The current financial turmoil in the Asia-Pacific region, which
started in the second half of 1997, will result in a worsening of economic prospects
in 1998 for the region. In the International Monetary Fund's (IMF) assessment released
in May 1998, the earlier 1998 forecast for Japan, ASEAN countries, South Korea and
China were adjusted sharply downwards.
The growing economic problems facing Japan, including the weakening
of the yen against other currencies, the crisis in the banking sector, and the waning
confidence among industry leaders, is a particular cause of concern for the Asia-Pacific
economies. The packages of Japanese stimulus measures fell short of expectations
and have so far remained ineffectual in stimulating the economy headed for a recession.
Japanís faltering economy poses the danger of undercutting efforts to revive battered
economies elsewhere in the region. Japan is the biggest export market for many Asian
countries as well as their largest source of capital, both through bank loans and
direct investment. The fall in the yen raises the spectre of another round of depreciations
in the regional currencies and setting off a deeper and more prolonged regional crisis.
In the light of current assessment, the December outlook could
still be considered favourable, especially for Indonesia and South Korea, which were
earlier expected to register positive growth. The economic projections for 1998 were
revised downwards for many countries. Singaporeís growth rate was reduced to 3.2
per cent, while Philippines will slow down to 1.8 per cent. The growth rates for
Thailand (- 3.1 per cent), Indonesia
(- 8.5 per cent) and South Korea
(- 0.8 per cent) were reduced
Economic activities in the ASEAN-4 countries are expected to
record a negative growth, i.e. -
2.7 per cent in 1998. The short- and medium-term prospects for the region are still
unclear in the wake of uncertainties in the currency and stock markets. Domestic
demand is adversely affected by monetary and fiscal tightening, rising unemployment,
and low business confidence. The depressed stock and property markets generate negative
wealth effect, prompting consumers to reduce their spending in view of the uncertainties
about future earnings. Interest rates have risen because of increasing risk premium
to compensate for uncertainty, and this will dampen consumption and domestic investment.
Households will face rising inflation that results in falling
real wages. In view of the anticipated lower corporate earnings and personal income,
the amount of tax revenue collected by the government will be adversely affected
and government spending very much constrained. The prospects for the region would
become clearer after their currencies and stock markets stabilise.