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.