Hi lightning you could be correct. There appears to be a lot of speculators out there.
Asia's paper tigers
Australian Financial Review July 18/97
By Rowan Callick, Hong Kong
The recent dramatic decline of the Thai baht and this
week's speculative attacks on the Philippines peso, the
Indonesian rupiah and the Malaysian ringgit has
refocused global attention on one of the big questions in
the region: Asian economic success, myth or miracle?
Of course, it's neither. And the attention is helping to
unravel any lingering sense of mystery or inscrutability
about the part of the world in which Australia's future is
widely seen to lie.
It is more than a decade since the great American and
European portfolio investors "discovered" Asia. And
while a few continue, top- down style, to weight the
region as a single entity, many others now pick stocks
and companies, bottom-up; they acknowledge that
Thailand is not Taiwan is not "Asia".
But some broader lessons are being learned from the
episode. And some of these lessons may lead to stronger
fundamentals for Asian economies but may also be
accompanied by growth rates that appear less
astronomically elusive from the Australian perspective,
and by greater political and economic transparency.
Moreover, some of the region's oligopolies which have
been the prime beneficiaries of cheap, plentiful capital,
which they have misdirected, may lose their grip on
power.
The fate of Thailand, literally "land of the free", was
inevitable, the result of a current account deficit of 8 per
cent of GDP that was asking for trouble from George
Soros and other speculators. Like sharks, they were
lured to the attack by the scent of blood -- the finance
ministry and the central bank being embroiled in a public
row over the country's shaky banking sector.
Thailand had pegged the baht to the $US, and provided
cheap money for investors -- much of which sloshed into
Bangkok high- rise property, as the city's public
infrastructure was seizing up. The ratio of bank loans to
the private sector, against GDP, rose from 28 per cent in
1980 to 89 per cent in 1995. On June 27, when the Thai
Government and central bank agreed on the
unsustainability of a huge weight of non-performing loans,
16 finance and securities companies were suspended for
30 days, and ordered to arrange mergers. But it was too
little and too late.
Prime Minister Chavalit Yongchaiyudh said on July 1: "I
will never allow the baht to devalue. We will become
poor." The next day's pronouncement was inevitable: the
baht was removed from its peg, and floated down, from
24.4 to the $US to almost 30 yesterday. Short-term
measures including foreign exchange controls have been
applied. But investors are still awaiting details of the
Government's strategy. Speculators continue to feed off
such uncertainties.
Thailand is the worst case, but is not unique. Malaysia,
Indonesia and South Korea have also been importing
increasing capital -- mainly from Japan -- despite slowing
export growth and a decline in their debt-servicing
capacity. Now Japan has relocated most of the industry it
can, and a cyclical slow-down has hit the electronics
industry.
Fixing Asian currency values has been associated with
sustaining national morale, but has amounted to fixing
prices as well, and thus to misallocating capital. Their
exports had been boosted for years by the decline in the
$US against the yen -- but they had lacked the monetary
flexibility to adapt to the recent strengthening of the $US.
Indonesia and Malaysia, too, have suffered from the
ripples from the Thai crisis, and have loosened their
currencies, broadening the margins within which the
rupiah and the ringgit may range.
The Philippines has been outperforming the rest of
South-East Asia in export growth, rising 23 per cent in
the first four months of 1997. But its current account
deficit, although below Thailand's, also made it vulnerable
to speculation, exacerbated by a troubling trade deficit at
13 per cent of GDP, and it, too, has been floated and
devalued.
Through the region, interest rates have been increased to
maintain capital flows, and inflation is thus also rising.
Falling currency values should at least boost exports --
Thailand's will now cost 20 per cent less -- but much of
the region, and especially Thailand, needs substantial
imports of raw materials in order to transform them into
export products. The governments are hoping that as
exports pick up again, so will domestic demand, and
interest rates can be relaxed.
Hong Kong -- whose own $US peg appears
semi-permanent, and is defensible by its macroeconomic
fundamentals (despite the characteristic Asian
over-exposure to property) and by massive reserves
there and in its new parent, China -- has benefited, as a
"safe haven", from these uncertainties.
Comparisons have inevitably been drawn with the
Mexican crisis of 1994, when the US bailed out its
neighbour by $16 billion -- all of which has been repaid.
But Thailand's economic performance has been more
dynamic than Mexico's.
