As 2009 gets under way, its hard to imagine that barely a year ago the theory of Asian decoupling was gaining real ground. Could rising demand from Asian consumers insulate this region from the slowdown that already appeared inevitable in the western world? Could our capital markets stand on their own two feet without the US to hold them up?
Certainly equity investors thought so, driving Asian indices to a peak at the end of October 2007. But, as the flaws in the global financial system were so rudely exposed in 2008, the myth of Asian independence was shattered.
Financial markets from Seoul to Jakarta crumbled as emerging markets investors pulled back their investments, leaving slim pickings for the regions bankers. Even China, Asias biggest success story of recent years, pledged to pump Rmb4tr ($584bn) into its economy to combat slowing growth as US consumers stayed away and commodity prices slumped.
But panicked comparisons to the 1997-1998 Asian financial crisis are overdone. Korea, for instance, was shouldering external debt worth 19.6 times its foreign currency reserves in late 1997; at the end of June 2008 that figure was just 1.6. Asian balance sheets, both sovereign and corporate, are far healthier today than they were 10 years ago, which means the fourth quarter sell-off has created some tremendous opportunities for investors able to take a long-term view.
Accessing capital will be a challenge in 2009, and Asian governments may have to take some of the burden, but Asias best companies will still be able to raise money in the public markets, and fees on private placements will help banks more than keep the lights on.
The international debt capital markets finished last year in disarray, with little appetite for anything without a triple-A government guarantee. Asias local debt markets, for all their potential, fared little better with volumes down and few corporate issues of note. The retail buyers that had been snapping up bank capital deals until the summer of 2008 disappeared, spooked by high profile losses on structured notes and Lehman Brothers paper. Only China and the Philippines showed any signs of real growth.Asias local markets have the chance to shine in 2009: domestic insurers, pension funds and the like have money to invest, and Asian companies will be turning more and more to their local markets for funding. But more depth is needed if they are to fulfil their potential, and calls for more co-operation between the regions many discrete markets are as relevant today as they have even been.
New issues in the international markets, meanwhile, are likely to be from only sovereigns, quasi-sovereigns and the highest rated corporate borrowers until emerging market investors recover some of the confidence they lost in 2008. While investors take positions in the depressed secondary markets, Asias high yield bond market, which had just begun to flourish in 2006 and 2007, will remain closed to new issues for some time yet.
Borrowers pay upUnaccustomed to such volatility, Asias loan markets crumpled in September as interbank lending dried up. With dollars in short supply, Asian borrowers found themselves forced to pay higher interest costs on existing loans as banks invoked market disruption clauses to push for a re-pricing of risk and the very concept of pricing deals over Libor was called into question. The inevitable rise in corporate defaults will not help risk appetite return, but it will encourage lenders to push for decent margins on their commitments that will ensure that Asian lending remains a profitable business for the banks that stay in the game.
Equity capital markets bankers will find it hard to replicate the sort of revenues they enjoyed in the 2007 boom, with deal volumes likely to fall far short of Asias records. Companies, however, are under pressure to reduce leverage ratios, and a rebound in Asias equity indices may spur some activity from those looking to replace debt with equity. Banks and insurers, for example, have been turning to the equity markets to replace large amounts of hybrid capital another market where investor interest is unlikely to return in the near term.
The turmoil in the global capital markets in late 2008 poses some big challenges for Asia. Will international investors return to the region as quickly as they deserted it? If not, can local players step up to fill the funding gap, or will governments find themselves forced to bail out their local champions. Will slowing economic growth and the resulting pressure on Asian currencies lead to a full scale currency crisis?
Navigating the turbulent markets in 2009 will be no easy task, and there will be some shipwrecks along the way, but bankers in this part of the world are convinced they are better off than their counterparts in the West. Asias borrowers will be hoping they are right.