|By Rohit Bajoria
Few of us can be unaware of the financial crisis which is rocketing round the world and which is commonly known as the ‘credit crunch’. Situations of near panic have prevailed in the main financial centers of Europe and America and have spread across many financial institutions in Asia.
What is at stake? Why, the prosperity of the last decade has suddenly been threatened and what can corporates/individuals do to sail through it?
As the financial situation globally continues to worsen, the importance of sound credit management has risen exponentially and has become a crucial cog in the wheel of individuals and business alike.
Loan volumes in Asia have been going down since the beginning of 2008 following the credit crunch in the global financial markets. The size of the deals has also been going down.
The economic malaise being felt across the world should put to rest the notion of ‘decoupling’. The world’s economies are inextricably linked. The reluctance of US retailers to commit to new orders, due to the credit squeeze and weak consumer demand, has created a crisis situation for Asian manufacturers and exporters.
Asean and Hong Kong exporters will face extremely difficult times ahead. While the weak external demand is very similar to that during the Asian Currency Crisis, the domestic environment in Hong Kong is very different. Interest costs are much lower than they were a decade ago.
One-month Hibor is below 2 percent, as compared to an average of 7.8 percent in 1998. Also, while we then had to deal with the popping of the property bubble, our domestic economy is now in healthier form.
Companies have been hurt by tighter credit. Banks are reluctant to lend, even when it comes to providing things as simple as letters of credit for international trade or bridging loans to financially healthy firms.
This is forcing companies to seek “small-ticket” solutions such as equipment leasing and renting rather than owning facilities – as opposed to big-ticket solutions like capital expenditure and opening new subsidiaries.
One final factor is the incredible volatility that we have seen in factor costs in 2008 – such as the price of oil and other raw materials as well as foreign exchange rates. This has frightened the business sector and made most companies far more conservative when it comes to spending, preferring to hoard cash as far as possible.
The Asia-Pacific region is characterised by multiple currencies, varied banking practices, and complex legal and regulatory requirements.
It is without doubt that international reserves in this region grew rapidly after the 1997 Asian crisis but of late we noticed quite a significant outflow particularly after the collapse of Lehman Brothers. Reserves declined by approximately 20 percent for Korea, 17 percent for Malaysia, 14 percent for Indonesia and 7 percent for Thailand since March 2008. A significant downside risk to these indicators going forward exists in the form of a slowdown in the exports.
The current account and debt servicing capacity backdrop has somewhat improved from the levels seen during the previous crisis. In 1996, a year prior to the Asian crisis blow out, Thailand had a current account deficit of almost 8.0 percent as percentage of GDP, followed by the Philippines, Malaysia and Korea with the same reading of 4.6 percent, 4.4 percent and 4.1 percent respectively.
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