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JULY 14, 2000 VOL. 26 NO. 27 | SEARCH ASIAWEEK

Asia's Memory Lapse
Three years after the Crisis hit, the region is forgetting the hard lessons dished out. Recovery is now at risk
By ALEJANDRO REYES




In 1992 Joyce Boutique opened its much-hyped flagship store in a brand-new Hong Kong office block. Tai-tais decked in baubles and taipans in Armani merrily sipped champagne and nibbled on cruditEs as they paraded around the city's newest temple to upwardly mobile fashion. In a hasty expansion in the mid-1990s, the family-controlled company opened some 40 branches in South Korea, the Philippines, Taiwan and Thailand.

Those days of excess are now a distant memory. The Asian Economic Crisis that began three years ago quickly rendered the Joyce lifestyle passe. The financial turmoil and a retail slump at home forced the high-fashion chain — named after style maven and house matriarch Joyce Ma — to close all overseas stores except those in Taiwan. In Hong Kong, the management suite moved from the tony Central district to a grimy industrial estate. The main outlet and other shops were relocated to less pricey premises.

The cost-cutting came too late. Losses mounted: $26.6 million in 1998 and $11.3 million last year. To raise cash, the Mas trimmed their stake, selling 20% to an Italian group. But two other deals fell through. Then Joyce lost its Armani, Gucci and Prada franchises. Armani alone generated a third of the company's 1999 gross.

Recently, a white knight rode in to rescue the damsel in distress. Wheelock & Co., which owns upmarket department store chain Lane Crawford, will buy 51.3% of Joyce for $26.3 million, halving the Ma family stake to 23%. Restructuring goes on. Joyce has started a younger, more affordable line called adhoc. But Internet shopping plans are on hold for lack of funds. Will Joyce regain its glitz and glory? Not for a while.

Ditto for East Asia. In the past two years, it seems to have pulled off a second economic miracle. Despite Japan's slump, the region is again the world's fastest-growing. Even basket-case Indonesia managed 0.3% growth in 1999 and could expand 3.8% this year, according to London's Consensus Economics poll (see report page 62). Propelling Asia's rapid recovery are rising reserves as imports shriveled and exports to the West, especially electronics, skyrocketed; stable currencies, lower interest rates, and higher fiscal spending. All-important confidence is up too, even in Japan, where the central bank's latest "tankan" index of business sentiment leapt from minus-9 in March to plus-3 in June, the sixth straight quarterly rise.

So what's the catch? Well, all the good numbers are making many firms and governments forget the tough lessons of the Crisis. Like how debt needs to be slashed to enable banks and companies to grow, be profitable and survive shocks. Why corruption and cronyism should no longer be tolerated. And the folly of failing to invest in education and infrastructure. On all these fronts, much of post-Crisis Asia is dragging its feet or simply backsliding. Don't look now, but if the global economy turns sour, the region's memory lapse, especially its slow action on debt, could make confidence a hazy remembrance — and the Crisis a recurring nightmare.

If that happens, "the effects could be severe," warns World Bank senior economist Richard Newfarmer, who led the team that released a major study of East Asia's recovery in June. "The potential [for another crisis], which now seems quite low, is sufficient for the region to firmly follow the path of reform." Adds the bank's chief economist for East Asia Kawai Masahiro: "When the recovery appears sustainable, financial sector and corporate restructuring may be [left] just half done, and problems may be carried forward into the future."

Even in South Korea, the poster nation for the recovery, there is uneasiness. "Investors see artificial hurdles in the flow of funds," frets Kim Ju Hyung, chief economist for LG Investment & Securities Co. in Seoul. Reason: banks won't lend. Elsewhere in Asia, loan growth has also been minimal. No prizes for guessing why: with all the bad debt on bank and company balance sheets, few are in any mood for major credit expansion. What's worse, many firms just don't pay, especially where poor bankruptcy laws and corruptible courts prevent the seizure of debtors' assets. Many banks, moreover, still lack proper credit analysis.

