Asian economies holding up

The laws of economics can appear perverse in the face of human tragedy, and this seems particularly the case where the Indian…

The laws of economics can appear perverse in the face of human tragedy, and this seems particularly the case where the Indian Ocean tsunami disaster is concerned.

Only a few industries in the Asia-Pacific region, including tourism, are expected to suffer short-term adverse effects, while others, such as construction, could actually enjoy longer-term benefits, analysts say.

"The economic impact was bigger during the SARS crisis last year even though the death rate was much, much lower. This will be the reverse," said Mr Rajiv Malik, regional economist with JP Morgan in Singapore.

Although Munich Re, the world's largest reinsurer, estimates that tsunami-related damage will amount to $14 billion (€10.6 billion), this pales into comparison to the $132 billion (€100 million) in losses resulting from Japan's Kobe earthquake in 1995, which killed 5,000 people, less than one-twentieth of those feared lost in the current disaster.

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The main reason for the disparity is that the tsunami largely affected economically poor areas with little industry and minimal infrastructure.

Most of the recovery money will go towards reconstruction, with Thailand planning to spend $510 million (€387 million) to rebuild its prime tourist destination around Phuket, and Indonesia expected to devote $1 billion (€758 million) to northern Sumatra, near the epicentre of the earthquake that triggered the tsunami.

Most of the reconstruction funds are likely to come from government budgets and international aid agencies, rather than insurers, since "typically these areas are not well insured because of their economic status," said Mr Neil Drabsch, chief financial officer at QBE, the Australian insurer.

"Insurance penetration in a lot of the countries affected is very small and in places like India there have not been foreign insurers allowed in," said Mr Andrew Martin, insurance analyst at Alliance Capital. The biggest impact will be on local insurers. Thai Reinsurance expects net losses of Baht100 million (€1.9 million). "Being the national reinsurer, Thai Reinsurance is involved with most risks in Thailand and will sustain a certain amount of exposure from this catastrophe," the company told the Bangkok Stock Exchange.

Although the tourism sector will suffer the biggest direct impact from the disaster, "its recovery is likely to be swifter than from SARS," said Mr Malik.

Mr Thaksin Shinawatra, the Thai prime minister, on Monday declared that the country did not need foreign aid to help it recover from the tsunami disaster, and could afford to pay for its own relief and reconstruction with government spending and domestic donations.

The government has already committed some $1.5 billion (€1.14 billion), with Mr Thaksin saying no resources will be spared in rehabilitating the affected region and Thailand's crucial tourist industry.

But Thailand's finance ministry, and other economists, project that the disaster will pare Thailand's GDP growth for 2005, even with a flood of government money to support reconstruction efforts.

JP Morgan forecasts Thai GDP growth will be reduced to 4.6 per cent this year, from an earlier projected 5 per cent, while Phatra Securities, in a report last week, estimated that GDP growth will be shaved by 0.6 percentage points, also to 5 per cent. The Thai finance ministry has estimated that the disaster will shave 0.3 points from GDP growth.

The Thai tourism industry, which accounts for 6 per cent of GDP and employs nearly 200,000 people from across the country, will suffer the greatest hit, as skittish foreign visitors cancel planned seaside holidays in the wake of the disaster.

Sri Lanka's economy has shown remarkable resilience in the past five years, enduring frequent floods, droughts and two decades of civil war, to average growth rates of between 4 and 5 per cent.

This strength may be further evident with the central bank estimating that Sri Lanka's gross domestic product could still grow at a rate of 5.5 per cent this year, just 0.5 percentage points slower than initially forecast.

Economists say one reason Sri Lanka's economy could still defy the odds is that the tsunami has left the island's industrial heartland largely intact. Its western province, which includes the prosperous seaside capital Colombo, generates nearly half the country's GDP.

Yet average incomes of $1,500 (€1,138) per head in Colombo outstrip rural incomes by more than five times. With as many as 100,000 coastal fisherman now unemployed after the tsunami, this income disparity is certain to widen.

Officials say domestic trade, part of the services sector which accounts for about one fifth of GDP, is likely to remain robust. The outlook is not as benign for fishing, which accounts for around 3 per cent of GDP but was the hardest hit of all sectors.

The projected cost of reconstruction is mounting, although precise figures are unavailable. Last week, officials put the cost at $1 billion (€758 million), a huge bill for a government whose resources are already stretched thin.

Sri Lanka's fiscal deficit has crossed 8 per cent of GDP and demands are pouring in from devastated areas for more government funds. Foreign aid will have to fill any shortfall. The World Bank has offered Sri Lanka $100 million (€75 million) in assistance, while the Asian Development Bank on Monday offered up to $100 million through new loans and revising current projects. Aid is also likely to come in from foreign governments, though specifics are not yet available.

The Maldives said on Wednesday that the Indian Ocean tsunami had affected the archipelago's entire 300,000 population and set back development by two decades.

Chief government spokesman Dr Ahmed Shaheed said in a statement that while the islands were spared the huge loss of life suffered in other countries, the land itself had been severely damaged.

A conservative estimate of $1.3 billion (€986 million) for infrastructure repairs is still twice the country's annual gross domestic product (GDP).

"It is clear that what eight days ago was the most prosperous nation in the south Asia region will face the highest per capita reconstruction cost," Dr Shaheed said.

- (Financial Times Service, Reuters)