MAIN PAGE | EVENTS & PROGRAMS | 2002 | IGM | AVAILABLE SPEECHES | ALASDAIR MORRISON
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2002 | IGM | AVAILABLE SPEECHES | ALASDAIR MORRISON
Striving for Growth
in a Challenging Environment PBEC 35th International General Meeting
Kuala Lumpur, Malaysia May 3-7, 2002 Alasdair Morrison Good afternoon. In speaking to you today about what we can do to rebuild confidence in Asia, I will focus more on confidence as it relates to the financial sector. There are three key areas that I would like to address:
Regaining confidence in the banking system and rebuilding investor confidence is, in my view, quite simple. It's about getting money into the right hands. By this I mean to those who will manage their businesses just a little more efficiently, those who can create value by giving their customers what they want, the people who are honest and hardworking and can be relied on to utilize prudently the money that others - whether as depositor, lender, or investor - have placed in their trust. When we have a system in place which ensures that money goes to the right hands, investors will be properly rewarded for their risk taking and will trust their money to Asia. (1) Confidence in the Banking System Role of Banks It is important to note how important banks are in allocating money, particularly in Asia. In our economies, commercial banks remain by far the largest aggregators and allocators of capital. Total household financial assets held in cash or deposits in Asia average around 59% compared to 14% in the US. Additionally, in comparison to their Western peers Asian corporations have traditionally relied much more on commercial bank loans than on the capital markets to meet their funding needs due to relatively undeveloped local bond markets. Consequently, a well-functioning and healthy banking system is a vital factor in ensuring efficient allocation of capital. Confidence in the banking sector is key to revitalizing growth in Asia, just as the failure of many banks to allocate funds efficiently was a major contributor to the economic crisis. NPLs and Recapitalization I'd like to talk about Non-performing loans, as they represent how much money ended up in the wrong hands. At the end of 1998, almost one quarter of banking system loans in Asia were non-performing. At the peak of the crisis, the figure was as high as 60% to 70% in some economies. Faced with hemorrhaging banking industries, Asian governments took action to clean up their financial systems. As a result of these efforts, NPL ratios have come down significantly across the region over the last 3-4 years. Capitalization levels of banks have also increased. Governments moved to intervene in and liquidate non-viable financial institutions. These efforts have been helpful but how successful have we really been? Additional Work is Required I would argue that despite the progress to date, there is more that needs to be done by governments and banks to help restore investor and consumer confidence in the financial system. · NPLs and Consolidation First of all, many countries in Asia remain over-banked and have not yet achieved sustained NPL levels in line with the 5% range of more mature banking systems. Cleaning up the system by finally aggressively working through remaining NPLs should be a key priority to restore confidence. Encouraging continued bank consolidation so that there are fewer but more efficiently run banks that can face international competition should also be a major priority. · Behavioral Change Second, restructuring is not just about reducing NPLs, merging banks and injecting capital. True reform is about behavioral change. Lending practices of banks in the region need to continue to be improved so that capital does not again end up in the wrong hands. This means an intense focus on improving credit culture, risk management systems and supervisory functions of Asia's banks. · Privatization Third, many banking systems that were virtually nationalized during the Asian Crisis need to be quickly privatized through direct sales or sell-downs in the stock market. Having major parts of a country's banking system in the hands of government can create conflicts in the allocation of funds. · Separating Winners From Losers Finally, banks should help instill market discipline to separate the companies that are winners and losers and channel capital accordingly. Banks should leverage their position as providers or intermediaries of capital to force local corporations to improve financial reporting standards, transparency and corporate governance. (2) Investor Confidence Building investor confidence similarly requires bold action. Investors need to have confidence in three major areas if they are to invest their capital. Confidence in Corporations First, they must have confidence in the individual corporations in which they invest. Companies that focus on increasing shareholder value will prove most attractive to investors. To regain confidence, companies need to demonstrate high standards of corporate governance and respect for shareholders' right. Adequate disclosure gives investors comfort that they have enough data to make informed investment decisions. The bar is rising. The recent Enron and Arthur Andersen debacle, together with questionable accounting practices at dot-coms, and even blue chip companies in the US, have prompted investors to ask for ever more transparency and greater checks and balances between management and the board. Restoring investor confidence in corporations and their leaders may require changes to executive compensation systems and the role played by boards of directors. In Korea, for instance, the codes now require half of the board of large listed companies to be filled by independent directors. Similar action needs to be taken in other parts of Asia. Confidence in Governments and Markets Second, investors must have confidence in the governments and markets of the countries in which they invest. Regulators and business must work together to create an environment that is most conducive to business and investment. The privatization of state-owned enterprises and the fostering of competition from both domestic and foreign players has proved its value in the revitalization of industries. Investors also need to have confidence