Bad Loans Could Blunt Asia’s Growth
Japan’s largest retailer, Daiei, announced a half-hearted plan in 2000 to improve profitability, refocus its business lines and work down its $16.8-billion debt.
Two years later, Daiei’s financial condition is worse, its mountain of debt remains high and its brand name has further deteriorated.
As Daiei goes, so goes much of Asia. According to a report being released today, delay and years of weak measures have cost the region a golden opportunity to tackle its enormous bad-debt problem.
Compared with 2000, the region now finds itself 33% deeper in the hole, weighed down by an estimated $2 trillion in nonperforming loans expected to blunt economic growth for years.
“Things could have been a lot better by now,” said Jack Rodman, author of “Nonperforming Loan Report: Asia 2002” by Ernst & Young.
Painful economic problems generally are easier to address when times are relatively good, and that was the situation Asia found itself in two years ago. Most economies in the region were enjoying strong growth, the 1997-98 Asian currency crisis had awakened many governments and their citizens to the risk of inaction, and international investors were willing to buy bad debt at a discount.
Now economies such as Japan, China, South Korea, Taiwan, Thailand, Indonesia, India, Malaysia and the Philippines find their restructuring jobs more difficult. The global economy has slowed, the accounting scandals in the U.S. have made international investors more cautious, and deflation has intensified with many Asian governments still reluctant to take bold steps, given the short-term political and economic costs.
That said, there also are some encouraging changes. In the last several months, governments in Taiwan, the Philippines, India, China and Japan have passed new legislation, initiated sales of nonperforming loans and stepped up bank inspections.
“NPLs are no longer such a dirty little secret to be swept under the rug,” Rodman said. “Have they fully recognized the scope of the problem? No. But it’s an improvement.”
Ultimately, a growing number of economists say, Asia’s debt problem is as much a political problem as an economic one. In many countries, senior bureaucrats and politicians have shied away from alienating fellow politicians, tycoons or mainstay companies by foreclosing on loans or taking other tough steps generally seen as necessary to regain traction.
Equally daunting for many leaders is the prospect of being penalized at the polls as voters register their wrath at thousands more layoffs or at publicly funded bailouts of well-heeled bankers.
The giant among Asia’s nonperforming loan economies is Japan, with a problem Ernst & Young estimates at $1.2 trillion, or about 60% of Asia’s total bad-debt load.
Japan has had more time to mull over, deflect and downplay its problems than most other nations, given that most of its bad loans were triggered by the collapse of its speculative investment bubble more than a decade ago.
Since 1997, Japan has disposed of about $300 billion in bad loans, but the bad-debt tide keeps rising, with the absolute amount the same as it was two years ago.
Leaders have become more willing to admit they have a serious problem. “It’s important to correct Japan’s bank overcapacity problem and quickly process the financial institution’s nonperforming loans,” Masajuro Shiokawa, Japan’s finance minister, told delegates at an Asia-Europe forum in Copenhagen over the weekend.
Still, Shiokawa’s comments aside, many analysts question Japan’s definition of “moving quickly” as its leaders continue to muddle along.
The runner up in Asia goes to China, which Ernst & Young estimates has a $480-billion bad-debt problem. China is juggling a different equation, stemming largely from the wrenching task of trying to transform a centrally planned economy into one more based on market mechanisms.
The government has taken a tougher line than some of its neighbors in admitting the problem and moving to sell off bad loans.
“NPLs are a big headache for China. One difference at the margin, however, is that the leadership is probably more proactive than the Japanese,” said Fred Hu, Hong Kong-based executive director with Goldman Sachs & Co.
Third in line is South Korea with a little more than $100 million in bad debts, according to the report. Most economists give South Korea good marks for addressing head on its bad-debt problem.
“Without cleaning up, we can’t expect a future,” says Choi Byung-kil, head of strategy with Hanvit Bank, the new bank created from the merger of Hanil and Korea Commercial banks. “If we don’t accelerate our efforts, then we’ll have to face another crisis again soon, so the pressure remains very intense.”
South Korea has emerged as something of a model for its neighbors as it has juggled the political and economic shoals of joblessness, wrenching social change and accusations that the nation’s leaders are selling the nation’s assets to outsiders for way too little.
“Every country has a fear they’re selling out the country cheap to foreigners,” said Kim Cheon-hong, executive director of Korea Asset Management Corp., a government agency charged with disposing of bad debt. “They think they’re never going to get big gains. But it’s like chumming. At first there are no big fish, but they show up.”
Ernst & Young’s bad-debt figures--as well as those of many other private-sector analysts--are far larger than the official statistics provided by most governments. Japan, for instance, pegs its nonperforming loan total for the nation’s 133 banks at $344.2 billion as of March. Although that’s a 25% jump over the previous year, it is still less than a third of the Ernst & Young estimate.
The difference is partly due to the amount of political pressure banks and governments are under to understate the problem, keep problems off the books and minimize their provisions for bad loans.
“Their hope is that Asia’s struggling economies and borrowers will recover and make them whole again,” the report says.
But the disparity in numbers also underscores another problem: the need for international standards covering the definition, classification and treatment of bad loans at a time when the WorldCom and Enron scandals reveal the need for more careful and consistent handling of accounting problems.
