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ASEAN looking a bit like ’97

An economic upturn always has the potential for crisis. Members of the Association of Southeast Asian Nations (ASEAN) appear to be blessed with an economic boom. But there is a feeling of deja vu as current circumstances closely resemble those on the eve of the Asian financial crisis, which started in July 1997.

The Thai capital of Bangkok is enjoying an unprecedented construction boom, with the prices of new condominiums in Wacharapon and Sai Mai districts having doubled in the past three years while new shopping centers are being built in the commercial section of Si Lom. Signs of a boom are also seen in rural cities as well, with new buildings cropping up in Chiang Mai and other areas.

As of the end of 2012, more than 8,000 Japanese corporations had advanced into markets of Thailand while their American, European, South Korea and Taiwanese counterparts are also stepping up their business activities there.

On March 19 the government of Prime Minister Yingluck Shinawatra surprised the world by announcing plans to construct four high-speed railway lines, including the 680-kilometer Bangkok-Chiang Mai line and the 450-km Bangkok-Nong Khai line, at cost of 2 trillion bahts (about ¥6.5 trillion), which is equivalent to a whacking 20 percent of the nation’s gross domestic product. Finance Minister Kittirat Na Ranong said the funds will be raised through domestic and overseas borrowing, which will be paid back over 50 years. The sum is enormous even with a simple comparison with the ¥300 billion Japan borrowed from the World Bank to build the bullet train line between Tokyo and Osaka in time for the 1964 Tokyo Olympics. Repayment of the debt ended in 1981.

In what appears to be another reckless spending spree, the Yingluck government since 2011 has been providing farmers with loans, using the seed rice it received from them as collateral. Because the assessed value of the rice was set 40 to 50 percent higher than the international market price, many farmers have chosen to default on the loans. The loan scheme has turned into a scheme of subsidies. It is feared this situation will burden the government to the tune of ¥200 billion to ¥300 billion a year.

The resulting high price of Thai rice has caused the country to fall from its position as the largest rice exporter in the world (through 2010) to a third place behind Vietnam and India.

A boom harboring potential crisis is also noticeable in Indonesia, whose gross domestic product accounts for 40 percent of ASEAN’s total GDP. The number of automobiles sold there in 2012 surpassed 1 million for the first time, and sales of home electric appliances registered an increase of 13 percent in January from the same month of 2012. After entering his second term in 2009, President Susilo Bangbang Yudhoyono is blessed with national economic stability and strong personal consumption. It’s about to make his country the undisputed ASEAN leader.

There is a downside. Indonesia recorded a trade surplus of over $20 billion in 2010 and in 2011. But it suffered a deficit of $1.626 billion in 2012 as exports fell 6.6 percent from the previous year as shipments of coal to China and manufactured goods to Europe dropped. Meanwhile, imports increased 8 percent because of growing imports of consumer goods for the wealthy and middle classes and of production equipment for foreign-owned factories operating in Indonesia.

This sharp turn indicates that Indonesia has not escaped the industrial structure typical of developing nations, where a domestic boom results in increased imports of both consumer and capital goods, which negatively affect trade balance.

To prevent overheating from consumption, the Indonesian government in June 2012 adopted new rules requiring purchasers of motorcycles — one of the biggest purchase items for salaried workers — to make a down payment equivalent to 20 to 25 percent of the price. This caused motorcycle sales in 2012 to fall 11.8 percent to 7.06 million units. It is estimated that sales this year will plummet further to about 5.5 million units.

Despite the government move, strong demand still prevails, creating “bottleneck inflation.” The consumer price index (CPI) for February rose 5.3 percent from the same month of 2012. As this is so close to the upper limit of the central bank’s inflation target of “4.5 percent give or take 1 percentage point,” the bank may turn to a tight money policy.

Vietnam has also suffered from the pressure of rising prices. With a tight money policy, the rise in CPI fell from 18.1 percent in 2011 to 9.1 percent in 2012. But this has resulted in a net decrease in investment in fixed assets while consumer spending rose by a mere 6.2 percent — quite low for a developing country.

Auto sales in 2012 fell 33 percent to fewer than 100,000 units while sales of motorcycles fell 3.7 percent to 4.23 million units due to a cap placed on their production volume and restrictions on import of parts.

In Japan, certain circles make much of Vietnam, Indonesia and the Philippines (known by the acronym “VIP”) because of their economic growth. But these countries have achieved high growth rates at the expense of trade deficits, fiscal deficits and inflation. In 2012, the fiscal deficit amounted to 2.96 percent of GDP in Vietnam, 1.62 percent in Indonesia, and 1.88 percent in Indonesia. Though these numbers are far smaller than those of Japan and other advanced nations, they are expected to balloon as these countries spend huge sums on infrastructure construction and other projects in 2013.

This tendency draws a large inflow of capital from foreign sources, reflected in the stock markets. Since the spring of 2012, benchmark stock indices in Thailand, the Philippines, Indonesia and Malaysia have continued to hit new highs. Capital inflows from overseas, trade and fiscal deficits, stock and property market bubbles, an overall construction boom — all are reminiscent of ASEAN countries on the eve of the 1997 Asian financial crisis.

To prevent recurrence of the crisis, the Chiang Mai Initiative for multilateral currency swaps among ASEAN countries, China, Hong Kong, Japan and South Korea was adopted. ASEAN countries also have tried to reduce trade deficits and accumulate foreign reserves. Although their financial stabilization mechanism has been strengthened, an onslaught by speculative funds could be massive.

Another potential threat to ASEAN nations, China and South Korea is the recent fall in the value of the Japanese yen. This again resembles the situation in 1997. At that time, the value of the yen declined from ¥94 to the dollar in 1995 to ¥108 in 1996 and to ¥120 in 1997 before the crisis.

If Japan improves its competitiveness thanks to a cheap yen, ASEAN countries will lose their competitiveness. Their exports and industrial production will decelerate, thus leading investors to withdraw funds from the countries. Thus it’s possible that a new Asian currency crisis could be touched off by the economic policy of Prime Minister Shinzo Abe, which calls for massive monetary easing to end deflation and to lower the value of the yen.

The impact of a new Asian crisis would certainly be far more serious than the previous crisis, because this time China is in the same boat as ASEAN countries. China is beset with rapidly rising wages, a rising currency (renminbi) that is weakening Chinese export competitiveness, and a rapid decrease in state-owned companies’ profits. With the trade surplus shrinking, the economic growth rate fell to 7.8 percent in 2012. To help buoy the economy, China has increased investment in infrastructure construction. The government hopes to raise the necessary funds through land sales, which will lead to higher land prices. Bubbles are coming back.

Investors fear that any burst of economic bubbles in ASEAN would cause a chain reaction involving China. This would lead to large-scale flights of capital from China. A new crisis encompassing China and ASEAN would greatly impact natural resources- exporting nations like Australia, Brazil, Canada and Russia. The shock from the new crisis would dwarf the Lehman Brothers shock of 2008.

While ASEAN countries undoubtedly have high potential for economic growth, their economies are still plagued by structural weaknesses. It is high time they became more aware of the potential risks that could stymie a promising future.

This is an abridged translation of an article from the April issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.