Looming Iraq War Cuts Asian Growth Forecasts. (Update)

Business Asia, October 2002 | Go to article overview
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Looming Iraq War Cuts Asian Growth Forecasts. (Update)

The threat of a US-led war in Iraq is edging towards reality, forcing countries to examine not only foreign policy, but also potential economic effects such a conflict would result in. Commentators are in a flurry of activity, and analysts are being forced to rethink their outlooks for the coming year. One such analyst is ING Groep NV, which has said it expects a US war with Iraq in the first half of next year, prompting it to trim its forecasts for 2003 economic growth in China, South Korea and other Asian nations. The company cut forecast growth for China to seven per cent from 7.5 per cent, for South Korea to five per cent from six per cent and for Taiwan to 3.5 per cent from five per cent. ING said nearly a quarter of exports from Asia outside Japan went to the US last year, up from 20.5 per cent in 1990, the year before the last Gulf War. Countries such as South Korea are expecting exports to rebound, lifting economic growth. "Increased dependence on the US and exports means the regional impact of a war will be worse than in the 1991 Gulf War," said Timothy Condon, ING's chief economist in Hong Kong. ING expects a war against Iraq in the first two quarters of 2003. China is probably the "most insulated economy" because of its strong economic growth, ING said. The bank cut its growth forecast for export-dependent Hong Kong to 2.3 per cent from 3.5 per cent, to 3.2 per cent from five per cent for Singapore and to 4.5 per cent from 6.5 per cent for Malaysia.

* Indonesia

The World Bank approved US$100 million ($183.28 million) in loans to Indonesia to improve health and education across the world's fourth-most populous nation. The aid will fund projects in more than 13 provinces, including Kalimantan on the island of Borneo, the eastern island of Sulawesi and the southern areas of the main island of Java, according to the bank. More than half of Indonesia's 212 million people live on less than US$2 a day--the United Nations Development Program's definition of the poverty line. The projects "provide an open menu of activities that communities could undertake based upon consensus, including revolving funds scheme for micro-credit, community priority investments such as bridges, school or health facility repairs", the World Bank said. According to government measures, Indonesia's poverty rate doubled to 19 per cent in 2001 from an estimated 9.6 per cent in 1996 before Asia's 1997-1998 financial crisis. Indonesia is seeking to reduce the rate to 14 per cent next year. Overseas aid and investment remain critical in Indonesia's efforts to rebuild its economy and bridge a budget deficit estimated at 40.5 trillion rupiah ($8 billion) this year.

* Japan

The Bank of Japan's plan to buy stocks from lenders will prove fruitless unless the Government helps banks shed bad loans so they can revive lending, warns head of the International Monetary Fund Horst Koehler. The plan may briefly boost equity markets "but if there is not the perception of fundamental improvement in the financial sector then this decision may be seen as very temporary", says Koehler. Bank of Japan Governor Masaru Hayami said last month that the bank would buy some of the US$200 billion ($366 billion) of stock held by commercial lenders to help keep them afloat.

* Philippines

The Philippines will ask investors this month to buy US$750 million of bonds from its unprofitable power monopoly. The country has been seeking three-fourths that sum in taxes from tobacco millionaire Lucio Tan for nine years. Failure to collect taxes, the source of 70 per cent of revenue, is widening the budget deficit. That helps explain why investors demand a higher yield to buy Philippine debt, even with the fastest economic growth in five years and low inflation. Last month, the Government said it had already spent 144 billion pesos ($5.1 billion) more than it earned this year, dashing any hopes it would keep the deficit to 130 billion pesos.

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