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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

NO END IN SIGHT

Now, politics too drives Asia's money woes

By Assif Shameen and Cesar Bacani


Go to a chart showing four SE Asian countries' exchange rates

Go to a story about Thailand's crisis-management team

Go to a story about Thailand's situation

Go to the interview with PM Chuan Leekpai

Go to a story about President Suharto's presentation of Indonesia's budget

Go to a story about Taiwan's push to invest in Southeast Asia

ON MONDAY, JAN. 5, Steven Xu came to work as usual at 7 a.m. At his desk in the middle of Standard Chartered Bank's Hong Kong dealing room, the regional treasury economist started sipping his double espresso coffee. He needed the extra fillip. From the shouted orders of the 90 or so traders around him and the numbers on his Bloomberg and Reuters screens, it was evident that the region's currencies were again tumbling. "At first I was stunned," says Xu. "But in this industry you just get numb. The last few months since July [when the currency crisis started] have been like Chinese water torture."

The drips just got a lot faster. Call it Currency Crisis Part 2. On Jan. 7, the Indonesian rupiah closed at 8,350 to the dollar, down more than 30% from its Jan. 2 close. The market reacted badly to the country's 1998 budget. The rupiah's depreciation against the greenback since July: over 70%. The Thai baht, Malaysian ringgit and the Philippine peso also spiraled to new lows. Says a frustrated Gabriel Singson, governor of the Philippine central bank: "It's the regional contagion."

It is not just economics but politics. "Political risk in Asia today is far greater than at any time in the past 30 years," says Manu Bhaskaran, chief economist of SocGen-Crosby Securities in Singapore. "In Thailand, you have a new government still trying to find its way as the economic situation deteriorates. In the Philippines, it is unclear who would emerge as winner in the May presidential election and how he or she would steer the country. In Malaysia, PM Mahathir Mohamad and his deputy Anwar Ibrahim want to take the nation in different directions." In Indonesia, President Suharto's fragile health raises questions about the succession.

"There is little evidence that policies are in place to address all the problems," complains Eric Nickerson, head of currency research at Bank of America in Hong Kong. Some officials are even talking of reopening signed-and-sealed programs with the International Monetary Fund, which now oversees the economies of Thailand, Indonesia and South Korea. (The Philippines is due to "graduate" from IMF supervision this year.) Thai Deputy Prime Minister Supachai Panichpakdi has called for a review of the Fund's $17.2-billion rescue package for his country. Don't forget Japan's economic mess and the specter of China devaluing the renminbi. Warns Nickerson: "It looks like it's going to get messier."

Foreign speculators sparked the currency turmoil last July by forcing Bangkok to float the baht. This time around, the impetus came from panicky local investors. Currency traders returning to work after the holidays found their desks full of "buy" orders from Asian corporations. "Across the board from Jakarta, Bangkok, Kuala Lumpur and Manila, we got nothing but companies hungry for dollars," says a trader for a European bank in Singapore. "It was like people had been starving for dollars." Many businessmen wanted to make sure they had enough greenbacks to service their foreign-denominated debt and pay for imports.

Others may simply have given up on their own currency. "It's a classic case of capital flight, an 'enemy-within' situation," says Standard Chartered's Xu. People are buying dollars at any price. And why not? "You can't invest in asset markets, economic growth is collapsing all across Asia, the region is plunging into recession, interest rates are rising, stock markets are tumbling, credit risk is escalating," says Desmond Supple, a currency analyst for Barclays Capital in Singapore. "No banker in his right mind wants to extend loans to Asia." Central banks seem helpless. Malaysia's Bank Negara tried to keep the ringgit below 4 to the dollar, but gave up. At one point Jan. 7, the currency fell to 4.90 to the greenback.

The rupiah may be the most vulnerable. "I'd put the won and baht right behind it," says Nickerson. "The ringgit is the other vulnerable currency." The peso, which has fallen 42% since July (won: 51%; baht: 47%; ringgit: 43%), looked more stable. In a sign of some confidence, Filipinos converted their hoarded dollars for pesos last week. The consensus is that the Philippine economy will still grow partly because Manila had implemented IMF-directed structural reforms. In contrast, economists now forecast recessions in Indonesia, South Korea and Thailand, and practically zero growth in Malaysia.

