Asia’s woes and us

As the aftershocks from the Asian currency cri sis and Wall Street’s big stock price fall on October 27 continue to reverberate across the Pacific, it is worth considering what the long-term fallout might be for the Forum Island nations.

To the extent that the crisis is still to unfold cannot be known but, as Pacific Islands Monthly goes to press, it seems the region is likely to emerge relatively unscathed. It is Japan that is pivotal for the Island nations. It is the biggest source of Asian tourists and by far the biggest Asian destination for Pacific exports. It is also the principle Asian aid donor.

Those countries most affected by these events are mainly in South East Asia. Thailand was the first to suffer. It has seen its currency drop by more than 30 percent against the US dollar and has been the subject of a multi-billion dollar rescue package by the International Monetary Fund (IMF). Indonesia has also had to call on the IMF and Malaysia and the Philippines have endured major currency devaluations.

The other country witnessing domestic economic meltdown is South Korea. Although the Korean economy is much larger than those in South East Asia (its GDP is roughly equal to that of Thailand, Indonesia, Malaysia and the Philippines put together), by mid-November it was also wilting. The Korea composite stock price was down well over 20 percent for the year and the won had fallen 14 percent against the US dollar. While each country has its own specific problems, one of the themes to emerge from Asia’s woes has been the weakness of its financial sector in which many banks are carrying a very high number of bad loans.

It is now clear that Japan, which has a big investment stake in many of the most affected countries, will at the very least catch an economic cold. According to the OECD, Japan’s growth which was already expected to be a sluggish 2.3 percent, will be revived down “substantially”. OECD chief economist, Ignazio Visco, told a news conference in Paris that Japan could lose just under 0.5 of a percentage point of growth - and that assessment was made before the Korean economy started its slide. Japan has had a grow ing role as a trading partner with the Pacific but it still only makes a small contribution to the region’s GDP. In many of the smaller countries aid makes a bigger contribution to GDP than trade and, even in countries with quite significant trade with Japan, that trade tends to be in commodities which are little affected by economic downturn.

Tonga is a good example. On the face of it Tonga looks vitally dependent on trade with Japan, 70 percent of its export income derived from that one source. Look into it a bit more closely and you will find Tonga, in fact, earns more from remittances sent home by expatriate Tongans. Aid also plays a big part in the

Tongan budget and its exports to Japan are mainly in the form of squash pumpkins - an item which will remain affordable in any recession. It is gold and tourism that are most likely to be affected by the roller-coaster ride unfolding on international stock markets.

Gold prices have fallen significantly and, with major international institutions announcing plans to sell-off some of their stocks, are likely to remain depressed - a worry for countries such as Fiji, Papua New Guinea and the Solomon Islands where gold is an important source of revenue. Tourism, however is another story.

In the past decade tourist numbers from Japan, and more recently South Korea, have grown rapidly but, despite that, they still only account for less than 15 percent of the total - and a high proportion of those go to New Caledonia and French Polynesia.

Far more valuable to the Forum Island nations are the large num bers of Australians and New Zealanders and, the not so numerous but big-spending, Europeans and North Americans.

The tourist industry is sure to suffer reduced numbers from Japan and South Korea and increased competition from a more competitively-priced Asia but it may be able to make up for those losses with strategically placed promotional campaigns in more lucrative markets. Light manufacturing and the garment industry in the Pacific could also be hard hit by the increased competitive ness of the Asian economies in the wake of their huge currency devaluations. Initial reactions from the Fiji garment industry, however, suggest Fiji may gain as much as it loses with more man ufacturers turning to Fiji because of its relative stability and the ease with which product can be moved off-shore. While some industries will be slow to be affected by movements on interna tional stock markets, the same can not be said for the trust funds which provide important revenue in some of the smaller Pacific nations.

Tuvalu’s Finance Minister Dr Alesana Seluka calculates his country’s Trust Fund has lost 10-15 percent of its value or SUS 3 million. But he is philosophical. Since the 1987 stock market crash the fund has been much better protected and Dr Seluka has the satisfaction of knowing that this year’s major draw-down (SUS 7 million) was completed just weeks before the markets plunged. In PNG, the giant among Pacific Island economies it is not the Asian currency crisis, but a far more human tragedy, that is having a major impact on the economy.

The drought there, brought on by the El Nino weather phe nomenon, now threatens the lives of a quarter of a million people.

Mike Manning, director of the Institute of National Affairs, esti mates it is costing the PNG government between approximately SUS9B,OOO and SUS 130,000 a day to provide minimum food rations to the starving.

On top of that, the government is losing SUSIB2,OOO-a-day, in revenue it cannot collect because low river levels have forced the closure of the huge OK Tedi copper mine. If rain falls before the beginning of December coffee crop will be possible. If it does not, additional losses will be counted in the tens of millions and the cost of feeding the hungry will also escalate. In Australia, economists estimate the impact of the events of the past six weeks will take less than one percentage point off economic growth. If the situation in South Korea and Japan again deteriorates signifi cantly - a possibility given the difficulties being faced by the finance sector in both countries - things could be very much worse. In that eventuality the Pacific, and indeed the whole world, would feel the ill-wind of recession. ■

Jemima Garrett

Sydney