Thailand and the Emerging Asian Crisis
31 July 2000
stratfor.com
Summary
Signs are emerging in Southeast Asia that strongly suggest a relapse of the
economic crisis that struck the region in 1997. Ironically, events in Thailand –
where the crisis began – are leading indicators of a larger regional trend. The
region is caught in vicious cycle: unable to muster the political will to reform
economies and steadily unraveling economies that undermine political will. The
question now is whether events will be contained in Southeast Asia – or spread
north to China and Japan.
Analysis
In 1997, the Asian economic miracle came to a very public end. Troublesome
undercurrents finally became manifest in a financial crisis, when Thailand’s
currency came under intense pressure, collapsing and culminating in a general
financial panic. Since then, Asian economies have struggled to recover.
Some, like the South Korean economy, have done better than others. But in
general, most Asian nations have been unable to institute the radical,
fundamental restructuring that a full, regional recovery would have required.
Some, like Indonesia, have simply lacked the wherewithal for reform. Others, like
Japan, have lacked the political will to endure the wrenching social costs.
Now, Southeast Asian currencies are once again under pressure amid political
turmoil and a continuously strong U.S. economy. We are now seeing signs that,
rather than recovering, Asia’s economies are once again running into rough
waters. Indeed, the same country that was the first domino to fall in 1997 seems
to be leading the way again.
The Thai government has been forced to intervene twice in the past three months
to stabilize the baht, without coming close to solving the currency’s problems.
Last week, the government was forced to intervene again. According to Thailand's
The Nation, the Bank of Thailand intervened in the London market on July 26 in
an attempt to strengthen the baht, which had fallen to its lowest level since
September 1999.
Thailand is not alone in the region in having to cope with the steady decline of the
value of its currency. The Philippine peso, which often closely follows the baht on
the market, came within 0.134 pesos of its weakest crisis point of 45.209 to the
dollar on July 27. The Indonesian rupiah hit its weakest point since October 1998,
and the Singapore dollar has reached its weakest point since September 1998.
But the baht has taken the most curious and disturbing path of regional
currencies. The currency has experienced a general downtrend since 1998, with
intermittent upswings. There was a brief rally between March and May 1998, and
another between October and December of 1999. Neither could reverse the
general downtrend.
This general pattern is seen throughout Southeast Asia; the peso has declined
more sharply than the baht, and the rupiah has declined steadily since the
presidential elections in October 1999. In the face of this pattern, stronger
countries, like Singapore and South Korea, have been forced to weaken their
currencies in order to remain competitive with regional rivals.
Three key factors are behind these events. First, Asia has yet to truly recover
from the economic crash of 1997 and remains fundamentally weak. Second, the
continued strength of the U.S. economy – along with rising U.S. interest rates –
has put heavy selling pressure on Asia's currencies. Finally, political and social
instability in Asia – particularly Southeast Asia – is again on the rise, decreasing
investor confidence in these nations.
This last is the key to understanding the region’s problems. The issue is no
longer economic, but political; the region’s economic problems are now
symptomatic of the region’s political problems. The economic problems could be
solved in many of the region’s nations if the necessary reforms could be
instituted.
But the fragility of the region’s political systems makes meaningful reform
impossible. A regime that imposes the required measures cannot survive.
Paradoxically, the failure to impose these measures has already created a
long-term malaise that erodes confidence in the regimes’ ability to manage the
situation. As a result, there is a no-win situation in much of Asia.
Consider Thailand. Thailand's ruling party, elected due to popular dissatisfaction
with the previous government that presided over Thailand’s epochal financial
crisis, was badly beaten in the mayoral election in Bangkok on July 23. The
election was won by Samak Sundaravej, a deputy prime minister during the 1997
financial crisis. He beat the main opposition candidate by nearly two to one and
the ruling party candidate by a margin of four to one.
Samak's victory was particularly troubling for both the ruling and the main
opposition party. He is dogged by allegations of corruption in the Thai press,
supports close cooperation between government and business, opposes freedom
of the press and ordered a brutal crackdown on pro-democracy demonstrators in
the 1970s. Samak is the epitome of the pre-1997 politician-businessman whose
manipulation of the banking system was a central cause of the Asian financial
crisis.
