Asian tigers fade, U.S. investors wise up

Asian tigers fade, U.S. investors wise up

By Nailene Chou Wiest

NEW YORK (Reuter): U.S. investors have woken up to new realities in Southeast Asia, where currencies swing, stock markets slump, recession threatens and economic nationalism may be rearing its head.

The unraveling of the Asian economic miracle has taken some weeks to sink in, during which even the most upbeat U.S. experts turned pessimistic.

In the two months after the Thai baht's effective devaluation on July 2, the currencies of Thailand, Indonesia, Malaysia and the Philippines lost their respective value by some 13 percent to 28 percent, triggering massive selloffs in the stock markets. Flying sparks threatened to ignite a regional conflagration engulfing Singapore, Hong Kong, Taiwan and Korea.

With economic growth in the whole region at risk, more defaults and downgrades in corporate earnings were expected to hit the markets further, said Geoffrey Dennis, emerging markets analyst at HSBC James Capel.

"We may be in the second or the third stage of the crisis, but we haven't seen all the economic fallout," he said.

Differences in economic fundamentals notwithstanding, the bears were on a full-scale rampage.

"All of Asia is tarred by the same brush," Dennis added.

Thomas Trebat, head of emerging market research at Citicorp Securities, who had warned of shock waves from Thailand, blamed the "hubris" of the Asia watchers in the market.

"Analysts were reluctant to believe that the growth rate (of tiger economies) would fall from 8.0 or 9.0 percent to 4.0 to 5.0 percent," he said, "And to 3.0 percent or less was just incredible."

Trebat blasted some investment advisors for their "poorly grounded judgment and cliches."

The favorite argument of those peddling Asian assets was that the Asians provided "textbook" examples of strong economic growth underpinned by high savings rates, and they relished pointing to the world's tallest skyscrapers and booming stock markets in the region.

Even when the storm was on the horizon, Thailand managed to sell its first Yankee bond at a solid price to unwary investors, he said.

The $600 million 10-year Yankee offering was priced on April 10 at 90 basis points (bps) over U.S. Treasuries. The spread widened steadily to 165 to 170 bps recently.

U.S. investors held their breath when the Thai government disclosed on Aug. 22 that its forward commitment in the next 12 months totaled $23.4 billion, while its reserves in mid-August stood at $27.9 billion.

Suddenly the $17 billion rescue package spearheaded by the International Monetary Fund (IMF) looked woefully inadequate. U.S. experts noted there was a limit to the transparency promoted by the IMF after the Mexican peso crisis. Unlike some macro- economic data, forward commitment could not, and some say should not, be revealed on a timely basis.

Allen Shiau, chief international economist at econometric consulting firm WEFA Group, said data probably should be made available within a year, but disclosing them right away would be counterproductive for a central bank to manage its monetary policy.

Dennis at HSBC pointed out that such disclosure was not even made by Group of Seven (G-7) industrialized countries.

During the 1992 crisis of the European Exchange Rate Mechanism, Britain gave in to speculative attack because of mounting pressure in executing forward intervention, he said. The extent of loss to the Bank of England was made public after Britain pulled out of the ERM, he said.

While academic, the debate on whether the Asian miracle was a mirage may go on. Market participants expected that much of the Asian economic order would change as the economy contracts. But many doubted that the IMF could reshape the Asian tiger economies.

"Politicians resent what they see as international efforts to dictate national policies," said an economist at a U.S. money center bank.

The "front-loaded" structure of the IMF loan package, in which some $10 billion would be made available in 1997, with subsequent disbursement phased on a quarterly basis, would leave the IMF with little leverage on Thailand's reform, the economist noted.

John Seel, watching the Asian economic scene for Bear, Stearns and Co. in Hong Kong, said: "We have not seen a positive policy response in Thailand. It has not convinced the market that it is serious in adhering to what the IMF is asking it to do."

Seel was also disturbed to hear comments from opposition parties in Thailand calling for the renegotiation of terms with the IMF.

The rise of economic nationalism during hard times could become a concern among foreign investors, said Luis Luis, director of research at Scudder Stevens and Clark, noting, "foreign ownership and offshore markets are easy targets." But Luis warned against over reaction.

Fiery rhetoric is not always followed by political action, and short-term fixes smacking of economic nationalism might become harbingers of long-term policies, he said.

Prime Minister Mahathir Mohamad of Malaysia, known for his denunciation of foreign speculators, recently made a U-turn to lift restrictions on short-selling which had scared away foreign investors.

Still, some Asian countries may prefer to follow the beat of their own drummers, said one fund manager, recalling that earlier this decade India had canceled borrowings from the IMF and stopped reforms in their tracks.