In Thailand, where the Crisis began, "the economy hasn't really come around and won't until banks and property companies get sorted out," says a Thai mergers and acquisitions expert. Many debt-ridden firms are like walking dead, with little incentive to work things out. Some even plan to go deeper into the red. Thai developer Tanayong wants to borrow capital for its only valuable asset, the much-delayed BTS Skytrain which began operating in December. The rail service needs to expand its route network to attract more riders, who now number barely a third of the 600,000-a-day target. Vikas Kawatra, senior investment analyst at Kim Eng Securities, thinks Tanayong may yet get its money. "There are always banks looking to invest in infrastructure," he says. Maybe not, though, if a borrower is sunk in debts and depreciated properties.

Besides having faulty laws and courts, governments block debt workouts by forgiving debts of companies deemed too big or prestigious to fail. Then other firms and banks hold out for the same relief. Last week Tokyo said it would write off nearly $1 billion in loans to the Sogo department-store chain, something that troubled contractors like Hazama also want. Warns Standard & Poor's credit-rating agency: "The implication that Japan's government will intercede, in some cases, to protect private firms with very little prospect of returning to health undermines incentives for lenders to resolve bad debt."

Indonesia is also in a forgiving mood. For government-owned aircraft manufacturer IPTN, the grand ambitions have faded and the bills are due (see story page 54). With state aid gone, thanks to IMF objections, the company can't pay its $375 million in debt, most of it to the bank restructuring agency. Though the order book is thin and the workforce is due to fall to half its 1998 number, management is asking Jakarta to convert its debt into equity.

Seoul is also reluctant to cut off all problem companies completely. "The government should avoid moral hazard," says Kim Joon Kyung, senior economist at the state-funded Korea Development Institute. That means letting firms beyond rescue, even those connected to influential chaebol, go bust. LG's Kim Ju Hyung believes banks fear debt writedowns and writeoffs. But inaction hurts the banks. Take Philippine National Bank. It has a strong brand, a large 324-branch nationwide network, and a $3-billion-a-year remittance business. But its 33% delinquent-loan ratio — highest among local banks — is eroding its capital and keeping it from lending.

With bad debts restraining credit expansion, domestic demand in East Asia is also constrained. This would pose a serious problem if exports, the main growth engine, decelerate, as is expected when the U.S. economy slows further in the coming months. If that happens, Asian governments may not be able to go into enough deficit spending to rev up economies, since they already carry giant debts. Even now, much of state revenues go to interest payments, as much as half in Indonesia. "This increase is putting a large strain on public finance," says Kawai of the World Bank. "When the next crisis comes, headroom for fiscal policy will be quite limited." And beyond that, the government's ability to fund infrastructure needed by growing economies is curtailed. So is spending on education — crucial for workforce competitiveness in the Information Age.

With such constraints on governments, companies will have to boost their competitiveness with little outside help. And the sure way to toughen them is to throw them into shark-infested waters and let them sink or swim. Take Ayala Corp. The 166-year-old Philippine property, banking, telecommunications and industrial group has seen competition surge in virtually every major line of business it is in. And that has spurred Ayala to get even better at what it does. Amid a glut in high-end offices and apartments, it has cut prices and begun using outside sales agents. Its Globe Telecom affiliate pioneered in text-messaging and became the cellphone leader.

Also in the group, Bank of the Philippine Islands boasts the lowest delinquent-loan ratio in the country. It merged with Far East Bank to form the largest local lender, and tied up with Singapore's DBS to lift regional operations, even as domestic banking opens up further to foreigners. And like any dynamic conglomerate, Ayala is dotcoming. Its iAyala unit is tying up with Globe to offer broadband Net access to Ayala's posh developments.

Whether or not there is another Asian crisis, companies need to do as Ayala is doing: gear up for global competition. The two W's — WTO and www — will make sure that businesses in any modern economy eventually face world-class rivals. Hence, the over-arching task for policymakers and corporate chiefs is to prepare for globalization. Firms must cut costs, beef up balance sheets, and boost efficiency, quality, innovation and customer service. Governments need to be more honest, accountable and competent. Forget those lessons and you won't need another crisis to go the way of the dinosaurs.

— With bureau reporting

Write to Asiaweek at mail@web.asiaweek.com

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