Business

Saturday September 19, 2009

A year after Lehman fell

By CECILIA KOK


THERE couldn’t have been more suspenseful times than these – when a 158-year-old financial goliath in the United States collapsed a year ago, triggering widespread fear and panic across global financial markets. The ensuing events tipped the world economy into a severe downturn.

Indeed, the demise of the venerable Lehman Brothers last September marked a defining moment for the world’s financial and economic systems.

But while we can sing hallelujah that the crisis did not last as long as expected, there are understandably structural changes going on in many countries as they adapt to the new economic realities.

People walk under a ticker sign announcing Lehman Brothers financial losses on Sept 10, 2008 in New York. It marked a defining moment for the world’s financial and economic systems. – AFP

Having poured in so much effort to pull ourselves out of the abyss, let’s take some time to reflect on the terrifying experience we have had over the past one year.

This issue, StarBizWeek explores some of the good, the bad and the ugly aspects arising from this one-year journey.

The good

Improving outlook ... The global economy is responding well to the massive injection of government spending worldwide.

It is generally perceived that the downturn has bottomed out about six months ago.

There are now some clear signs that recovery is on the way for most countries, though the process remains gradual and vulnerable, and some economists are arguing about the sustainability of those comforting indicators.

The head of the International Monetary Fund (IMF), Dominique Strauss-Kahn, last week said a recovery of the world economy could occur earlier than expected, at the beginning of next year.

The global financial institution has recently revised upwards its forecasts for the global economy.

It now expects the world economy to shrink 1.3% this year, a tad better than its earlier projection of 1.4% contraction, before growing again at 2.9% next year, compared with its 2.5% growth projection earlier.

Asia leading ... Asia seems to be leading the global recovery process. Most economies in this region started turning around in the second quarter of the year. Malaysia’s gross domestic product (GDP) is expected to post growth by the fourth quarter of this year.

The quick rebound of Asia seems to support the long-prophesied rise of the region as the next economic power.

Economists are arguing that the crisis has accelerated the tectonic shift in world economic power to the emerging markets of Asia, in particular, China.

This view was asserted by leading economists such as Dr Raghuram Rajan, an adviser to the prime minister of India and former chief economist of the IMF, at the World Capital Market Symposium last month.

Asian economies suffered a downturn arising from the financial crisis due to the collapse in exports demand from industrialised economies that were going through a deep recession.

Exports demand for Asian goods is still sluggish till this day, but the Asian economies are improving faster than expected, thanks to the expansionary packages that are stimulating domestic demand.

New platform ... Asia is coming to grips with the fact that external demand will most likely remain in the doldrums for a long time, as consumers in industrialised economies become more frugal.

Hence, the export-dependent region has been displaying a sincere desire to shift to a new economic model – one that is more inward-looking.

Efforts are now moving towards boosting domestic consumption for sustainable growth. This may take some time as such efforts would involve ideology changes – that is, from the present “save more, spend less” to “save less, spend more”.

Corporate governance ... Another positive arising from the crisis is that corporate governance – a boring subject that most companies would rather turn a deaf ear to – has gained prominence. Authorities are now placing more emphasis on the responsibility of corporations to avoid blind and excessive risk-taking to the detriment of not only their shareholders, but stakeholders of the economy as well.

The crisis has proven the moralists right – that human greed that goes unchecked can have damaging consequences on a global scale.

The bad

Inflation threat ... The economy bouncing back from the trough has brought with it a quick, perhaps too soon, rebound in the global crude oil prices, which are currently hovering around the US$70 per barrel level, compared with less than US$40 per barrel at the end of last year.

This gives rise to the risk of inflation, which could jeopardise the nascent recovery process. Nevertheless, economists are telling us that the inflation risk at this stage remains subdued, as most countries are still in a deflationary stage.

Technically, Malaysia too seems to be experiencing a deflation as indicated by its consumer price index (CPI). The negative CPI for the third consecutive month in August gives the impression that the general price level of goods in the country has fallen, but as we are well aware, this is not the case.

The negative CPI is more reflective of the decline in fuel prices over the past one year. But in general, the prices of most goods remain sticky since they were raised in tandem with the steep rise of fuel prices in July last year.

Cautious economists say the current environment of low interest rates provide room for inflation to seep in. So, they are of the view that central banks could raise interest rates earlier than expected to rein in the risk of inflation.

Bubbles forming? The expansionary monetary policies are feeding cheaper funds into the economy. While liquidity remains comparatively tight in most industrialised economies, emerging markets in Asia are flushed with liquidity.

