prerequisites for economic recovery. Indonesia is due to hold elections in June and November to choose a new President. Free and fair elections can bring forth a government that has the legitimacy and support to carry out major reforms. The new leadership will have many urgent priorities to attend to. Singapore wishes Indonesia well and hopes that the election will result in a strong and pragmatic government with the mandate to rebuild the country.
23 Given our close trade and investment links with the region, Singapore could hardly be untouched by the typhoon. Our exports lost competitiveness, because our neighbours' currencies depreciated sharply against the Singapore dollar. Retrenchments shot up. Tourism and commerce were badly hit. Growth fell from 8% in 1997 to 1.5% last year.
24 But Singapore has been less badly hit than our neighbours, because our fundamentals were sound. We too had a property bubble, but fortunately we pricked it just in time. Our companies had not borrowed excessively. Our banks were tightly supervised and well capitalised.
25 Our immediate priority was to lower business costs and strengthen our competitiveness. Last November the government implemented a major cost-cutting package. We reduced government taxes, rentals and charges. We also cut wage costs by 15%, by reducing contributions to the CPF - the government-run compulsory savings scheme - as well as variable bonuses that companies had built into workers' take home pay during good years.
26 These measures will take time to show results, but the economy seems to be bottoming out. There have been fewer retrenchments this year. The electronics industry is picking up. Exports increased in March, for the first time in several months. Overall we should have no difficulty achieving the -1% to +1% growth that MTI has forecast for the year. But despite this we will have to persevere with the measures taken, as the economy has far from fully recovered and the storm is not yet over.
27 To complement these short term measures, we are actively developing long term capabilities. We are emphasising worker training and education, investing in economic infrastructure, promoting technopreneurship and a knowledge-based economy, and liberalising the financial sector. These strategies will help us to prosper with the region again, when it emerges from the crisis.
28 One area I have been personally involved in is the liberalisation of the financial sector. Over the last 18 months we have changed policies to give fund management companies greater access to domestic funds, develop the debt market, demutualise and merge the exchanges, overhaul corporate governance, and introduce risk-focused supervision and inspection of financial institutions.
29 We have also announced our intention to allow greater foreign competition in the domestic banking sector. We are now in the midst of working out the actual programme. Because this is the most far reaching and delicate of all our changes, we are taking some time to consult widely, weigh the options and risks, and judge the extent and timing of liberalisation.
30 While taking strong economic measures, we have not neglected to strengthen our social cohesion. Without close mutual understanding and cooperation between government, employers and workers, it would have been difficult, if not impossible, to take the steps that we did. We have persuaded Singaporeans to accept short-term pains for longer-term gains, but we will continue to make sure that the lower income groups do not bear a disproportionate burden in this crisis.
31 Our overall approach continues to be to rely on market forces, allow free capital flows, encourage foreign investments, and plug ourselves into the global economy. We seek to distinguish ourselves from the rest of the region, strengthen our economic links with the developed economies, and participate in the region's recovery as countries overcome their problems.
OUTLOOK AND OPPORTUNITIES
32 When the crisis first struck, people thought it was the end of Asia. Then when it spread to other emerging markets, some thought it was the end of the world economy. But it was neither.
33 Asia will recover. Not immediately, and not all at once; but as countries rebuild and put things right, recovery will come. The fundamentals which previously supported two decades of high growth in Asia have not disappeared - a sturdy work ethic, skilled and disciplined workforces, and an entrepreneurial culture. In time, these strengths will enable the countries to grow and progress again.
34 For the discriminating investor, the bottom of a cycle offers many opportunities. Prices are down, and fundamentally sound companies facing difficulties are looking for strategic alliances. Also many Asian governments have recognised the need for foreign equity, and relaxed restrictions on foreign investments.
35 Not all investment prospects are yet ripe to be harvested. Sellers take some time to reconcile themselves to the new reality, and accept that their assets are now worth much less than before the crisis. Patience is therefore essential.
36 But there are already possibilities. Some Japanese, European and US companies are beginning to move in the region. Thus, British Telecom recently paid RM1.8 billion for a 33.3 percent stake in a private telecom company, Binariang Bhd, in Malaysia. Singapore companies are cautiously investing too. A Singapore consortium, which includes Belgian firm Tractebel, will invest US$1.2 billion to help build a 640 km pipeline from the Indonesian West Natuna gas fields to Singapore. The Development Bank of Singapore purchased a majority stake in Thai Danu Bank last year, though DBS has acknowledged that in retrospect it might have done some things differently.
37 I asked one European banker recently what his bank would do. He said that the bank had been in Asia for one hundred years, and had seen far worse upheavals. It would take the latest problems in its stride, and wait the storm out. It would not opt out from the region. Other investors may not have such a long history in Asia, but for them too taking a long and informed view will be well worthwhile.