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.