that the law will be impartially applied. The legal system must protect everyone equally and guard the rights of minority shareholders. A market in which there is a free flow of business and economic information is attractive as investors can understand with whom they are placing their money. Confidence in Financial Intermediaries Finally, investors must have confidence in the financial intermediaries that help to allocate their capital and present them with investment opportunities. Investment banks, brokerage houses, mutual fund companies and others will play an increasingly important role in Asia as they do now in the West. They must apply the highest standards of integrity and avoid any semblance of conflict of interest, in which regard some work is required to restore investor confidence. Further, investors must be presented with multiple options to invest their savings. Mutual funds and other securities products, for example, which currently only account for 27% of household financial assets in Asia versus 40% in the US, will likely grow to be a major vehicle for the investment of savings in Asia as they have in other parts of the developed world. Similarly, corporations must have confidence that their market intermediaries have the local and global knowledge and the technical expertise to assist them as they access the capital markets. (3) Consumer Confidence Consumer confidence is about the consumer's expectations for the future - for employment, the state of the economy, their income, their return on assets (particularly stock market and real estate assets), and their quality of life. It is also about confidence in the availability and reliability of retirement schemes and a social safety net. Importance of Consumer Confidence We should take note that consumer confidence can play an integral role as a driver of growth. Confidence can give consumers the inclination to spend even during seemingly difficult times. US nominal GDP fell in Q4 2001 while nominal consumption rose at an annualized rate of 6.2%. The 5.8% growth in GDP in the first quarter of 2002 achieved in the US in the face of slumping stock markets and lower business investment has largely been attributed to consumer spending. It seems that US households are leveraging up to take advantage of low interest rates and low prices thereby helping to prop up an uncertain economy. Also, increases in housing wealth in the US have partly offset equity losses resulting in the reemergence of a positive "wealth effect" thereby boosting US consumer confidence. The Korean economy has also been supported by consumer demand in recent months with private consumption growing twice as fast as the economy in certain periods. However, in many other Asian countries, the consumer is still a relatively limited contributor to GDP growth. Growth of the Asian consumer market will leave Asia better prepared to weather inevitable economic downturns. Building Long-Term Consumer Confidence There are a number of steps that can be taken to bolster consumers' confidence for the long-term. Investment and commercial banks and insurance companies can help build long-term consumer confidence by providing a more complete suite of wealth management products, such as securities and mutual funds, so that consumers have more investment options and can expect a higher return on investment. Real estate values in many Asian countries have recently also not been as stable as they are in the US, contributing to a sense that the future value of peoples' assets is uncertain. Stability in the value of property, usually the most significant asset an individual owns, gives people more confidence about their future wealth. In addition, consumers need to have confidence in their long-term financial security. Adequate retirement schemes need to be developed further in Asia - currently pensions and insurance account for 12% of household assets in Asia compared to 30% in the US. Closing - Preparing for Future Growth CEOs and Managers also have a major responsibility to foster confidence among investors and consumers and to prepare their businesses for future growth. Focus on Customers and Shareholder Value Managers can do this by focusing on increasing earnings and maximizing shareholder value. They should use this downturn to build better relationships with their customers to show that they are there during both good and bad times. Focus on Core Business Managers should increase their focus on building their core business rather than spreading their attention across a wide range of disparate operations. One of the first steps taken in post-crisis Korea was to dismantle some of the chaebols in order to increase their focus on core lines of business, allowing them to build scale and expertise in a few core areas or to occupy specific market niches. Also, investors prefer a focused strategy as they increasingly have the option to diversify their invested capital across industries. Complex organization structures have become particularly suspect as investors have begun to wonder what lies behind the complexity. Improve Capital Structure The recent US scandals have also raised investors' concerns over liquidity, earnings, and accounting issues and have provided the impetus for managers to re-examine their capital structures. Good managers will prepare for future growth by building stronger balance sheets. They will optimize their company's capital structure by "terming out" their debt - replacing short-term debt with longer-term debt, equity and convertible bonds - and reducing financial leverage to prepare for growth. Promote Integrity Last but not least, restoring investor confidence is about integrity. CEOs and leaders should demonstrate not only the ability to deliver quarterly bottom line targets, but also the moral commitment of doing what is right for the shareholders and the employees in the long term. Investors want CEOs to be more forthcoming, not only in celebrating success, but also in admitting mistakes and taking corrective action promptly. The businesses and managers that take these steps will be the ones that earn and build investor and consumer confidence. I have confidence that all of the things I've discussed can and will take place. I thank you very much for your time. |
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