Catalog

Macroeconomic forecasts

Consensus Economics has published forecasts of selected macroeconomic indicators for Indonesia, Korea, Malaysia, and Thailand since 1995. By examining these data it may be possible to assess the degree of confidence that "experts" have in the outlook. If, for example, forecasts of growth move lower and the dispersion of these forecasts widens, this might indicate that risks to the outlook have increased.

In Figure 1.4.14, the evolution of Consensus Economics forecasts for GDP growth from January 1995 (the forecast for "1996") through to January 2007 (the forecast for "2008") are shown together with the standard deviation of the forecasts. The figure shows simple averages of mean forecasts and standard deviations. The impacts of the crisis are immediately apparent in the sharp drop-off in forecasts of average growth that occurred in January 1998. Relative to the years before the crisis, it is clear that private sector forecasters have lowered their sights, and are yet to raise them. Equally striking is the increased dissonance in the outlook that starts in January 1998 and is present through to January 2005. This could be interpreted as evidence that not only were private sector forecasters less optimistic than before the crisis, they were also much less certain.

Equity values

Equity prices are often used as a barometer of investors' views of long-term growth and market prospects. Figure 1.4.15 presents data on real equity prices. These have been calculated both in domestic currency and in US dollar terms. In domestic currency units, real price indexes are defined as the benchmark index (measured relative to a 1990 base), divided by the consumer price index. The US dollar indexes convert the local indexes at market exchange rates, and are then divided by the US consumer price index. While the US dollar index is affected by exchange rate movements, capital flows and exchange rates are influenced by investor confidence, too.

In domestic currency units, real equity prices in 2006 exceed values in 1990 only in Korea and Malaysia, while in US dollar terms, only Korea's equities have appreciated. Dollar prices in Indonesia and Thailand are less than 40% of their 1990 level and prices in Malaysia and the Philippines are about 15% lower. This might be taken as evidence that confidence in long-term growth prospects in the crisis countries has ebbed, leading to lower investment rates and slower growth (e.g., Lee and McKibbin 2006).

Equity prices have, admittedly, some limitations as a measure of investor beliefs about long-term growth prospects, and are just as likely to be influenced by short-term prospects for gains as by the long-term outlook. Certainly, surges in emerging market equity prices in 2006, which have continued through the first months of 2007, appear to reflect speculative positions taken by investors hunting for yield in highly liquid international markets. But to the extent that this has raised prices, it suggests that the present comparisons may exaggerate beliefs about long-term prospects. If, instead, comparisons are made between 1990 and 2005, all markets (including Korea) show lower prices in US dollar terms relative to a 1990 benchmark. These trends suggest that beliefs about potential growth may have been downgraded or that the risk premium may have been raised.

Corporate balance sheets

Debt-equity ratios prior to the crisis had reached dangerously high levels and left debtor firms exposed to interest rate and market risks. A difficult process of debt resolution and workouts followed, but with the majority of the work being completed within 5 years. The data in Figure 1.4.16 capture trends in debt-equity ratios from 2002 to 2006. The ratios in this figure are expressed in ratios of the market value of debt to the market value of capitalization for all listed companies in each market. The sharp declines in debt-equity ratios over this period suggest a sustained effort within the corporate sector to protect against risks and fortify financial defenses by bringing debt exposure down. Figure 1.4.17 shows the evolution of credit (as a percentage of GDP) to the private sector over the period 1995-2005. Except in Korea, credit-to-GDP ratios have fallen relative to the precrisis period and would be consistent with heightened prudence. As credit to the household sector has been brisk in some countries, these data probably overstate flows of credit to the business sector.

Economist Intelligence Unit business rating and risk indicators

There is a wide variety of data on the business environment and risks. The Economist Intelligence Unit (EIU) has been collating these data for the crisis countries over an extended period. Unfortunately, EIU does not provide measures of the reliability of these indicators, which rest largely on the judgments of in-country analysts and experts. Table 1.4.1 presents EIU business environment ratings. These ratings are centered 5-year averages, so the score for 1995 covers the period 1993-1997 and the rating for 2002, the period 2000-2004. These are used as approximations for the pre- and postcrisis periods. The more heavily shaded cells indicate where scores deteriorate over the comparison period. The checkered pattern of ratings speaks for itself, but it is noticeable that on "policy towards private sector enterprise" and on "financing," EIU ratings get worse in all countries. If these expert opinions or perceptions are widely shared, it would suggest that the environment for investment in the postcrisis period is now less favorable than before the crisis.

EIU also produces ratings that cover political as well as economic risks. Table 1.4.2 (below) presents these data. They, too, show a seesaw pattern, with improvements in some areas and regression in others.