Bernie & Stitch...do you know the great Broadfoot?
The only man to call the crisis.
Fantastic story that appeared today in Hong Kong
For Private Use Only
(C) SCMP
Monday March 9 1998
Risk analyser places faith in forecasts without frills
DAVID IBISON
The offices of the Political and Economic Risk Consultancy (PERC) are in almost as big a shambles as the economies of the countries it assesses. There is no lobby, as such, and entry is gained by rapping a knocker on the door which, when opened, reveals several workers battering away at typewriters surrounded by randomly located computers, desks and book shelves.
Bob Broadfoot, the man who founded the consultancy in 1975, sits in his modest office at the back, an office he shares with his golf clubs, crooked indeterminate prints on the wall, boxes of computer software, plants that look like they were last watered when Suharto came to power, an air-conditioning control with exposed wiring and a flickering neon ceiling light.
Out of these humble surroundings came a report in February last year that "warned a financial sector crisis was building in Asia and that the status quo as it prevailed at the time was not sustainable in the medium term".
It was just about the only report that spotted the Asian crisis that followed, identified the countries which would be hit and assessed the reasons behind the crisis accurately. It was almost universally ignored.
The World Bank was still hailing the region's successes and ratings agencies such as Moody's and Standard & Poor's were dolling out investment grade ratings as if there was no tomorrow.
"We were lucky on that one," says Mr Broadfoot. "What we didn't see was the intensity of the cross-border implications - that one we didn't catch."
Without denigrating Mr Broadfoot, lucky is the right word. He spotted the crisis by seeing a familiar face pictured on the front of the Bangkok Post.
"He was a guy who was involved in Hong Kong during the very early crash of the futures exchange in 1981. He was head trader for Worldcom. He didn't do anything fraudulent but he lost a lot of money and then disappeared. He was a typical Hong Kong wheeler-dealer, and really not a bad guy.
"But all of sudden I saw him on the front page of Bangkok Post captioned as a senior adviser to one of Thailand's better banks. So I said 'this is going to be fun to watch, we're going to have a scandal down here', and one month later the bank went bankrupt and he is now under extradition in Vancouver.
"He had the prime minister and the finance minister in his pocket. That was the sign."
Tall, intense and humorous, Mr Broadfoot played down his agency's prescience when it came to calling the crisis correctly.
He did not, however, spare any punches for those that missed it, saving his more strident comments for the financial industry rather than the IMF or the rating agencies.
Why weren't the signals as clear for them as they were for him?
"I don't think they wanted them to be clear. It displays an amazing lack of due diligence, an over-reliance on numbers and not nearly enough reliance on really getting to know the people behind it.
"Don't forget the brokers. If you are looking at where the real reports are coming out, it's the guys who are trying to sell funds.
"There was one case where we were hired by a fund manager to assess the political risk of four countries. We analysed Indonesia and said if you are going there, your problem is going to be avoiding doing business with the children. They may be an asset now but they could be a liability tomorrow.
"The client came to us and said 'you have to change that because we won't be able to sell the fund to our clients'. They chose not to portray it to the market.
"One of the problems with the analysis we see written by brokers and rating agencies is that they focus too much on strictly economic criteria without stepping back and looking at the non-economic influences.
"There is now no excuse for them to be so blinkered as they were before."
Mr Broadfoot's unblinkered eyes are presently swivelled in the direction of Indonesia, which holds elections in two days amidst its most severe political and economic crisis in 30 years.
It is fair to assume the eyes of President Clinton and pretty well every political leader in the world are also scrutinising Indonesia's volatile situation. How close is Indonesia to total social collapse?
"Close. I think we will have a breakdown.
"The question is really timing. That's always the hard part.
"The situation is so critical - sooner or later you will get a new government.
"If you keep the current government in power for five or 10 years, what it would take to restore business confidence is a radical restructuring of the family businesses. I don't think anything short of a complete liberalisation - dismantling the state-enterprise sector and awarding contracts on the basis of commercial merit - will work.
