Singapore Government Press Release
Media Division, Ministry of Information and The Arts,
36th Storey, PSA Building, 460 Alexandra Road, Singapore 119963.
SPEECH BY SENIOR MINISTER LEE KUAN YEW TO THE DUSSELDORF INDUSTRY CLUB, DUSSELDORF, 8 OCTOBER 1998, 8 PM
Asia in Crisis: Risks and Chances
A year after the Asian financial crisis erupted in July 1997, the world economy has never been more fragile. East Asia including Japan, is in recession. The US economy, which is already in its seventh year of economic expansion, is being sustained by high consumer spending and is susceptible to a major downturn in the stock market. Europe continues to grow but its recovery has been export-based while domestic spending continues to be hobbled by the high unemployment rate.
With the collapse of the Russian rouble in mid-August, the financial crisis has now infected all emerging markets. Latin America appears to be headed for a major economic slowdown if not a recession. Through the interlinkages of financial markets, the contagion has also reached the pulse of Europe and the US. Clearly, the "Asian" crisis has become globalised as nervous investors pull their funds from companies and banks with exposure to emerging markets and move them into safer assets, causing stock markets world-wide to tumble.
Prospects for East Asia
Just as the euphoria of the past few years was unjustified, the present pessimism is overdone. The Asian crisis may have wiped out years of growth and development in the crisis countries. However, what we saw in East Asia in the past 30 years was not a mirage. Strong growth in their export industries has transformed agricultural communities into industrial nations. The East Asian values of hard work, sacrifice for the future, respect for education and learning, and an entrepreneurial spirit are the basic strengths which will see these peoples through the current crisis, and help them regain their former economic dynamism. In time, investor confidence should return to East Asia.
These decades of development have put in place a base of infrastructure, technology and management skills that will withstand the crisis. The rankings of East Asian countries in international surveys of economic competitiveness have dropped in the past year, but East Asia remains ahead of other developing regions and transition economies. The 1998 World Competitiveness Yearbook, by IMD in Lausanne, finds Singapore, Hong Kong and Taiwan still within the top ten countries in the world where "enterprises are managed in an innovative, profitable and responsible manner". The crisis has revealed structural and institutional weaknesses in East Asian economies, but the economic infrastructure which was built up over the last three decades is still in place.
The External Environment Must Improve
What must happen before East Asia can recover and return to its potential growth path? Within East Asia, prospects depend on the performance of East Asia's largest economies, Japan and China. However, the contagion has now spread beyond Asia and the risk of a global deflation has increased. The US and its G7 allies must take decisive measures to deal with the crisis to ensure the world economy does not go into a recession.
As long as Japan – East Asia’s largest economy – remains depressed, the whole region will be hobbled. Japan absorbs 12% of the region’s exports and has been the largest source of FDI in nearly every country in East Asia since the mid-1980s. Japan has been generous in its response to the Asian crisis. It has carried the biggest share of the IMF rescue packages in Korea, Indonesia and Thailand, and has been forthcoming with humanitarian aid. Japan announced during the IMF meeting a new initiative of a US$30 billion package to help the affected countries in East Asia raise funds in the international capital market. Really the best contribution that Japan can make is to get its economy moving again.
Japan is an export powerhouse and a net creditor nation. Its financial problems, the bad debts in the banking sector, were not the result of excessive borrowing from abroad, but home-made. With political will, it can cut the Gordian knot of domestic bad debt and begin its recovery.
China has also been affected by the crisis, through slower export growth to East Asia, and declining investment flows from East Asia. However, China's external position remains strong, with foreign reserves of US$140 bn and large current account surpluses. Its caution in liberalising its capital account has buffered it from the crisis.
To sustain growth in the long-term, China has to persevere with structural reform in its banks and state-owned enterprises. Its political leaders are committed to this. China's stable economic development will enhance the attractiveness of East Asia as a region. In the near-term, China's commitment not to devalue the renminbi will be a stabilising factor in East Asia.
The external environment is a positive factor. EU and the US can and must take the lead in managing the crisis. They are currently the two locomotives of world economy. They must not allow the financial crisis to spread and weaken their own economies. Fortunately, US and European leaders are aware of the severity of the global financial crisis and have called on G7 countries to study how to improve the working of the international financial markets.
Putting Their Houses in Order
An improvement in the external environment is a pre-requisite for recovery in East Asia. It sets the stage for Asia’s economies to export and grow their way out of the crisis as Mexico did a few years ago. However, the pace of recovery will vary from country to country depending on nature and magnitude of the problems in each country and how resolutely they go about addressing these problems.
Thailand and Korea
Thailand and Korea are struggling to implement economic reforms prescribed under IMF programs which are designed to address concerns of international investors and win over their confidence. They have made significant progress in restructuring their banking and corporate sectors. Thailand has opened its financial sector to foreign equity participation, while Korea has also opened hitherto protected sectors to foreign investors.
Although painful, these reforms have shown some results. Domestic interest rates have declined while their exchange rates have stabilised. Current accounts have improved, although their exports are still weak because of weak demand from their major markets in East Asia. Because Thai and Korean governments have shown by action that they are committed to reform, foreign investors are reassured and capital has started to flow back.
Indonesia, by contrast, lost valuable time when it did not follow through with its early agreements with the IMF. As a result, the situation had deteriorated, and panic fed on itself. It is a tragedy that half of the total population of 200 million Indonesians will be living below the poverty line by the end of this year. The international community can assist with humanitarian aid. But only Indonesians themselves can resolve the social and political problems spawned by the economic crisis. Indonesia is struggling valiantly to implement the IMF program and has made some progress in stabilizing its currency, reforming the banking system and restructuring the debt. Investors are holding back until they see that Indonesian entrepreneurs themselves have confidence in their own country and are re-investing afresh after the riots in May.