Things could get worse. The currency slide is putting pressure on the renminbi -- China may lose market share as the neighbors' exports become cheaper and cheaper. If it devalues, fresh speculative attacks on the Hong Kong dollar, which is pegged to the U.S. currency, will follow. And perhaps yet another round of competitive devaluations. The yen is another concern. From 80 to a dollar in April 1995, the Japanese currency has fallen to 134 and the consensus forecast is 140 in the coming months. The more pessimistic analysts see a trading range of 140 to 155 yen to the greenback because the economy is not picking up as expected and a recently announced fiscal stimulus package and tax cuts are not having the desired effect.

"As long as the yen stays weak, we aren't going to see recovery in the rest of Asian units," says Nickerson. A too-cheap currency limits Japan's ability to import goods from Asia. The nation's internal problems, especially the huge bad debts held by its banks, mean Asia can no longer expect to get as much aid and loans as in the past. Japanese institutions may even put more pressure on Asian markets if they are forced to sell assets or call in loans. "A weak yen at a time when the rest of Asia is looking up to Japan for some help actually becomes part of the Asian problem," says Nickerson.

Here are more doomsday scenarios. "The chief one is the impending political meltdown in Indonesia," says Supple. "The world's fastest growing labor market is entering a period of sharp economic contraction, falling real incomes and escalating food prices, raising fears of a social backlash. There is an ethnic dimension, with Chinese becoming scapegoats." The ranks of the unemployed may swell even more if Indonesian workers in Malaysia, estimated at 1.5 million, return home. Kuala Lumpur has stopped processing applications for foreign unskilled hands (except domestic helpers) and says those who have been in Malaysia for more than six years will not have their permits extended.

Then there is Pyongyang. "North Korea is the forgotten factor in this regional currency turmoil," says Supple. "If the North Korean regime collapses amid the famine there, the South is in no condition whatsoever to bail it out or move towards peaceful unification with the North. You'd see currencies fall so sharply your eyes would pop out." Still, the election of Kim Dae Jung as president in December has gone some way in removing uncertainties in Seoul. The new chief, who formally takes over in February, has been taking some high-profile initiatives, including a confidence-building meeting with financier George Soros last week.

Can anyone stop the currency meltdown? "Wait for market forces to take control," says Xu. "Eventually, the markets will just decide currencies are so cheap." But the process can be speeded up by restoring investor confidence. "Now, it goes beyond Malaysia, Indonesia, Thailand," says the economist. "You need confidence in the whole region." A key issue is transparency. "Release more economic data," urges Xu. "Tell people how much money you have. Honesty is the best policy." It is also what Soros, who has been asked to become an informal adviser to Korea, told his old friend Kim, a fellow campaigner for democracy in Myanmar.

That means hewing closely to the tough terms of the $57-billion IMF-led recovery program signed in December. Investors consider the Fund's involvement in an economy as a seal of good housekeeping. That is one reason why Malaysia may yet call in the IMF even though it does not have balance-of-payment problems. Kuala Lumpur's homegrown fiscal and economic measures, including pushing mergers among financial institutions, may not instill the needed confidence.

Still, an IMF credit program is not a silver bullet. There are fears that the Fund may be prescribing such radical surgery that the patient may well expire on the operating table. "The effects from the implementation of the IMF measures have been worse than expected and confidence has not yet recovered," says Thailand's Supachai. He wants the Fund to review the policy of high short-term interest rates. As a condition of the $33-billion package for Indonesia, the IMF has decreed a budget surplus in 1998. But Suharto announced a plan that only balances spending and revenues because of worries that a tighter clampdown may trigger riots.

Social instability is a legitimate concern. The IMF hints of flexibility on fiscal targets, but it is adamant about structural reforms. "Asian governments must show willingness to take hard decisions," says Nicholas Kwan, chief economist for Merrill Lynch in Hong Kong. Sandra Lawson of Goldman Sachs urges other reforms. "Asian nations need to introduce greater transparency and openness in the overall political process," she says. "With a freer press and a more transparent system, the mistakes will not be repeated."

In the short term, additional outside assistance may be needed. "We're now reaching the point where nothing internally is working," says Kwan. "The governments of North America and Europe must help in a big way because if they don't, their own economies could get hurt." Asia's national problems have already become regional woes. They should not be allowed to mutate into a global crisis. -- With reporting by Alexandra A. Seno / Hong Kong, Laxmi Nakarmi / Seoul, Antonio Lopez / Manila and Santha Oorjitham / Kuala Lumpur

Exchange rates against the U.S. dollar as of Jan. 7. Source: Datastream


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