The prognosis is in.
The Asian flu is more than a case of economic sniffles. It has infected currencies around the world and inflated the blood pressure of exporters counting on strong demand from the Pacific Rim.
A University of Manitoba economist estimates it will take five years before the financial remedies for the Asian economic meltdown start to work.
A five-year flu? That is more like an affliction, a condition, a plague.
Norman Cameron outlined the causes and consequences of the Asian financial turmoil at a recent Canada Grains Council seminar.
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He said cures won’t kick in quickly because sluggish political systems are partly to blame for the economic problems.
“An awful lot of this hinges not on economics, it hinges on politics,” said Cameron.
The Japanese government allowed “hopelessly uneconomic” domestic industries to form recession cartels in 1974. These groups were designed to share local markets and prevent foreign companies from competing.
They never disbanded. Cameron said it’s unlikely the government will force them apart any time soon.
Although Japanese export sectors excelled, the stalled domestic sector led to unemployment concerns in the mid-1980s, said Cameron. The government eased that fear with monetary policies that pushed up Japan’s internal economy. Real estate prices skyrocketed.
Banks built up a “dud loans portfolio” with real estate as collateral, Cameron said.
Today, after the bust, this collateral has lost one-third to one-half of its value. Borrowers can’t repay their debt, but banks can’t afford to seize the assets and lose money from the loans.
Bad loans are worth 18 percent of Japan’s gross domestic product, and 40 to 50 percent of GDP in other Asian countries.
“This is more than just a head cold,” said Cameron.
Banks won’t be able to fuel economic growth by extending new credit until they become solvent. They have been slow to write off some of their bad loans, said Cameron, despite attractive bailout offers. Japanese banks are closely linked with large industrial firms and find it “personally uncomfortable” to tell these clients their debt is worthless, said Cameron.
In South Korea, major companies are tied up in huge industrial conglomerates. Writing off debt would mean bankrupting large chunks of the country’s economy, he said.
Asian countries overbuilt productive capacity during the boom years, said Cameron. The economic activity that comes with building more capacity won’t happen anytime soon, he said.
To some degree, European and North American buyers of Asian exports will determine how quickly Asian export sectors grow to fill the capacity, said Cameron.
Doug Mutch, executive director of the grains council, said the role of the Asian crisis in sinking commodity prices has been somewhat overplayed.
Mutch noted commodity prices tend to move in cycles. In the mid-1990s, high world commodity prices spurred overproduction, which then caused prices to trough.
The Asian flu coincided with the bottom of the cycle and exacerbated its effects, said Mutch.
Bill Riley, manager of planning and market development for Xcan Grain Pool Inc., said the Asian situation has much to do with the “precipitous drop” in feed prices over the past year.
Japan is the largest importer of feed in the world, said Riley. Indonesia had been a major buyer of Canadian canola meal.
But when currencies crashed, Asian consumers could no longer afford to eat as much meat. Feed demand plummeted.
The weaker demand coincided with a massive crush of soybeans for a strong edible oil market, said Riley.
Soybeans are 82 percent meal. The large crush led to glut of soybean meal, further weakening protein prices.
European subsidies encouraging feed production haven’t helped the situation either, said Riley.
