Shades of 1997: Is Asia Trapped in Déjà Vu All Over Again?
Hong Kong, December 4 /SHfn/
It certainly isn't 1997 revisited, at least not yet, but there are disturbing signs of deteriorating currency values across Asia, and if you recall your history of three and a half years ago, that was the warning sign that heralded the great Asian meltdown.
Asian central bankers are watching in quiet frustrations as their currencies are battered by an odd confluence of disparate forces. The strong dollar, everyone knows about that, is so dominant Asian nations can't hold the value of their currencies against it. But the weak Japanese Yen and the weak Euro are playing their part as well, because they force Asia nations to tinker with their own currency values to maintain their markets outside of Asia. But that in turn reduces their ability to import needed industrial goods, restructure their financial structure to pay off nonperforming loans and in general wreaks all sorts of nasty problems.
There are the political events that have contributed to knocking the Philippine Peso, the Indonesian Rupiah and the Thai Baht lower. In common for all these three: weak central government amidst political chaos. The President of the Philippines, of course, has been impeached and Joseph Estrada is heading this week for trial before the Senate. There are repeated calls in Indonesia for President Abdurrahman Wahid to step down. Thailand is about to hold a national election in the midst of a massively confusng political picture.
But there are other factors that also drive Asian currencies down. There's a flow of money out of the region's stock markets -- whoops, that happened in 1997, too - and capital outflow weakens currencies. But probably most important is that the longest global boom in anyone's memory is slowing and demand is falling. The US after an expansion that has gone on for eight years and produced a stock market and economic boom without parallel is now clearly beginning to slow. The main driver of Asia's growth these past few years has been rising exports, and a slowdown in the West is going to hurt, particularly the ubiquitous electronics industry of Asia. Corporations appear to be pulling back on capital spending, nonperforming assets are growing, bank lenders are getting tougher and corporate earnings downgrades are well ahead of upgrades. For Asia, this is not good news. One economist of our acquaintance is expecting Asian export growth to slow in 2001 to a respectable if a bit stodgy and unfamiliar 8 percent, from 20 percent this year. It is no wonder that Asian exporters have bad nightmares of their goods piling up on docks with no place to go.
In Hong Kong, where the Hong Kong Dollar is tied by a rock-hard peg to the US Dollar, its currency is steady - except against currencies from the rest of Asia - they're dropping against the HK Dollar -- and for a small area that is so dependent on tourism, that's not good news. China's Renminbi also is holding steady, a result of a good export performance but also the fact that the Peoples' Bank of China isn't yet in the mood to let the currency freely float.
And now the cheap Japanese Yen and the cheap Euro. Japan competes directly in export markets for manufactured items such as machinery with Taiwan and Korea. Its weaker Yen gives it an advantage, but also puts pressure on Seoul and Taipei to bring their currencies lower so they can hang on to their customers. Both the Won and the NT Dollar have lost about 5 percent since mid-summer.
The North America market long has been the big prize for Asian exporters. A strong Dollar should mean it would be easier for them to sell in America. But there they now also have to face the weak Yen and Euro and as Taiwan and Korea have found to their dismay, the only way to compete is to bring your prices, and thus your currency, lower and lower.
Central banks could drive their currencies back up by controls and tightening, but that proved a mess in 1997. It would worsen already sluggish domestic demand, discourage investment and reduce the capital spending these nations need.
To be sure, there are some big differences between the end of 2000 and the middle of 1997. Firstly, central banks in Asia have built up huge foreign exchange surpluses so they are in a much stronger position to manage their currency values than they were the last time around. So, falls won't be off the edge of a cliff; maybe, just into a ditch for awhile. And foreign debt servicing isn't as a big of a problem now. What Asia is waiting for with baited breath is a soft landing in the US economy. It will preserve its markets and, more importantly, give the US Federal Reserve an excuse to ease its tightening stance which should make the US Dollar just a little spongier.
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