The global financial crisis is taking an increasing toll on Asia's corporate sector with the region's economies now among the world's hardest hit, a senior IMF official warned Tuesday. "Corporate risks are rising and market indicators are flashing warning signs," IMF deputy managing director Takatoshi Kato said.
"There are signs that even the best Asian corporate 'names' are being rationed out of financial markets and are considering approaching their government for direct assistance," he told the annual meeting of the Pacific Economic Co-operation Council, a regional think tank, in Washington. Large Asian firms, like their US counterparts, entered the crisis with strong balance sheets and when the demand shock hit, they faced little immediate pressure to scale back their activities or cut costs, he said.
"However, liquidity positions have since dwindled." Kato said the global economic downturn is hitting Asia more severely than other regions with fourth quarter data showing a decline in output of nearly 15 percent in Asia, excluding China and India.
Many small and medium-sized enterprises, he said, were also suffocating under the weight of the global crisis, which stemmed from a US home mortgage meltdown that triggered financial turmoil and slammed the brakes on growth.
The firms borrowed heavily during the previous decade to expand their activities as suppliers to larger manufacturing groups but with the onset of the crisis, banks immediately started to rein in lending to these firms, Kato said. Bad corporate loans were also expected to taint bank balance sheets in Asia.
"The feedback loop between the financial and real sectors is expected to play out," Kato said. "Given the likely prolonged nature of the downturn, non-performing loans are likely to rise. This will feed into bank balance sheets." Kato said large Asian corporations would need to further cut production if the credit crunch combined with a sharp fall in demand put healthy companies into trouble and scuttled profits.
Predicting that the region could see a wave of consolidation through mergers and acquisitions, he said firms were only now beginning to adjust employment levels. "In the near-term, the process may prove quite painful, particularly if large job losses are involved," he said. "Already, unemployment has started to climb across the region and potentially high social costs from this downturn are a looming threat."
Kato said that as financial activity world-wide shrunk, Asia's financial centers "have also been broadsided." Citing Hong Kong, the special administration region of China, he said its financial system was "contracting," particularly in areas such as asset management and brokerage services. In Singapore, lending to non-bank customers has been contracting recently in the Asian Dollar Market, he said.
In Japan, stricter lending standards, wider risk spreads, and the significant stock market declines have tightened financial conditions, he said. Kato also noted that private investment in most Asian countries had slowed significantly and warned about a slowdown in private consumption as well.
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