Asia Fears an Economic Crisis That Has Roots Far From Home

Mark Landler New York Times Service Friday, September 28, 2001

HONG KONG Mark Lettenbichler expected a flood of canceled bookings in the days after the terror attacks on New York and Washington. What worries Mr. Lettenbichler, the general manager of the Ritz-Carlton hotel here, is that his guests have not yet returned.

"At least with the Asian crisis, you knew where the bottom was," Mr. Lettenbichler said, referring to the economic slump of 1997-1998. "The disturbing thing here is you don't know what to expect. We know we're going to see a decline, but for how long?"

From luxury hotels to computer manufacturers to shipping agents, Asian companies are battening the hatches for a much deeper-than-expected economic downturn. Unlike the Asian tempest of the late 1990s, which was largely rooted in home-grown excesses, people here feel swept by events out of their control.

Mr. Lettenbichler recalls that hotels here and elsewhere were half empty during the Asian crisis. He worries that a deep recession in the United States could bring back those days. In this age of global interconnectedness, he said, Asia's distance from the West will provide little insulation.

Like the United States, most Asian countries were well into a slowdown before the tragedy of Sept. 11. Much of that was due to weak export demand from the United States and, to a lesser extent, Japan.

Now those weaknesses have been amplified, as economists reduce their forecasts for consumer demand and growth in both countries. Salomon Smith Barney said in a new report that it expected the United States economy to contract 0.2 percent in the fourth quarter, while Japan's will shrink 1.5 percent.

As Americans and Japanese curtail purchases of laptop PCs, video games, and designer clothing, their austerity is reverberating through export-dependent economies like South Korea, Taiwan and Singapore.

On Wednesday, Singapore reported a record 21 percent decline in industrial production in August, and Korea is expected to follow with a double-digit drop of its own. Meanwhile, Taiwan - with its linchpin technology sector - is rewriting its record books. Unemployment is expected to top 5 percent as Taiwan suffers its worst recession in half a century.

"The slowdown in the tech sector has had a very adverse effect on our economy," said Taiwan's finance minister, Yen Ching-chang, in a recent interview. "If this tragedy affects the U.S. economy, Taiwan will not be exempt."

Nearly 40 percent of Taiwan's exports go the United States or Japan. Mr. Yen is cautiously optimistic about the American economy, saying it is big enough to absorb the shock of the attacks. But he said Asian countries could no longer depend on Japan to be a locomotive for the region.

"After the financial crisis, no one can be sure when Japan will recover," said Mr. Yen, who conferred with other finance ministers at a recent meeting of the Asia Pacific Economic Cooperation forum in Suzhou, China.

Not all Asian countries are affected the same way by a simultaneous downturn in the United States and Japan. Hong Kong's exports, while vulnerable to the global weakness, are cushioned somewhat by its role as a middleman for China, packaging and reshipping goods to and from the mainland.

Hong Kong will benefit from the Federal Reserve's cuts in interest rates, since its currency is linked to the United States dollar at a fixed exchange rate. A weaker dollar will also benefit other countries that peg their currencies to the dollar, such as Malaysia.

Higher oil prices, a possible result of military action, would have a similarly uneven effect. Importers like Korea and the Philippines would be badly hit, while producers like Indonesia and Malaysia would benefit.

What sets this slump apart is its potential effect on China. Asia's most populous country came through the regional crisis with scarcely a scratch, mostly because it is less dependent on exports than its neighbors. But many analysts say it will not weather the global falloff.

Lowered estimates of China's growth in 2001 and 2002 still put it far ahead of other Asian countries, many of which are in recession or teetering on the brink. But 11 percent of China's foreign direct investment comes from the United States, and some experts worry that investors may steer clear of it, and other emerging markets.

"Everyone in China is expecting a very buoyant year in foreign direct investment," said Henry Lee, the managing director of Hendale Asset Management in Hong Kong. "But I think the first reaction of Americans will be to hold their own fort, before investing outside the U.S."

That could spell trouble for Southeast Asian countries, which have suffered a marked decline in foreign investment since the crisis of 1997-98. Most vulnerable are countries with large, and potentially angry, Muslim populations, such as the Philippines, Malaysia and Indonesia.

Few people believe this downturn will be as devastating as the Asian crisis, which wiped out years of development and redrew the region's economic and political map. But most agree that Asia can forget its dreams of returning to health in 2002.

http://www.iht.com/cgi-bin/generic.cgi?template=articleprint.tmplh&ArticleId=33903

-- Martin Thompson (mthom1927@aol.com), September 28, 2001