Business strategy in Asia Pacific

Business strategy in Asia Pacific

By Sofyan Wanandi

The following article is based on a paper presented at the
Asia Pacific Economic Cooperation forum's CEO Summit in
Vancouver, Canada on Sunday. This is the first of two articles.

VANCOUVER, Canada: The currency and economic crises affecting
the Southeast Asian region in 1997 were not totally unexpected
given the already evident strains on economic fundamentals --
high current account deficit, over expansion in unhedged
borrowing, and high levels of capital inflow.

However, the extent of the shock and the contagion effect that
began with Thailand's crisis and spread to the rest of the ASEAN
countries, took all of us by surprise. Even Singapore, which was
running a current account surplus, was affected and the contagion
effect appears to have spread to the Asia Pacific region --
including the U.S. We will all be wondering how to analyze this
outcome for many years to come.

All the economies in Southeast Asia have experienced a
shakeout of significant proportions since July, with dramatic
levels of depreciation of their currencies against the U.S.
dollar and the plummeting of stock market indexes.

Governments have struggled to respond to the crisis by
undertaking tight monetary policies, rescheduling big and
prestigious projects, taking other budgetary measures, dealing
firmly with financial sector weaknesses, and deregulating trade
restrictions and export promotion measures.

Thailand and Indonesia have in fact also sought and received
assistance from the IMF, as well as receiving supplementary funds
from neighboring countries. In total Thailand received US$17
billion and while Indonesia received $34.2 billion. Most
importantly, in the case of Indonesia, the U.S. contributed US$3
billion.

The measures attached to such an IMF package reinforced the
steps the government was planning to undertake and forced them to
happen sooner rather than later. While the Thai cabinet debated,
and subsequent cabinets changed the steps needed to implement the
IMF package, in Indonesia the steps to be taken were determined
prior to the approval of the loan and second-tier standby
facility.

The medicine was most bitter, with a budget surplus being
targeted and the liquidation of 16 banks. The implementation is
still to be completed and will be reviewed every three months by
the IMF.

While uncertainties remain, there has been restoration of
market confidence and some measure of stability. The lessons are
also clear -- they are not dissimilar to those we thought we
learned from the Mexican crisis.

There is a need for timely and accurate information disclosure
by governments with regard to economic data and by
businesses/banks regarding their performance; misinformation
leads to rumors and speculation.

Governments, in their words and deeds, need to provide clear
signals and greater transparency; inconsistencies and mixed
signals affect investor confidence in the short-term and more
importantly cloud the medium-term outlook of the country's
prospects.

Political will in undertaking the necessary and difficult
steps to bring the economy to a more efficient and competitive
condition by reducing protection and opening up domestic markets,
needs to also be demonstrated clearly.

Furthermore, the issue of ensuring political leadership -- and
the smooth transition from one leadership to another -- as well
as having a more open political system, also needs to be
addressed. The present currency turbulence highlights the
importance that investors have placed on such issues.

All our economies are in transition. The present crisis was a
wakeup call for both governments and businesses. The government
has taken steps to respond, and continuous action will be needed.
The business sector also realizes that the rules of the game have
changed.

A less predictable exchange rate environment means that there
is a need to guard against currency risk. Companies caught with
expansions being funded by dollar and short-term lending, which
dried up in the crunch, also relearned the basic lesson of
matching assets and liabilities in terms of currency as well as
term structure and diversification of sources of funding -- along
with the dangers of overexpansion.

In the short-term our economies will experience a slow down as
they adjust to changes in government policy and investor
confidence is restored. It will take time for investor
confidence, and thus investments, to flow back to the region.

The private sector's process of consolidation and
restructuring, as well as weak consumer demand, will affect
growth in the next year or two.

However, if the adjustment policies are undertaken
successfully and governments and businesses use this opportunity
to make the necessary self-corrections and recognize that they
will be operating in a different environment henceforth, I am
confident that in the medium-term, the prospects continue to be
bright.

The basis of our economies are still sound and given that the
right steps are taken, I am confident that we will be on track to
a stable growth.

Sofyan Wanandi is chairman and chief executive officer of
Gemala Group.