EAST ASIA: AFTER THE CRISIS
I will give a broad sketch of the economic developments in East Asia, and then take questions.
East Asia's Recovery
2 Economic prospects have brightened across the globe. Your economy and the rest of Latin America are rebounding from the 1999 "Samba" crisis. Similarly in Asia, the financial crisis of 1997-98 is behind us now. The economic recession, though deep and painful, was short-lived. In 1999, East Asian economies (Malaysia, Indonesia, Philippines, Singapore, Thailand, China, Hong Kong, Korea and Taiwan) expanded by an average of 5%, from minus 3% the year before. In 2000, they are forecast to grow by an average of about 7%.
3 Asia's recovery is not driven purely by cyclical factors. I am bullish about the longer-term prospects for the region. Here are some of the reasons.
Growth Broadening to Domestic Demand and Intra-Regional Trade
4 First, Asia's recovery was initially dependent on fiscal spending, the global electronics boom, and strong demand from the US and EU. Now, it is broadening to private domestic demand and intra-regional trade. For example, exports within East Asia (excluding Japan) rose by a significant 32% in the first quarter of 2000.
Financial and Corporate Reforms
5 Second, during the crisis, many Asian governments pushed ahead with reform in their financial and corporate sectors. This is a key reason behind the return of investors (both foreign and domestic), the stability in financial markets and the revival in consumer spending.
6 Banking restructuring in Korea and Malaysia, for example, has moved into the mature phases. The bulk of the recapitalisation and transfer of bad loans is almost complete. The focus this year will shift to the disposal and restructuring of non-performing loans accumulated in the government-run asset management companies. Progress has been slower in Thailand because bank recapitalisation has largely been led by the private sector.
Japan's Recovery
7 Another reason for my optimism for East Asia is Japan. Japan's economy is turning around. Japan's trade, investment and tourist flows to East Asia suggest that its economy is getting stronger. Since early 1999, East Asia has been enjoying rising Japanese foreign direct investment (FDI) flows, rising Japanese imports of East Asian goods, and an influx of Japanese tourists.
8 Japan is restructuring to secure a sustainable recovery. The lifetime employment system is being replaced by a more flexible labour market. Deregulation and the Financial Big Bang have caused merger and acquisition activities to surge 7.6 times in 1999 to a record high of US$150 billion. FDI inflows rose 250%. The combined operating profits of Japanese enterprises rose 16% in 1999 despite falling sales, indicating significant cost cutting.
China's Structural Turnaround
9 Fourth, China is continuing to open up. It is reaping the fruits of the last twenty years of restructuring. The more dynamic private sector is displacing the inefficient state-owned enterprises (SOEs). In 1998, privately-owned firms produced about 40% of industrial output, up from a negligible 0.5% in 1980. Many SOEs, on the other hand, have been closed, merged or sold to private owners. Those that survived are more profitable and efficient. Two years ago, China had over 6,000 key SOEs that were bleeding losses. By June 2000, more than half of them had turned in profits.
10 When China enters the WTO (World Trade Organisation), global competition will spur an even faster pace of restructuring. It will also open up abundant opportunities for businesses, especially in the areas of banking, insurance, securities, construction, telecommunication and distribution.
Liberalisation and Deregulation
11 Fifth, East Asian governments have liberalised and deregulated their economies aggressively in recent times, especially Korea and Taiwan. They now welcome foreign investors to take a stake in their economies. Korea has lifted foreign ownership limits in most industries. Taiwan recently raised the foreign ownership ceiling on listed companies from 15% to 50%. This ceiling, furthermore, is expected to be completely removed in 2001.
12 Singapore is one of the most open economies in the world. Parts of our services sector, like banking and telecommunications, which were partially protected, are now liberalised. Ownership limits for banks and telecommunication companies have been lifted. The domestic telecommunications market was fully opened to foreign participation from 1 April this year. Foreign banks have been granted greater access to our domestic market. Foreign fund managers now have greater access to our large pool of domestic savings.
