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US Confrontation with Iraq Hits Asian Financial Markets - 2003-03-11

The threat of war in Iraq and concerns about the U.S. economy are unnerving Asian economies, with many companies and consumers putting new spending on hold.

Share prices in Asia have continued to slide this year, as investors become increasingly skittish about the drama being played out in the United Nations over a threatened war in Iraq.

Stock market indexes in Hong Kong and Australia are near four-year lows and Tokyo stocks continue to languish at 20-year lows.

"The markets are obviously taking a beating in the last few days and weeks due to the concerns about the U.S. situation with Iraq," said Bill Anderson, senior vice president at UOB Kay Hian Holding, a stock brokerage firm in Bangkok.

This week, the United Nations Security Council is expected to vote on a new resolution declaring that Iraq has not complied with demands it end banned programs to develop weapons of mass destruction. The draft resolution, sponsored by the United States and Britain, would clear the way for using the force to disarm Iraq.

Companies around Asia say a war with Iraq, or a prolonged political standoff in the United Nations, will hurt business in several ways.

"The first part is the hike in oil prices. The second part is I think the slowdown on the global economy that will hit our exports," said Arporn Chewakrengkai, chief economist for Thailand's Government Pension Fund. "And the third part is it will hit the stock market. So these will impact on the wealth and income especially for consumer confidence."

Oil prices have been near 12-year highs for weeks, and there are signs the U.S. economy is weakening. The United States is a major market for Asian exports.

Those uncertainties have led the Asian Development Bank to warn that regional economic growth could be weaker in 2003 than originally expected. The ADB still forecasts an average growth rate of 5.6 percent for the region, but that is down from its earlier prediction of six percent growth.

Thomas Verlohr, managing director of Commerzbank Asia, says many countries expect lower growth if war breaks out.

"Singapore has already said that in the case of a war, we should revise our growth rates further down and I think their initial targets between 2.5 and five percent would obviously not be achieved because of these uncertainties. What are the results of a war, nobody knows," he commented.

Cliff Tan, a senior analyst with investment bank Salomon Smith Barney in Singapore, says businesses find it difficult to expand now.

"I think people are concerned about what higher oil prices mean for the global economic recovery, what it might mean for future exports," said Mr. Tan. "So a lot of both the real business world as well as in the world of the financial markets, there's a lot of pausing of activity, of planning, of execution." The travel industry in Asia is particularly nervous. One fear is that fighting in Iraq could lead to terrorism attacks, which could scare off both tourists and business travelers.

"Organizations such as IATA, which is the International Air Transport Association, looking at alternate routes so that traffic can still move - for example between Asia and Europe - but obviously bypassing a fairly large air space in the Middle East," said John Koldowski, a spokesman for the Pacific Asia Tourism Association. "We anticipate there would be an immediate shutdown of non-essential travel, for obvious reasons."

Mr. Koldowski says new marketing and investment plans are ready, but he adds if any war is short, Asia's travel industry should recover quickly.

Although many companies are holding off on nonessential spending, some business experts say they expect Asia to bounce back fairly quickly if a war with Iraq is over quickly.

Andrew Swan, a media analyst with JP Morgan in Singapore, says there is a pipeline of full of advertising orders that will be placed once global tensions ease.

"If it's just a short-term issue and the Middle East tensions get resolved reasonably quickly then I'll think you'll see that pipeline come through and ... could be very, very strong for a lot of markets," he said.

Financial analysts also say that markets also could rebound quickly once fighting starts, especially if it appears the war will end quickly. And if stock prices rise, that will make both companies and consumers feel more confident about spending money, helping Asian economies recover.