Nevertheless he won. He defeated both the party that promised reform and the
new opposition party that encouraged economic reforms. This provides a sense of
the dilemma faced by Thailand. The public is simply incapable of accepting the
social cost of either moderate or radical reform. Faced with the need to change,
the public is turning back to the politicians who created the crisis in the first
place. With parliamentary elections mandated before November, Thailand
appears poised for a return to the political status quo ante.
The consequences for international confidence in Thailand’s economy would be
negative, to say the least. Indeed, the currency markets are already registering
their dismay. Other regional nations are facing equally difficult political situations,
as dissatisfaction mounts over the lack of economic recovery.
Confidence in Indonesia's president, Abdurrahman Wahid, has steadily declined
since his election in October, and he faces an August showdown with a
parliament increasingly pressing for his removal. In the Philippines, President
Joseph Estrada has faced continued accusations of corruption and cronyism, and
thrown the nation's slender resources into a full out military action in the south
against Islamic insurgents. In Malaysia, too, where longstanding Prime Minister
Mahathir Mohamad enacted currency controls shortly after the economic crisis,
competition from the Islamic opposition has seriously challenged Mahathir's grip
on power.
The economic and political instability in Southeast Asia feed upon each other,
creating a vicious circle that threatens to spiral the region once again into the
depths of economic crisis. If Thailand fails to control the declining baht, the
Philippine currency is certain to collapse – if it doesn’t do so on its own before
that. Indonesia, too, threatens to trigger a relapse of the currency crisis and has
called on its neighbors for technical assistance to bolster the plummeting rupiah.
Estrada, in his State of the Nation Address on July 24, warned that the peso
decline was the result of "a new Asian contagion." While largely intended to pass
the buck for the 15 percent decline in the value of the peso since his election two
years ago, the Philippines appeared cautious of another currency crisis early in
the year, establishing limited currency controls in January.
Thailand’s central bank appears strong enough to delay the inevitable for a while,
but the nation's economy is large enough that when it falls, it will certainly drag
the Philippines and Indonesia with it. Despite Mahathir's currency controls,
Malaysia, too, would be unlikely to avoid the regional relapse.
As a result, it appears that Southeast Asia is once again on the brink of
economic crisis, and its leaders are becoming aware of it. Given the political
configuration in many of these countries, it seems unlikely that internal political
intervention will stabilize the situation. To the contrary, we would expect the
regions’ political paralysis to exacerbate the problem.
It is equally unlikely that international intervention will provide any stability. The
International Monetary Fund (IMF) and the major powers can stabilize currencies
for a while, but currency instability is a symptom of the problem, not the problem
itself. IMF austerity leads to social chaos; lack of austerity leads to social
malaise.
The real issue is how far north the disease will spread. The two major question
marks are China and Japan. Japan, the largest economy in Asia, also suffers
from the Asian disease in its extreme form. Japan’s political process has
prevented meaningful reform more effectively than anywhere else in Asia. The very
size of the Japanese economy has allowed Japanese politicians to buy enormous
amounts of time, not available to their poorer relations in the south, with which to
put off the day of reckoning.
If Southeast Asia moves into crisis, Japan will not be far behind. Nor will China.
China worked very hard to limit the effects of 1997 on China. Much of the labor
was smoke and mirrors. China was hit and hit hard. One of the results was an
intensification of political controls designed to limit social instability resulting from
economic dysfunction. That bought China some room for maneuvering. But time
has passed without a fundamental solution to China’s economic problems. A new
tidal wave of Asian economic problems could cause massive problems for China
this time.
Asia and the United States now appear caught in a zero sum game, in which
U.S. economic strength costs Asia dearly. This is more appearance than reality,
though. We have noted the extraordinary de-synchronization of the global
economic system. The reality is that whatever happens to the United States,
Asia is feeding upon itself.
Its inability to re-capitalize its banking system is reflected in its endemic
currency crisis. That in turn is rooted in a failure of capital formation. So long as
Asia maintains inefficient enterprises in order to maintain social stability, it
cannot rebuild its economy. The region’s best hope is that the long-term malaise
will be just that – long term – and will not turn into another crisis.
That is what regional leaders are hoping for, and that is a pretty dismal hope. It
looks like Southeast Asia is headed once again for rough waters and that it may
well take the Asian economic powers – China and Japan – with it.
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