Asia Learned From Its Financial Crisis; US Didn't

♠ Posted by Emmanuel in ,, at 5/04/2011 12:01:00 AM
While visiting the website of those famous bond fiends PIMCO, I came across an interesting article on the resilience of Asian economies since the 1997-98 financial crisis. Chia-Liang Lian makes the case that Asia--particularly developing Asia--represents a good investment opportunity. This, of course, comes in tandem with PIMCO's Bill Gross famously dumping malodorous US Treasuries. Times are a-changin': Asian developing countries are now well-placed to secure better credit ratings as you'll read below, while the US is famously set to be downgraded in the likely event that its economolested finances deteriorate even further. While most of us have a mental image of developing Asian countries being reliant on the US market as an export destination, the reality is that the EU surpassed it as such quite a few years ago:
Lian cites reserves as self-insurance (perhaps overdone IMHO), emphasis on fiscal discipline, monetary prudence, and manageable impact from the Japan quake as reasons to expect Asia to carry on nicely. Especially in the fiscal and monetary arenas, there is certainly a contrast of crises evident: While Asian countries learned their lesson (and most European ones to a lesser extent), the United States' money-for-nothing policies have resulted in an unyielding depreciation of its currency and a concomitant disbelief in incredulous policy statements.

But let's not dwell on the hopeless and look at the bright side in Asia. Let's start with Indonesia which was pretty much ground zero of the Asian financial crisis. A scant twelve years on, it is on the brink of realizing investment grade status. Plus, its designation as such by two credit rating agencies should further bolster local capital markets as large institutional investors are given the effective "go" signal. From the Jakarta Post:
It has been more than 12 years since the 1998 Asian financial crisis, and Indonesia still has not managed to regain its investment grade status from rating agencies like Fitch, S&P’s and Moody’s. In the last few years, Indonesia has been blessed with relatively stable political condition, which enabled both portfolio and foreign direct investments to come in. This coupled with strong international commodities prices accelerated Indonesia’s economic growth, resulting in flushed foreign exchange reserves, which reached the highest ever at US$106 billion in March 2011.

The above trends translate to the maturation of Indonesia’s institutions and policy framework, as evidenced also by the easing of the country’s fiscal and external debt burdens stemming from the government’s track record of pragmatic fiscal and debt management policies.

The strong fundamental improvements that we have seen in Indonesia in recent years is the reason why Fitch is looking to upgrade Indonesia’s long-term foreign currency sovereign debt to investment grade sometime in the next 12-18 months. This move, when it materializes, will reinforce the market’s perception that Indonesia has been on the right track. More importantly, the upgrade, reflecting a safer investment destination, would make it possible for a wider universe of international investors, including massive US pension funds, to begin investing into the Indonesian stock market.

However, the real plus for Indonesia will come when a second rating agency also upgrades Indonesia’s rating as large US fixed-income investors, including pension funds and other institutional investors use the Lehman Aggregate Bond Index as their benchmark, which requires two investment-grade ratings in order for a bond to be included in the index. Worth noting is that once a rating agency upgrades, at least one would tend to follow within a year.
Another crisis-affected country to a lesser extent is the Philippines. Alike Indonesia, its macroeconomic picture is looking up, and it has just mounted a roadshow to convince the aforementioned credit rating agencies to consider upgrading it towards similar investment-grade status in the near future. With public debt reduced to 55% of GDP (North American debt lubbers take note: this is not a typo), it isn't a far-fetched goal:
The Philippines is wooing the three major credit rating agencies-—Moody's Investors Service, Fitch Ratings, and Standard & Poor's—-for an upgrade in its credit scores, as economic managers believe the country deserves it amid improving fiscal situation and external liquidity.

Finance Secretary Cesar Purisima told reporters on Thursday that he went recently to New York and Washington D.C. and met separately with representatives of the three credit rating firms. In the meeting, he presented fiscal and monetary data on the Philippines that he said should encourage the rating firms to lift the country's credit scores. He also reiterated the Aquino administration's commitment to meet its medium-term fiscal goals.

The Philippines is rated three notches below investment grade by Moody's, and two notches below the same by Fitch and S&P. Purisima said the credit rating of the Philippines has been lower than that of Indonesia, but added that the fiscal situations of the two countries have been similar. He also cited the country's declining debt-to-GDP [gross domestic product] ratio and deficit-to-GDP ratio. "Our debt ratios and deficit are declining, and our financial sector is well managed, and so we deserve better ratings," Purisima said...

The Philippine government has P4.7 trillion [about $109.6B] in outstanding debts, equivalent to about 55 percent of the country's gross domestic product. This has been brought down from over 70 percent a few years ago.
It remains utterly ludicrous how American deficit deniers believe that even looser money policies than those that brought on the US subprime crisis are the solution to what ails it. I guess the Asians learned from their crisis, but the Americans didn't. Their contrasting public finances tell the story, and even the habitually tardy credit rating agencies are coming around to this fact. Here is the PIMCO conclusion on Asia's sunnier side:
Our conviction of the resilience of emerging Asian countries leads us to be open to adding exposure as attractive opportunities arise. We continue to maintain exposure to emerging Asian currencies. We expect growing acquiescence to currency appreciation as an effective tool to keep imported sources of inflation in check. In this regard, the gradual appreciation trend in the Singapore dollar should remain intact. Despite recent gains, we believe the South Korean won and Chinese yuan remain fundamentally undervalued.

In external credits, select high grade, quasi-sovereign bonds in South Korea and India offer attractive reward opportunities for the risk. We look for avenues to “shake hands with governments” in countries where credit fundamentals are continuing on an upward trajectory. Specifically, Indonesia appears on track to potentially achieve investment grade status in the next twelve months. While the sovereign bonds have largely priced in the prospect of an upgrade, select higher-yielding corporate bonds offer an attractive risk-reward balance, particularly those that have demonstrated a consistent credit record. In the credit default swap market, we look to add, during periods of generalized market weakness, exposure to high quality sovereigns with strong credit metrics.