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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

REALITY CHECK

Economic planners finalize new policies. The key is implementation

By Assif Shameen


Go to a story comparing regional prices of Big Macs

Go to story about how a Thai cement company is surviving

UH-OH. THERE GOES THE PRIME MINISTER. Again. "We may suspect that they, the Jews, have an agenda, but we do not want to accuse," Malaysia's Mahathir Mohamad said last week. "And incidentally, we are Muslims and the Jews are not happy to see the Muslims progress. The Jews robbed the Palestinians of everything, but in Malaysia they could not do so, hence they do this -- depress the ringgit." The PM later said his remarks were misinterpreted. But the damage was done. After holding at around 3.05 to the dollar for several days, the ringgit resumed its spiral Oct. 13.

So did the Indonesian rupiah. It fell to a new low of 3,850 to the greenback Oct. 6, but firmed after Jakarta sought help from the International Monetary Fund (IMF). It then slid to 3,625 Oct. 13. International ratings agency Standard & Poor's had downgraded its outlook on the rupiah's prospects. The Thai baht was stable at the 35 to 36 level as the government finalized a rescue plan for 58 shuttered finance companies. It fell to 36.75 after the measures were unveiled Oct. 14. The Philippine peso traded between 32 to 33 after falling to its lowest point ever, 35 to the dollar. On Oct. 15, it was around 34.30.

Just how low can Southeast Asia's currencies go? "There is more downside," warns Pauline Gately, a regional economist at BZW Asia in Hong Kong. "If you look at Mexico, where the currency lost 70% of its value over a few months, you should ask yourself why the baht or the peso or the rupiah should stop at 35%. Hopefully, within the next six months, we will see some currency stability, but it really depends on how the policy makers steer their countries." Miron Mushkat of Lehman Brothers has a timetable of three to six months. "Volatility is a reflection of confidence," he says. "People don't realize that confidence is built from a complex mixture of reality and perception."

That is why the ringgit gets pummeled every time Mahathir attacks foreigners. Rightly or wrongly, he gives the impression that his country will not be putting its house in order because it does not believe reforms are needed. But other leaders are reaching out. In Hong Kong last week for a conference organized by the World Economic Forum, Philippine President Fidel Ramos gave interviews left and right. "We feel the problem is the product of both internal and external factors," he told Asiaweek. "The external factors we have no control over. The internal factors we can try to correct. The main thing is that we immediately saw this as a wake-up call for remedies to be put in place."

President Suharto of Indonesia is going further. In Jakarta last week, his finance minister, Mar'ie Muhammad, briefed fund managers from Singapore, Hong Kong, Australia, Europe and the U.S. about how the government will stabilize the currency. Suharto also named a trusted adviser, Widjojo Nitisastro, to take charge of an economic reform program to be finalized with the IMF and the World Bank. A respected academic who has taught a generation of Indonesian technocrats, the 70-year-old Widjojo has helped push through many economic deregulation measures in his three decades of friendship with the president.

These are all the right noises. Now comes the reality part. "IMF or no IMF, what the markets clearly want to see are improving fundamentals," says Robert Rountree, the chief economist of Nomura Research in Hong Kong. That depends on the policies that will be followed -- and their actual implementation. Early reactions to Thailand's IMF-sanctioned program to rebuild its financial sector were underwhelming. Malaysia's moment of truth will come on Oct. 17, when Finance Minister Anwar Ibrahim presents the new budget. Interest rates and banking initiatives are the issues to watch in Indonesia and the Philippines.

First Thailand, the mismanaged economy that started it all. The IMF granted the country a $17.2-billion standby credit in August. Among the new measures announced last week were the removal of most restrictions on foreign ownership of financial institutions -- for 10 years -- and the formation of two agencies to rehabilitate or liquidate the 58 closed finance companies. But the government did not require finance firms wishing to reopen to have a higher capital-adequacy ratio than the current 8.5%. "The reform package looks a bit disappointing," says Gately. "We will hear a lot more from the IMF because, if Thailand wants all of the $17 billion, it needs to do better."