And in regional terms, Latin America's GDP growth,
expected to reach 4.7 per cent this year, is lagging Asia's,
at 6.2 per cent. In 1996, Asia accounted for two-thirds
of the entire $160 billion foreign investment in developing
countries -- though almost half the total derived from
Asia itself, led by Hong Kong.
Improvements in Latin America's performance since the
Mexican crisis have been associated with measures --
such as greater transparency in relations between
governments, banks and the broader community -- that
are now, since the Thai debacle, also hitting the top of
agendas in Asia.
Extending the domino theory from Thailand's neighbours
to emerging markets worldwide, there is considerable
concern that the contagion may spread back to South
America, with Brazil most obviously vulnerable.
But the greater sophistication granted the investment
industry by its decentralisation of decision making, and
weight allocation, to regional offices will prevent any
panicked withdrawal -- although some reweighting is
inevitable.
Richard Tsiang, director of Hong Kong-based regional
fund manager Allard Capital, remains positive about
Asia. While attention has been focused on export driven
growth, he says, "the potential of all these domestic
markets is also enormous". But the investment industry is
using the currency crisis as a time to take stock and
review its strategies.
Janet Henry, senior economist with James Capel, said
exchange rate risks would now be added to any other
risks of investing in theregion. Although the current
concern has been confined to South-East Asia, she is
convinced it will spread to East Asian countries.
"But it's too soon to turn the lights off Asia," she said.
There will be higher inflation, more unemployment and
bankruptcies, and slightly slower growth in the short
term, but she anticipates a recovery in the second half of
1998.
"Over time, these events can turn into a positive -- with
more flexible exchange rates giving these countries more
control over their monetary policies. They won't have to
raise interest rates just because the Federal Reserve
does."
Rob Barker, of National Mutual Funds Management
(Asia), said the company's Philippines weighting was
about double that of Thailand. But current account
problems in both were "like a flag waving to speculators,
'Come and take a look at me' ".
Mark Sundberg, Salomon Brothers' head regional
economist for Asia excluding Japan, believes "there is
much less of a problem than all the commotion suggests .
. . A superficial examination of structural features of these
economies makes you ask who's next on the block".
"Look further into the structure of the current account
deficits, and try to identify what is short-term and volatile
and what is long-term and committed, peel back the
layers, and the problem for the Philippines does not
appear anywhere near the Thai magnitude. There has
been over-exuberant investment in property.
"But as an economist, you look at all this and say 'Animal
spirits, you never know where they'll turn up next' . . . "
Sundberg said that behind the immediate issues,
however, the longer-term structural questions remained
-- the degree of investment in education, and the attention
to infrastructure for the information age.
And in Asia, the clear leaders so far were Singapore and
Malaysia. Thailand's secondary school completion rate
was very low, he said, compared with, say, the
Philippines -- resulting in the former's loss in capacity to
export skilled labour.
Those countries, such as Singapore, South Korea and
Malaysia, that had fostered the transition of industries to
adding greater value, were also better placed, he said.
Philip Bowring, a consultant to Kleinwort Benson Asia
and former editor of The Far Eastern Economic
Review, said that when South Korea and Taiwan were
growing most rapidly, they used funds more efficiently
than Thailand or Malaysia, limiting access to their capital
markets, and keeping interest rates high.
The South-East Asian economies could keep borrowing,
he said, while export earnings were growing faster than
debt. But last year's downturn in the electronics industry
had dealt them a blow. They were also now having to
compete, he said, with the effectiveness for just-in-time
deliveries to North America, of growingly efficient
industries in countries such as Mexico and Costa Rica.
But a bigger blow, Bowring said, had been China's use of
its excess capacity, massive inventories and government
ownership of industries, removing them from the usual
financial disciplines, to increase market share. "China has
been the only low wage country to sustain rapid export
growth in the last year," he said.
How China may benefit from, or be affected by, the
currency crisis remains unclear. The World Bank believes
its share of all foreign investment in developing countries
has already peaked, at about a third.
Overall sentiment remains positive, but few foreign
investors have yet posted returns that match the country's
claimed growth figures. The fundamentals, in such a
controlled economy, remain insulated, with four large
government-owned banks dominating the finance sector.
It's not the end of Asia as a model for the world, said
Bowring. "But it is certainly time for a pause for thought." |
