| DJ, excerpt from The Richebacher Letter March 1997. " Basically, the woes of developing Asia are of the Japanese variety, both in their causes and in their effects. to prevent huge capital inflows from appreciating their currencies and hurting their export competitiveness, the central banks of the Tiger countries have been accumulating foreign currency reserves at a furious pace. Because of the scale of these purchases, and the relative primativeness of the Tiger money markets, these reserves in effect cannot be sterilized. The essential outcome has been runaway money and credit growth amidst low real interest rates, leading to a long list of symptoms associated with overheating economies-inflation, financial speculation, and excessive investment in industrial plant and property. The resulting excess domestic demand has driven the Tiger economies into trade deficits- despite their high savings ratios. during the 1990s, the foreign exchange reserves of these countries have rocketed from $150 billion to $450 billion. this dwarfs even Japan's own enormous dollar hoard, now totalling about $215 billion. considering their high savings and investment ratios, these countries greatly resemble Japan. but looking at their balance of payments, the striking similarity is with Mexico. While Japan's reserve accumulation accrued primarily from its burgeoning trade and current account surpluses, the dollar glut in the tiger countries completely from money and capital inflows that have vastly exceeded their trade and current account deficits, thereby leading to massive foreign exchange reserve growth. Only Singapore and Taiwan are in current surplus. ............... An aggravating and complicating factor is the fact that several Tiger countries, both banks and highly geared corporations have incurred large, unhedged liabilities in foreign currencies, chiefly the dollar, because of the substantially lower interest rates available in those currencies, relative to domestic borrowing . given the widespread pegging of the tiger currencies to the US currency, dollar borrowing is obviously preferred. The ultimate result: While the Tiger central banks furiously accumulate reserves in order to cap their currencies, tiger commercial banks just as furiously borrow dollars and yen to fund their domestic runaway credit growth, thus defeating the purposes of the central banks.............. Rampant, precariously funded credit creation is only one of the big problems facing the tiger economies. A second one , essentially correlated with the first, is the growing misallocation of this rapid credit growth. Again, it often is positively stressed that most of this credit has financed bboming investment rather than government spending and private consumption, as in the industrialized nations. Unfortunately, prolonged overinvestment jeopardizes economic stability no less than prolonged overconsumption- as Japan's dramatic bubble demonstrated. In the tigers, as in Japan during the late 1980s, vast sums have been channeled into overexpanding property sectors, into financial speculation, private consumption, money losing state enterprises and politically well cnnected corporate deadbeats. in a number of asian countries , non performing loans abound. Little wonder that investors have been dumping Asian bank shares with a vengeance.... continued in later post |