The country has yet to dispel suspicions that it lacks the will to let bankrupt lenders sink. Many of the closed financial companies are owned by influential Thais. Days before the Oct. 14 announcement, the head of an advisory panel on the proposed reforms, Amaret Sila-on, complained of political interference and resigned. The IMF has also voiced concerns about political meddling. Thailand has trimmed the budget and delayed some big infrastructure projects. But it continues to charge a much higher interest rate on baht borrowings offshore compared with the local market rate. The two-tier system is meant to curb speculation, but may also deter genuine foreign investment.

Despite Mahathir's rhetoric, Malaysia has been trying to cool its overheated economy, which has been growing more than 8% annually over the past nine years. To cut the current-account deficit, it postponed several infrastructure projects, including the massive Bakun Dam in Sarawak state. Finance chief Anwar has promised a "painful" budget that takes "realities" into account. "There is a lot riding on that document for Malaysia," says Donald Hanna, an economist for Goldman Sachs in Hong Kong. "I'd like to see a big, big budget surplus. The way to address Malaysia's problems is to slash expenditure." Anwar is expected to announce delaying more mega-projects.

Some analysts urge raising interest rates -- prime lending is currently 9.5% -- to help stop the local currency's slide. "One of the reasons why the ringgit is still Asia's most vulnerable currency is because of the government's refusal to raise rates," says Gately. There is little incentive for foreigners to hold the currency. But analysts say a rise of 2 to 3 percentage points could bankrupt many well-connected but highly leveraged businessmen. "Malaysia must decide whether it wants economic discipline or growth," says Rountree. "It can get 7% growth for next three years, but that means readjusting to 5 ringgit to a dollar and far higher inflation."

Both Indonesia and the Philippines have raised interest rates. That helped stabilize their currency, but made corporate borrowing more expensive. "What happened was that speculators initially forced interest rates to extremely high levels," says Rountree. "Even the good companies got hurt because no corporate treasurer in his right mind could possibly imagine that interest rates would reach such levels. Indonesia and the Philippines don't have the structural problems of Thailand, but they have specific-company problems brought by high interest rates. Those are now spilling over to their banking sectors."

Indonesia seems more vulnerable. "Its banking system is on a thin edge," says Wan Ismail, an analyst with Morgan Stanley Asia in Singapore. The base lending rate is 35% per year. "Banks aren't lending any more money and the overall loan growth in the last month or so is probably zero or even negative," he adds. "Companies with existing lines of credit are finding it hard to draw down loans. It's a mess." The big number of Indonesian banks -- some 240 compared with Thailand's 15 -- complicates the problem. And some of the larger lenders have piled up foreign-currency debt, now more expensive to repay because of the rupiah's 35% depreciation since January.

That is partly why the IMF was called in. "Suharto did the right thing," says John Seel of Bear Stearns Asia in Hong Kong. "The other option was to let the rupiah go down the tubes and allow a collapse of the financial sector." Still, Jakarta may not draw all of the $12 billion or so it is asking in standby credit, which can be used only for balance-of-payment problems. "What Indonesia really needs is a Good Housekeeping seal of approval from the IMF," says Hanna of Goldman Sachs. "Its fundamentals are much better than those of most other Southeast Asian countries."

The Philippines, which already enjoys the IMF's stamp of approval, is due to leave the agency's tutelage this year. Ramos dismisses concerns that the move may affect investor sentiment. "Why should they lose confidence?" the president asks. "The graduation from the IMF would upgrade our credit rating, therefore lowering interest rates [on international loans]." Ramos says he is confident that local rates -- prime lending was 32% last week -- would soon come down. As for the peso, the president predicts an appreciation: "Somewhere between 31 and 32.50 [to the dollar] will be comfortable."

Rountree thinks the Philippines and Indonesia will be the first to regain their footing. "A weaker currency will boost exports because they produce lower-end goods," he says. "Once the effects of devaluation start to filter down in a few months, they would fare even better. At some point, we would see their current-account deficit recede." Export growth in the Philippines is already a robust 20% to 25%. But the recovery will be slow and painful. "This is going to be at least a two-year phenomenon," says Gately. "Anybody who thinks it will be over by Christmas better wake up." From their talk, at least, many leaders already know that.


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