Embracing the New Economy
13 Last but not least, most Asian countries are busy preparing themselves for the opportunities of the New Economy. Asian governments, for example, have invested heavily in technology parks, such as Singapore's Science Park, Hong Kong's (HK$13 billion) Cyberport project, Malaysia's Multimedia Supercorridor and India's Software Technology Park. More recently, Thailand announced plans to build a (US$1 billion) Cybercity.
14 Asian governments are also developing their domestic capital markets. This will deepen their financial sectors and ensure the availability of funds for New Economy businesses. Many Asian countries have created new stock exchanges with a technology focus. Malaysia's MESDAQ, Hong Kong's GEM and Japan's MOTHERS have been established to provide venture capital funding to start-ups.
Risks to Sustainable Growth
15 For these reasons that I have outlined, I am optimistic about the medium and long term prospects for East Asia.
16 That said, I must caution that there are some risks that could cloud the otherwise bright horizon.
17 Indonesia, the largest country in ASEAN, remains a key uncertainty. The political situation is still evolving. There are secessionist tendencies in some outlying provinces. The pace of financial and corporate restructuring has also been slow. It has, for example, only disposed of less than 1% of its holdings of non-performing loans.[1]
18 As a result, foreign investors have not returned to Indonesia. If Indonesia stumbles, there would be severe consequences for the region.
19 The China-Taiwan cross-strait situation is another potential flash point. How the two sides handle the One-China issue will have an impact on the stability of the entire region.
20 In Southeast Asia, we are concerned that the focus on domestic restructuring, the political uncertainty in some of the countries, and a possible backlash against globalisation, may distract governments from regional economic integration. But Singapore and other members of ASEAN are working hard to ensure that our efforts to form an ASEAN Free Trade Area remain on track.
Conclusion
21 Overall, and despite these pockets of concern, I am optimistic about the longer-term prospects for the region. Asia has confounded its skeptics by staging a "V" shape recovery. True, a large part of the economic rebound may have been the effect of a cyclical recovery aided by a favourable external environment. However, the strong economic recovery also reflects the willingness of many Asian countries to undertake painful but necessary economic and institutional restructuring. This has helped to restore investor confidence and led to the return of foreign capital into the region.
22 East Asia's fundamental strengths - high savings rates and an enterprising, industrious, and well-educated population - have also helped the region's rebound. These same strengths, I believe, will ensure a more prosperous East Asia in the years to come.
23 East Asia will therefore present many opportunities for investors in Latin America. East Asia is a vast market, comprising 1.8 billion consumers and with a nominal GDP totalling US$6.7 trillion. [2]
24 There is, in fact, much room to deepen linkages between our two regions. In 1999, only 6% of Latin America's exports went to East Asia, while only 3% of East Asia's exports were sold to Latin America. There is also scope for companies in East Asia and Latin America to diversify their FDI into each other's markets. In 1998, three-quarters of Latin America's outward direct investments went into other countries in Latin America.[3] Investments into Asia were negligible.
25 It is for this reason that I had proposed the East Asia-Latin America Forum (EALAF), which held its inauguration meeting in September last year. I hope the Forum will help kick-start the process of greater exchange and co-operation between our two regions. This will be to our mutual benefit.
26 I look forward to more intense economic ties between our two regions, and between Brazil and Singapore, in the coming years.
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Footnotes:
[1] Figures as at 21 July 2000. Source: The Indonesian Bank Restructuring Agency (IBRA) Monthly Report, August 2000.
[2] Figures for 1999. Includes Japan, China, Taiwan, South Korea, Hong Kong, Thailand, Philippines, Malaysia, Indonesia, and Singapore.
[3] Source: United Nations Conference on Trade and Development, "World Investment Report 1999: Foreign Direct Investment and the Challenge of Development", page 66.