Is the Asian currency crisis over?
There are two possible models that throw light on this question. Thailand and the other Asean countries affected by sell-offs of their currencies and stock markets over the summer might follow the pattern of Mexico in the peso crisis of January 1995. Mexico returned quickly to economic growth on the back of a big injection of capital from the IMF (and the US government), by selling most of its banks – after bailing them out with public money – to foreigners, and by forcing ailing companies to disappear. Companies that survived thrived as the devalued peso made them more competitive.
In some respects, south-east Asia is following that pattern. Thailand has received a large bail-out package from the IMF and (after some false steps) has closed down all its bankrupt finance companies.
But the signs are that south-east Asia is following a more worrying model for recovery – that of Japan circa 1990. When Japan’s boom economy ground to a halt, the authorities refused to recognize the problem. As successive waves of problems hit (bank bad debts, company bankruptcies, a real-estate crash), each time the government responded with palliative measures and propped up any institutions that got into trouble.
A clear lesson from the Japanese model is that the consequences of a dramatic collapse are never easy to predict. If decisive counter-measures are not taken, the effects can dribble out over years and produce roll-on effects that no-one could have predicted at the start.
Here is Euromoney‘s tentative forecast for some of the consequences of the south-east Asian crisis:
There will be a lot more bankruptcies. Already companies in south-east Asia have gone under, unable to cope with the burden of 25% annual interest rates. Those with foreign-denominated debts will be hit even more badly. Some companies will use the new circumstances as an excuse to default and renegotiate better terms with their banks. Bankers report that this is already happening in the Philippines.
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Foreign banks will be allowed to buy banks in Thailand, Indonesia, Korea and Malaysia for the first time. The banking systems of these countries will not be able to survive without an injection of foreign capital and technology. Asia remains the only part of the world where banks are still off-limits: in many Latin American and east European countries, most of the banking system is foreign-owned. That appears to help the local economy. One western banker tells Euromoney that even the Thai central bank – which has previously been sniffy about allowing foreigners even to open branches – is actively looking at allowing takeovers.
Japanese banks, by far the biggest lenders to south-east Asia, will be forced to write off billions of dollars of bad debts from that region. Japanese banks made 53.5% of all loans by foreign banks to Thailand, 47.4% to the Philippines, and 39.7% to Indonesia, according to the BIS. The banks will argue that a large proportion of these loans were to subsidiaries of Japanese multinationals. But these subsidiaries will face problems similar to those of local companies.
The world economy will slow. Economists predict that Japan (46% of whose exports go to Asia) could lose 0.6% of GDP in 1998 as a direct consequence of the economic slowdown in the Asean countries. Even the US and Europe could lose 0.2% or 0.3%.
Some of the above could have beneficial, rather than detrimental, effects on the world economy. The US stock market, which was heading for a correction less than a month ago, may now look better value. The negative effect on US growth next year will keep inflationary expectations at bay for longer. The decline in Japanese interest rates (with 10-year government bonds yielding only 1.75%) will help to keep US rates low too. Some of the portfolio flows diverted from Asia will return to the US market.
Project financiers in Asia will find their business dries up. Malaysia and Thailand have already postponed some grandstand projects. Visitors to Bangkok will be disappointed to learn that Gordon Wu’s much-delayed expressway to the airport has been held back yet again (although recent travellers to the city also report that the economic slump has reduced the volume of traffic to an almost manageable level).
The effect on international capital market issues is not yet clear. On the positive side, many of the sovereign and top corporate borrowers in the region will need to refinance debt. Thailand has already announced a multi-billion borrowing programme to replenish its reserves. The spreads will have to remain attractive – they are still less than sovereign issues from Brazil, for instance. On the negative side, as defaults on international issues increase, investors will become increasingly nervous about putting their money in the region.
This is by no means a definitive list. But the point is clear: you are deluding yourself if you think the crisis in south-east Asia is over. The ripples will continue for years.