Malaysia's problems are different from those of Thailand, Indonesia and Korea. The Malaysian economy is fundamentally quite sound. Malaysian companies have not borrowed excessively abroad and its external debt is relatively low. However, overlending by domestic banks have created the same symptoms of asset bubbles, and over-investment in unproductive projects.
Malaysia's Prime Minister Mahathir is wanting to jump-start his economy by imposing capital controls to insulate the currency from speculation. Capital controls can offer a temporary window of opportunity to stimulate and reform its economy. The government has sharply lowered interest rates, reduced bank reserve requirements, and instructed banks to maintain their lending growth at 8%.
Capital controls are not a substitute for prudent macroeconomic policy. It gives respite for banking reform and corporate restructuring without volatile exchange rates forcing the central bank to raise interest rates and slow down the economy. There is danger in excessive expansion in domestic demand leading to a deterioration of its trade balance, resulting in a loss of foreign reserves and capital flight.
No country, however strong its fundamentals, can insulate itself from the effects of the financial turmoil. However, Singapore has been comparatively less affected by the Asian crisis, chiefly because we have a sound and robust financial system, and a corporate sector that was not over-leveraged.
Singapore's problems are those of contagion. Our economy is closely intertwined, through trade and investment, with Malaysia, Indonesia, and other economies affected by the crisis. Tourism from Korea, Japan and Southeast Asia has declined, and our exports and imports with the region have fallen.
However, Singapore has escaped the brunt of the crisis because we maintained tight macroeconomic discipline and constant vigilance over the banking system. As a result of sound macroeconomic policies, our interest rates were lower than US dollar interest rates, and Singapore companies had little reason to borrow in US dollars. Our banks are strong and well-supervised. Thus, even though Singapore’s financial system is more open than those of our neighbours, we have weathered the crisis better.
Singapore has also implemented measures to reduce business costs, and to enhance our productive capacity. We are continuing with economic restructuring and strategic plan to position Singapore as a regional and international business hub. We are investing in infrastructure and education, including the training and retraining of workers. We have undertaken a comprehensive review of the financial sector and have implemented major policy changes to enhance our role as a leading financial center in the Asian time zone.
These measures will not yield immediate dividends, but they will strengthen our competitive advantage and position us for the longer term when East Asia recovers.
Risks and Chances for German Businesses
Asia may seem like a risky place to do business today. However, the risks were greatest when the region was booming. Today, investors' worst fears have already materialised. While the near-term economic prospects remain bleak, the downside risk is limited, while the upside potential is tremendous in the medium to long term. Companies with the resources and the gumption to grasp the opportunities and position themselves during the downturn, will draw the benefits when East Asia recovers.
Dusseldorf and the North Rhine-Westphalia region is home to many key companies in chemicals, engineering, communications and media. Companies in these industries are no strangers to risks, long lead-times, and the ups and downs of economic cycles. They also know that the best chances are oftentimes at the bottom of a cycle, when costs are down, and when opportunities arise to form strategic alliances with fundamentally sound companies, which need the markets and cashflow from a foreign partnership. Not making strategic investments in a downturn could leave companies unable to catch up when demand recovers.
German companies should not write off the good business relationships they have built up, and the capital investments they have made in East Asia. Just a fortnight ago, Federal Minister of Economics Günter Rexrodt, gave a speech at the "Indonesia Day" of the Kreditanstalt für Wiederaufbau or KfW, where the keyword was "continuity" – continuity in business relationships and in capital investments. The German government understands this. Last month, President Roman Herzog led a business delegation to South Korea. When East Asia recovers, these long-term investments will yield high dividends.
Over time, ongoing institutional reforms will make East Asia a leaner and friendlier place for foreign investors. Transparency in corporate accounts and protection of minority shareholders, which were ignored when share prices were rising, have now become issues of importance. In today’s high-risk environment, greater transparency will prove critical in convincing investors, both domestic and foreign, to buy a stake in a local company. East Asian governments are pragmatic; they know that they have to improve corporate governance and the legal framework in order to attract foreign investors.
These structural reforms will also create a more level playing field for local versus foreign businesses, for large versus small businesses. As with smaller companies all over the world, the disadvantage of size is offset by the advantage of agility. Germany's vibrant "Mittelstand", the small and medium-sized companies, can punch above their weight if they can get a headstart in East Asia now. Similarly, East Asia's small and medium-sized companies may be less unencumbered by the problems of larger conglomerates, and respond more flexibly to the crisis.
Dr Heinrich von Pierer, the CEO of Siemens, in his address to the OAV (East Asian Society) in February this year said that the danger of staying out of Asia is greater than the danger of remaining engaged there. Those who pull out may find it difficult to recapture their market positions when Asian economies have grown again, as they will surely in due course. To demonstrate that these are not empty words, Siemens has a new plant manufacturing surface-wave filters in Singapore this year. Other German companies have invested or are contemplating investment in Singapore notwithstanding the economic problems in the region. Mannesmann invested S$13 million in a new regional centre next to the existing German Centre in Singapore. The German logistics company Logtrans opened a S$24 million Districentre to provide logistical support to its customers, including small and mid-sized companies wishing to expand their operations from Singapore. These projects show that German industry plans beyond the present troubles.
I would encourage you to explore the opportunities in East Asia. Singapore remains committed to facilitating the recovery of our neighbours. Our recently-announced Germany-Singapore Enhanced Partnership will enhance cooperation between the business sectors of our countries. Singapore is the gateway to Asia for German industry and business, just as Germany provides the gateway for Asian business into Europe. We welcome you to Singapore, a springboard to East Asia. We can share the benefits when East Asia recovers.