Asia's Currency Crisis Grows As Companies Confront Debts
By DARREN MCDERMOTT
Staff Reporter of THE WALL STREET JOURNAL
12-15-1997
SINGAPORE -- Asia's crashing currencies are eroding the financial health of the region's companies.
And that means more unrelenting pressure on foreign-exchange rates, as corporate borrowers scramble for dollars to meet the mountain of dollar-denominated obligations on their books. The new and very worrying outlook for Asian currencies, particularly the Indonesian rupiah and Korean won, is that they have fallen victim not to speculators or government-driven competitive devaluations, but instead to panic demand from companies struggling to repay increasingly expensive foreign-currency debt.
The Korean won and the Indonesian rupiah both have lost more than half their value this year against the dollar, marking a decline equal to the Mexican peso's plunge in 1994. Now they look set to outdo the peso.
"One has to prepare for further downward moves," says Bill Belchere, head of fixed-income research at Merrill Lynch in Singapore. "What we are seeing is a total lack of confidence in these currencies compounded by the lack of an adequate policy response."
Trigger Effect
The rupiah plunged Friday on renewed concerns about the health of President Suharto after the government reversed course and announced that the 76-year-old leader would not, after all, attend a regional leaders' conference in Kuala Lumpur. The currency fell again in New York trading on a fresh round of unfounded rumors of troop movements in Jakarta, crashing to 5,550 rupiah to the dollar, down 17% from Thursday. The Thai baht fell to a record 45.15 baht to the dollar, dragged down mostly by the rupiah's fall. The Korean won fell by its daily 10% limit at the opening of trading, but recovered fully as the central bank surprised the market with a round of dollar buying, closing slightly higher at 1,715 to the dollar. But traders believe the central bank lacks the resources to maintain intervention at those levels.
The rupiah's slide dragged other regional currencies to new lows. Trading of the peso was suspended after the Philippine currency fell by the daily limit to an all-time low of 37.360 pesos to the U.S. dollar, from 36.585 pesos Thursday. The Singapore dollar hit its lowest level since February 1993, before finishing at S$1.6509, down from S$1.6329 Thursday. The New Taiwan dollar dropped to close at NT$32.321 to the U.S. dollar, down from NT$31.900 on Thursday. The Malaysian ringgit also ended lower, finishing Asian trading hours at 3.7995 to the U.S. dollar, down from 3.7570 ringgit.
Around the region, bankers and traders are fretting that governments will refuse to take the medicine that the International Monetary Fund has prescribed -- or, worse, that the IMF has got the wrong prescription. This loss of confidence is spurring more and more bankers to call in their loans to Asia's beleaguered companies -- making the possibility of defaults all the more real.
Potential Bankruptcies
The rupiah's slide against the dollar means that the debts of many Indonesian companies are now much larger than their equity and some could go bankrupt, says Neil Saker, regional economist at SocGen Crosby Securities in Singapore.
In South Korea, where the won has fallen further against the dollar in percentage terms than any other Asian currency, evidence is now mounting that even hard-currency earners, such as exporters and conglomerates with overseas subsidiaries, are having trouble getting access to capital.
High levels of foreign debt are nothing new to Korean companies, which for years have operated with debt loads several times their equity capital base. But what was once just an accounting issue becomes painfully real when lenders demand all their money back at the same time.
If the South Korean government can't find a way to support its currency or get its hands on more dollars, "we're going to see a moratorium on Korean debt this week," predicts P.K. Basu, economist at UBS Securities in Singapore. Other economists are making similar predictions for Indonesia. And Asian leaders, attending the regional meeting in Kuala Lumpur, are expected to call for as-yet unnamed measures, possibly in conjunction with the IMF, to stop the slides in their currencies.
Address the Quandary
But whatever governments decide to do, they will have to address the quandary that companies now find themselves in. Desperate for dollars, either to repay loans that have been called in or to hedge their outstanding dollar debts, companies are rushing to the foreign-exchange market faster than ever -- only to find that the market is all but paralyzed.
"As the dollar grinds higher you induce more buying," says Ong Pang Liang, head of foreign exchange at Bank of America in Singapore.
That's why the Korean won, on several days last week, crashed by its daily limit of 10% within minutes of the start of trading; the demand for dollars is so great that potential buyers begin bidding for dollars at the highest allowable price, and before potential buyers of won emerge the currency has touched its limit and trading is shut for the day. When the government last month replaced the 1% daily trading limit on the won with a 10% limit, it was seen as tantamount to a free float. But now economists are calling on Seoul to scrap the mechanism altogether.
"They should let the currency go, for one," says Mr. Basu. "For another, they need to push up interest rates." Higher interest rates would further strangle Korean companies, but would make Korean bonds more attractive to foreign investors -- a trade that's worth it, Mr. Basu says. "A collapse in the currency is going to hurt the corporate sector just as badly as high interest rates."
--Tom Holland of AP-Dow Jones News Service contributed to this article. |