"If he [Suharto] does that he can stay in power and business is going to start coming back. But I don't think he's going to do that.
"If you assume he is not going to do that, the Chinese will be taking out their money, there will be more difficult times for people outside the urban areas, you are going to have mass immigration. This is already happening. If you keep going in this direction, sooner or later this government is going to change.
"The economic deterioration will be a glue that pulls the rioters together. The longer this goes on the higher the odds you are going to get a change of government from the outside. You get an Iranian-style situation or a Nicaragua-style situation.
"What is a more likely scenario is that the inside powers - military groups and certain families - will see that the longer this goes on the more their personal interests are going to be vulnerable and they will try and convince him to step aside or they'll boot him out."
It is this chaotic scenario that is attracting the attention of the United States.
Having already warned Mr Suharto of the dangers of economic contagion, President Clinton last week sent Walter Mondale to the country, and Mr Mondale's warning was of a more worrying nature.
For the first time, he passed on views that the contagion that had affected the region might not just be economic, it might be social as well.
Riots have already occurred in South Korea, Thailand, the Philippines and Malaysia. Having already lit one fire that has caused a haze over the region, could Indonesia be the spark that lights a political fire too?
"In certain ways yes, in certain ways no. I do not think you are going to have an Indonesia in the other countries. I think this crisis by and large will show how much Asia has matured in terms of social stability.
"In Korea you are not going to get student demonstrations as they are worried about having enough money to pay their tuition. They are not really eager to worsen their own lot - so what you are probably going to get is the majority of demonstrations by unemployed bankers, which doesn't really intimidate me.
"But if Indonesia disintegrates, the biggest creditor to Indonesia is Japan - as it is to Thailand and Korea. The Japanese banks are scared to death of a debt moratorium - and are also scared to death of any move to have the foreign creditors take a loss and be forced to write down their loans by knocking down the value of the assets.
"That's really damaging. At the moment they are barely at or below the BIS minimum reporting requirements. If you discover the loans on property in Indonesia are not worth what they are extended at - say 10 per cent of their value - that increases their loan exposure.
"That gives them less room to manoeuvre in Korea and Thailand - which could force them to play harder with Korea and Thailand, which could force more dislocations in Korea - so you would get anti-Japanese protests.
"Plus, think of the immigration flows - it's got to be destabilising for Australia and Malaysia."
It is, according to Mr Broadfoot's analysis, a finely balanced situation - a situation that requires leadership if it is to be dealt with successfully.
The region's natural leader - and the one originally favoured by the US - is Japan. Unfortunately, Japan cannot keep its own house in order, let alone anyone else's. There is a leadership gap in the region right now and according to Mr Broadfoot, it is only natural that the mainland should fill it.
"Japan's failure will enhance the Sino countries' role. It will pull Taiwan and mainland China together economically. China is going to more aggressively woo Taiwanese and Hong Kong capital as it is not going to get any money from Indonesia and Thailand.
"It will keep the Greater China countries together, set their political differences aside and the rest of Asia will have to view this emerging Greater China as a greater focus of their policy."
It would appear the elections in two days could be a turning point for the entire region, paving the way for Greater China - in the longer term - to assume a leading political and economic role in Asia by usurping Japan.
At least, that's what Mr Broadfoot believes. He is, however, cannily aware of the downside. Asked what he found most fascinating about his chosen career, he gave the following answer.
"I get it wrong so often."
Bob Broadfoot, head of the Political and Economic Risk Consultancy (PERC), was born and educated in the United States.
He graduated from university in Ohio to work initially for a Swiss consulting operation at the time of the Bretton Woods agreement.
He set up PERC in 1975 to provide analysis for companies seeking access to Asian markets.
His client base is primarily made up of Fortune 100 companies. PERC publishes a regular newsletter called Asian Intelligence. |
