Kamis, 31/01/2008

Global Recession and Asia’s Resurgence

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Global Recession and Asia’s Resurgence

THE SUBPRIME MORTGAGE crisis that led to the meltdown of the US economy, whose impact is still felt at this time, has corroborated the fact that the property industry is the generator of the economy of a country. The property industry is like a ball that can destroy the economic system of a country if it becomes uncontrollable. The impact of such an economic situation can be felt at the regional level, and it even can affect the global economy. Countries in Asia have experienced such a situation in which the property industry appeared to be like an uncontrollable ball.

Take Indonesia as an example. Before the economic crisis hit the country in 1997 almost all banks channeled excessive credits to property firms. Many bankers even had shares in several property companies. Edward Soeryadjaya, the eldest son of William Soeryadjaya who founded Astra Group and was Indonesia’s second richest man according to a survey conducted in 1992, entered the banking sector by founding Bank Summa. He had stakes in several property companies like Bandung Indah Plaza (Bandung), Mirama Hotel (Surabaya), Sabang Hotel (Jakarta) and many others. As a result, property credits from Bank Summa mainly went to property companies that were partly owned by the Soerjadjaja family. The bank did not care whether its loans to such property firms violated the legal lending limit principle stipulated by Bank Indonesia (Central Bank).

Not surprisingly, bad credits booked by Bank Summa in early 1990s amounted to over US$750 million. This was the reason why the government liquidated the bank on December 14, 1992. But, Bank Summa was not the only bank closed down by the government. On November 1, 1997 the government liquidated 16 banks, and another 35 were closed down on February 1998.

On March 13, 1998, the government liquidated another 38 banks whose liquidity was extremely poor. Then, it took over nine banks before put them into its recapitalization program. The fact above showed that 70 percent of those banks were affiliates and alliances of property firms. Such relationships were behind all the mark up and even the window dressing activities carried out by the banks and related property firms.

As a result, bad credits in the national property sector in 1997 amounted to no less than Rp80 trillion. However, Indonesia was not alone. Almost all countries in Asia were in a similar situation. Property crash was experienced by Asia and led many countries in the region to an economic crisis. In his article entitled Five strong signals of Japan’s coming crash printed in the Washington Post July 3, 1998, Kenichi Ohmae said that property crash in Japan had been sparked by the unhealthy financial foundations of property firms in that country.

Many developers built their businesses without capital and only relied on alliances and affiliation with bank officials. Moral hazards occurred everywhere, in all economic lines. The economic crisis in Malaysia, Thailand, Singapore, India and other Asian countries was not less serious as compared with Indonesia or Japan. During the course of no less than three years countries in Asia had to fight their economic crisis that had been sparked by a property crash.

And, it is now the turn of the United States. Yes, the world’s most influential superpower is experiencing an economic crisis that was triggered by a property crash. At the time the sub-prime mortgage crisis hit the United States, the world was worried that a global recession would occur. That worry, albeit not that big as in 2007, still lingers. This is because–despite

The Federal Reserve again and again injecting funds to the money market, which was followed by European Central Bank and central banks of the countries directly affected by the sub-prime mortgage crisis in the United States—the worst financial disaster since World War II is believed to continue affecting the global economy during the course of this year. Indeed, the impact of the sub-prime mortgage crisis is so devastating. Just imagine, at this time the United States books debts of no less than US$43 trillion, and if that amount is equally divided to all of its citizens, each American will owe US$145,000, excluding private debts like credit cards.

Global recession is now an undeniable fact. The United States gives quite big contribution, or 30 percent, to the gross domestic product of countries around the world. The United Nations said global recession will very strongly hit poor countries, slow down the growth of world trade, and possibly will put to an end the current booming of commodity prices.

And then, how far the global recession will impact Asia? There are reasons to worry about the impacts of the sub-prime mortgage crisis on the Asian economy. Around 60 percent of the exports of emerging economies including countries in Asia go to the US and European markets. But, do not be pessimistic right away. The current Asia is not the Asia of the 1997-1998 period. Nielsen Company’s survey revealed that consumers still have so high optimism about Asia.

World Bank and Asia Development Bank estimate that Asia, including Indonesia, as an emerging market will receive a relatively light blow from the US recession although it cannot totally avoid its impacts. Their optimism is based on the strong macro economic fundamentals and the solid trade balance of Asian countries, prudential policies in their banking and financial sector, and Asian countries relatively becoming less and less dependent on the United States.

International Monetary Fund (IMF) cut its projection of world economic growth in 2008 to 4.1 percent from the initial level of 4.4 percent. This is the worst level of the world economic performance in the past five years. The US economic recession during the course of 2008 is the main factor. The US economic growth in 2008 is estimated at 1.5 percent only, down from the initial projection of 1.9 percent.

Meanwhile, some developing countries like Russia, India and China are predicted to see their economy continuing to grow. Even, China’s gross domestic product is projected to grow by 10 percent. Is all this a beginning of the resurgence of Asia, which, frankly speaking, will worry the United States and European countries? (Deddy H. Pakpahan)