Financial experts are now warning of potential asset bubbles, especially in property, forming in Asia.

HSBC Global Research, in its recent analysis of the Asian economies, argues that liquidity in the region is far too abundant for policymakers to keep interest rates at their current lows.

It adds that low growth and the lingering uncertainties are setting the conditions for bubbles to emerge as officials maintain their accommodative monetary stance.

In an economy flushed with liquidity, prices of assets can increase even if growth fundamentals appear unsupportive.

There are already signs that the leverage in Asia is building up, while that of the West is falling.

Nomura International in its recent report says since the collapse of Lehman Brothers, the Asian leverage has risen from 15x to 17x for the second quarter of this year. The Western leverage, on the other hand, has decreased from 34x to 28x in the same period.

The Hong Kong-based research outfit argues that Asia’s leverage is coming off all-time lows and will probably go higher. This is especially so for Hong Kong, China, India and Indonesia.

Joblessness ... Meanwhile, the labour market conditions in the global economy have not improved much. Unemployment rates in most countries remain high, and they are rising.

This problem does not only plague the industrialised nations, but also some Asian economies, including China.

For instance, the US unemployment rate could probably reach 10% by the end of the year. It stood at a 26-year high of 9.7% last month, as 216,000 jobs were lost.

In China, the labour ministry recently said only half of the 24 million people on its official unemployment rolls were expected to find jobs this year even if the country managed an 8% economic growth for the full year.

The estimate did not include the millions of new graduates and migrant workers. This implies that the actual number of joblessness in the economy could be much higher than the official forecasts.

The unemployment rate in Malaysia was at a manageable 4% for the first quarter of 2009. The rate is expected to increase to 4.5% for the full year, compared with 3.3% in 2008.

The unemployment situation in Malaysia is mainly affecting the manufacturing sector, which is currently awash with excess capacity due to weak external demand.

Declining investments ... Excess capacities across industries in most economies have caused the decline in private investments across the board.

In Malaysia, the sharp decline in private investments activities is due mainly to excess capacity in the manufacturing sector.

According to the Malaysian Industrial Development Authority, for the first half of 2009, total foreign direct investments in the manufacturing sector fell 53.9% y-o-y to RM10.6bil, while local investments fell 44.1% y-o-y to RM5.2bil.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng says there could be a prolonged recovery for private investments in Malaysia due to the prevailing excess capacity.

Widening deficits ... While the massive injection of government spending worldwide have managed to pick up the slack in most economies, higher government spending amid declining revenues have pushed some of them to face historically high levels of fiscal deficits.

This is particularly so for the US, whose fiscal deficit is expected to rise above US$2 trillion by the end of the year.

Malaysia has been in a fiscal deficit position since the Asian financial crisis in 1998. The present pump-priming activities is expected to widen its fiscal deficit to 7.6% of the country’s GDP this year, compared with 4.8% in 2008 and 3.2% in 2007.

Some countries like Singapore are luckier as they are merely depleting the surpluses that they have accumulated through the boom years to finance their expenditure.

Protectionist measures ... On the global trade front, many countries seem to be putting up barriers to protect their own turf. This is despite policymakers preaching the opposite – that protectionism will only hurt global recovery. A case in point is the recent spat between China and the United States.

And the ugly

Greed is back ... With the improving economic outlook, the appetite for risk has also returned as investors seek to make more easy money.

Stock markets in major economies are rising. It is widely feared that their valuations are getting stretched to levels unjustified by earnings growth. It has also been reported that Western financial institutions are once again betting on high-risk instruments for better margins.

Unfortunately, as long as there is money to be made, greed is pretty much a virtue. Yet, this is the very sin that has brought the global economy into this mess. Generally the fear of missing out on the global rally far outweighs the risk of a potential sharp correction ahead.

Slow reforms ... In the West, efforts to reform their financial regulations have been slow. There have not been any significant changes taking place despite the many proposals raised for the governments to improve their monitoring systems over the activities of the financial institutions. So, doors are still open for systemic dangers to strike again.

Nobel Prize-winning economist Joseph Stiglitz recently told Bloomberg that the US has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers.

“In the US and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz told Bloomberg, adding that the banking problems are now worse than they were in 2007 before the crisis.

Nevertheless, Asia can boast of its sound financial systems that are highly regulated. But unless Asia truly decouples from the West, should any shock happens again, the region would most likely have to go through another round of economic challenges.

So, even with the rising optimism over the conditions of the global economy, it is just wise to keep our feet on the ground and know that the road ahead remains patchy.

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