Asia is recovered, U.S. in trouble
Asia is recovered, U.S. in trouble
Benjamin Pedley, Singapore, Dow Jones
Five years after the Asian financial crisis began, the region
is recovered and relatively healthy at a time when the U.S.
economy and its once much-vaunted business model are under
pressure and close scrutiny.
On July 2, 1997, Thailand floated the baht, sparking turmoil
in southeast Asian financial markets as economies in the region
untied currencies pegged to the U.S. The crisis spread to North
Asia, with the South Korean won as well as the Taiwan and Hong
Kong currencies also coming under attack.
To be sure, the region still has its structural problems: non-
performing loans remain stubbornly high in countries including
Thailand, Indonesia and Taiwan; unemployment is up, with labor
market rigidities still a problem; and many of the economies
still have massive external debts.
But Asian economies have recovered strongly, and many of the
trigger points of the Asian currency crisis, which became a full-
blown economic emergency, have been eliminated, says Greg
McKenna, head of currency strategy at National Australia Bank
Ltd.
"In Asia now you have current account surpluses, they have
rebuilt their reserves, and taken a lot of steps toward improving
corporate regulations. They have come back strongly, though
clearly Indonesia and the Philippines still are in some
difficulty," said McKenna.
The key similarity between the Asian crisis and previous
global crises since the early 1980s was that they occurred under
fixed currency regimes. And though dollar-pegs in China, Hong
Kong and Malaysia remain, there hasn't been the massive inflow of
'hot money' that preceded the failed defense of the baht by Bank
of Thailand during capital flight - and similar efforts by
authorities elsewhere in the region.
Moreover, financial regulation and supervision is improved,
correcting somewhat the lack of corporate and public sector
transparency, which was a major ingredient of the crisis.
Indeed, with recent scandals over distinctly opaque U.S.
accounting practices at collapsed energy trading concern Enron
Corp., troubled telecommunications company WorldCom Inc. and
Xerox Corp, Asia is looking fairly clean in comparison.
"The U.S. has definitely lost its moral high ground on the
transparency, and accountability issue," said McKenna.
The main risk for non-Japan Asia now is a double dip recession
in the U.S. or disappointment about the global recovery rather
than anything structural.
"If the recovery turns out to be a mirage then Asia will be
hurt, but those trigger points - such as massive capital inflows
- that were there in 1997 aren't there any more," said McKenna.
"Those pressure points now are really found more so in the
U.S. with its massive current account deficit, and steadily
increasing budget gap, and the markets have been skewed heavily
in favor of dollar assets meaning the volume of potential
outflows can generate Asian crisis-like volatility," he added.
A falling dollar is a key reason Asian currencies are higher
of late, with the exception of the Philippine peso, which remains
weak on concerns that a tumble in Latin American markets make its
debt servicing more costly. Save for the peso, all Asian
currencies are above their Asian crisis lows.
This scenario is in sharp contrast with the picture that
started to emerge five years ago when regional units collapsed.
When Bank of Thailand stopped defending the baht, it plunged
16 percent in one day, and at its all-time low January 1998 was
at 56.50 baht versus the dollar compared with 24.55 baht July 1,
1997. At 0715 GMT (2.15 p.m. Jakarta time) the baht was at 41.435
baht, its strongest level since September 2000.
An improved banking system helped in the recovery of the baht,
and asset prices in other local markets, and this is typical of
most banking systems across non-Japan Asia.
The real success story to emerge from the ruins of the Asian
crisis is South Korea, which recovered from the crisis with the
aid of a $58 billion bailout package in the fourth quarter of
1997 led by the International Monetary Fund.
In the same period the IMF also structured an $18 billion
package for Thailand and a $43 billion facility for Indonesia.
"Top of the pops by a long shot is Korea. Sure there have been
hiccups with conglomerates restructuring, but it took the hard
decisions to fix its structural problems and followed through on
them. It's now reaping the benefits," he said.
Evidence of its economic turnaround is no better illustrated
than by its foreign exchange reserves data. During the depths of
the Asian crisis as the IMF stepped in, Korea's reserves were a
mere few billion dollars.
This is a drop in the ocean compared with its level of
reserves now, which exceed $110 billion, making it the fifth
largest holder of reserves in the world behind Japan with $420
billion and China with around $225 billion.
"Korea has significantly cleaned up its financial system and
is now showing signs of developing a domestic demand dynamic,"
said Sanjeev Sanyal, economist at Deutsche Bank.
"Looking forward, Korea appears to have found a clear niche in
manufacturing exports that is higher up the chain than where
China is entering," he said.
With domestic demand a more significant contributor to
national gross domestic product in Korea than in other economies
in non-Japan Asia, it would be better insulated from any
disappointment regarding U.S. or global growth.
"To a great degree a lot of corporate debt has been
restructured," said Singapore-based Sanyal.
Sanyal said Malaysia has also made substantial progress in
restructuring its financial sector and building an economic
system that allows manufacturers to move up the production value
chain.