A regional perspective

Ralph McHenry
Asia Pacific Leader
Business Recovery Services
PricewaterhouseCoopers

One of the most striking features of developments in the world economy over the past decade or so has been the increased pace of globalisation, and in particular, the increasing integration of most Asian countries into the world marketplace. Moreover, this integration has been based increasingly on manufactured products, including high technology products, as opposed to simply commodities and low value-added semi-manufactured goods.

Of course, in a region as diverse as Asia, it is difficult to generalise. The region ranges from the economic giant Japan, with its model of advanced capitalism so different from the model practiced in the other advanced countries in the region, such as Australia or Hong Kong, China, all the way through to countries such as Pakistan, with a gross domestic product (GDP) per head only a little over 1 per cent of Japan’s. And the differences across the region are not just related to the state of economic developments in these countries.

Growth in foreign direct investment
Yet despite all the differences, there are common themes as well. All countries are seeking rapid economic growth, and even if the terms under which it is welcomed may vary, all countries are looking for increased flows of foreign direct investment (FDI). The scale of this investment is difficult to exaggerate. For example, the stock of FDI in a country such as Malaysia is around US$2,400 (US dollars) per person, representing nearly two-thirds of per capita GDP. China is currently attracting nearly US$50 billion annually in FDI. Indeed, even a country such as Japan, long wary of foreign investment, has recently embarked on a campaign to double inward FDI by 2008. Although the stock of FDI equates to only 2 per cent of the country’s GDP (for most industrialised countries it is 20 to 30 per cent of GDP), such is the relative size of the Japanese economy that this would represent inward FDI of over US$100 billion annually.

A country such as Japan is primarily looking to FDI to invigorate a sluggish economy. Other countries see FDI as the key to economic growth and development, either through the financing of infrastructure projects, or the attraction of investment in industrial and commercial facilities. So there has been a hunger for foreign capital which has been provided both by companies looking at Asian investment as a long-term (‘strategic’) investment, as well as investors and financial institutions looking for quicker and higher (‘financial’) investment returns than those they believe to be available in the traditional markets of Europe and North America.

Asian economic crisis and its aftermath
Inevitably, with such a hunger for investment and with so much western capital looking to feed that hunger, expectations reached unsustainable levels, a bubble resulted and then burst, culminating in the 1997 Asian crisis, as investors strived to recover their loans and reduce their exposure to what suddenly looked like a risky Asian sector.

It then became clearly apparent that the insolvency regimes of many of the countries affected were inadequate to cope with the burdens placed on them. This precipitated a barrage of criticism, particularly from international investors, about the legal frameworks in many of the countries affected. Whatever the merits or otherwise of these criticisms, the inadequacies revealed should not really have come as a surprise, and one is led to the conclusion that many investors may have rushed into lending into Asia without having fully investigated and thought through the risks involved.

The legal inadequacies particularly revealed themselves in an inability to handle restructuring, and the laws dealing with liquidation and bankruptcy processes were regarded as soft and opaque. Moreover, even informal restructuring approaches, led by banks seeking to work-out debt in over-leveraged companies on a voluntary basis, and based on cooperation between the parties, needed workable and dynamic insolvency systems to act as ‘incentives’ or ‘catalysts’ to all parties to cooperate in the debt work-out process.

Additionally, the sudden and extreme nature of the crisis meant that it was not just ‘corporates’ which got into trouble, but many of the region’s banks as well. As a result, a lot of the initial focus was diverted to shoring-up the banking system itself, rather than on operational and financial improvements and restructuring of corporations. This necessary diversion perhaps goes some way to explaining why corporate restructuring has been slow compared with the US and European recoveries during the recession of the late 1980s and early 1990s.

Introduction of asset management companies
With non-performing loans (NPLs) threatening to overwhelm banking systems, many Asian countries established asset management companies (AMCs), either explicitly government-owned or backed by government guarantee, to purchase NPLs from ailing banks to help the banking sector overcome its liquidity problems and continue lending, thus avoiding a credit crunch. Korea was first off the mark in establishing a national asset management company (KAMCO). Malaysia soon followed with Danaharta (the national AMC) and the Corporate Debt Restructuring Committee (CDRC), and Thailand set up the Thai Asset Management Corporation (TAMC).

Countries that started early and took an aggressive approach have, unsurprisingly, made the most progress. Malaysia’s Danaharta, for example, expects to close in 2005. But countries that sought simply to reschedule their debt problem are still facing serious challenges to their banking systems, the weakness of which is infecting the rest of their economies. Japan is a case in point, although recent economic data point to the possibility that we are seeing the early stages of mild recovery.

Legal frameworks
The Asian crisis did, however, lead to some positive developments, such as the framing and implementation of legal frameworks more conducive to corporate restructuring, including the establishment of AMCs, in many countries. Moreover, in countries where legal frameworks have yet to be modernised following the 1997 crisis (for example, Socialist Republic of Viet Nam), there are increasingly strong calls for legislative shake-ups.

These legal frameworks differ in many significant respects as can be seen from the country-specific chapters in this Guide. But it is important to bear in mind that it is not just the formal legal framework which impacts on the form, nature and efficacy of restructuring and insolvency processes. Just as important are factors such as attitudes towards corporate governance, cultural attitudes towards dispute resolution and the role of external third parties within such a process, the functioning of the judicial system and access to experienced financial and legal professionals to help steer the process through to a conclusion. Even the most modern and notionally effective legal and regulatory framework can be adversely impacted in its efficacy by cavalier attitudes to corporate governance, or by a court system which is slow or inconsistent in its application of the relevant legislation.

However, the approaches to restructuring and insolvency across the Asian region are based fundamentally on legal frameworks, and this Guide provides a comprehensive and detailed summary and analysis of the legislative regimes across a wide range of countries, together with an assessment of the advantages and disadvantages of applying certain aspects of the law in a variety of circumstances. We hope the reader finds it both useful and informative.