Blessed Are the Cash-Hoarders
It was eerily reminiscent of the dark days of Asia’s financial crisis in 1997.
The impact and aftershocks from the worsening financial turmoil in the United States reached the shores of Southeast Asia a day after US
Federal Reserve announced $85-billion rescue plan to save insurance giant American International Group (AIG) following the Lehman Brothers’ bankruptcy a few days earlier last September.
In Singapore, hundreds of worried customers rushed to a local American International Assurance office to redeem policies amid fears the US insurance giant could be the next big financial firm to tumble.
As queues formed outside AIA’s offices, with some clients seeking to end their policies. The city-state’s central bank, known officially as the Monetary Authority of Singapore (MAS) came out to reassure policyholders saying the AIA had sufficient assets in its insurance funds to meet its liabilities.
However the jittery clients continued to line up outside the AIG offices, hoping to terminate their policies, ignoring the full-page advertisement in local daily the Straits Times in which the AIG unit said it has “more than sufficient capital and reserves to meet all obligations.”
The Bank of Thailand meanwhile had to clarify to the clients of AIG Retail Bank (Thailand) that the Thai unit of the trouble US firm had a separate capital fund from that of its parent and its business transactions were not related to those of the parent group.
That reassurance came a bit late as some depositors had already withdrawn funds from the bank. However, commercial banks in Thailand took a blow due to their exposures to investments in Lehman Brothers which went under.
Among the worst-hit in Thailand by the Lehman Brothers bankruptcy is Bangkok Bank, Thailand’s top lender, which holds 3.5 billion baht ($101 million) in senior, unsecured bonds issued by the US firm. Also taking the brunt were second-ranked Krung Thai Bank and fifth-ranked Bank of Ayudhya.
In Indonesia, the upheaval on Wall Street prompted the central bank to cut one of its rates at which it lends to commercial banks, fearing the flow of funds through the global financial system will dry up.
Bank Indonesia also offered to pay more on deposits that banks place with it, offering local lenders extra help at a time when market were gyrating after the collapse of Lehman Brothers, the takeover of crisis-hit Merril Lynch and funding troubles at AIG.
The other two key markets in Southeast Asia – Malaysia and the Philippines – were much better off thanks to limited or no exposure to the troubled banks in the US.
The lesson has probably been learnt and most bankers in the region, with painful memories of the 1997 crisis, prefer to lend cautiously, avoiding the kinds of high-risk, high-return bets that they cannot manage.
A culture of risk aversion underscores the differences between the US and Asian financial markets. Regulators are more hawkish on monitoring banks, and companies are less likely to pile on debt so soon after the last crisis, which led to waves of bankruptcies.
While the global economic slowdown is bound to crimp the region’s export-led growth, its bankers can breathe more easily knowing that they’re not saddled with toxic assets. The cash-hoarding banks, and governments, appear to be in good stead so far as US banks try to dig out of a hole.
… Bad Loans Are ‘Forever’
Research houses and rating agencies meanwhile have warned financial institutions across Asia of significant rise in soured loans in 2009 as the global economy stutters, resulting from a string of failures at small-sized manufacturers and a cooling property market. Analysts say that policy-makers pushing for banks to lend to smaller firms could undermine banks’ bottom line, despite rescue packages from government and the central bank to shore up bank liquidity. Economic downturn will reveal any weakness, mismanagement and poor credit quality.
The Return of the Bad Loans
Policy makers in Southeast Asia are walking a tight rope as the impact from the global financial crisis threatens to go from bad to worse. Compared with other emerging economies in South America, Eastern Europe and Africa, there is greater room to manoeuvre here in Asean, thanks to 1997 economic crisis that forced the governments across the region to strengthen fundamentals in banking regulations, foreign exchange systems, fiscal stability and foreign reserves.
There is no room for complacency, though.
The sharp global economic downturn in Asean’s export destinations, the US, EU, Japan and most recent China, has already started to take its toll on most countries in the region. When shipments tumble, output drop, factories begin to grind to a halt and businesses resort to retrenchment. Though not as rampant as it was ten years ago, business closures and job losses are mounting as credit crunch grip a spectrum of industries.
This in turn put pressure on the financial institutions which face a dilemma of rising non-performing loans and declining growth profit while authorities are pushing them to keep the credit flow and get businesses going.
Unified by the common danger, financial authorities in Southeast Asia find a good opportunity to come together and pool their resources to fend off the impact.
On the sidelines of the Asia Europe Meeting in Beijing last November, the ten-nation Association of Southeast Asia (Asean) and the three East Asia partners – China, Korea and Japan, unveiled the $80-billion Asian Monetray Fund. To be created by the end of June 2009, the "Asean Plus Three" fund will supersede the Chiang Mai Initiative, which came into being in 2000 in the wake of the 1997 Asian financial crisis to ease mainly bilateral currency swaps.
It was in 2006 that the countries began talks on transforming the Chiang Mai Initiative into a more powerful and multilateral reserve pooling mechanism. Last May they reached preliminary agreement to create a foreign exchange reserve pool of $80 billion. The initial agreement called for South Korea, Japan and China to provide 80 percent or $64 billion, with Asean members providing the remaining $16 billion.
The initial focus was squarely on liquidity even though Asian banks were not exposed to toxic assets like Western financial institutions.
This was followed by stimulus packages as the second wave of the crisis reached ashore. In November, Singapore entered recession with much of Southeast Asia’s export dependent economies most likely to follow.
With US demand unlikely to return until 2010 and Europe having only just entered the initial phase of the crisis, it is critical for Asean to shift its market focus from exports to domestic demand and services, the sooner the better. It is going to be tough dealing with economic downturn, to be followed by a wave of increase in loan defaults.