Currency crisis sound death knell for Asian countries

Currency crisis sound death knell for Asian countries

By Philippe Ries

HONG KONG (AFP): The crises knocking Asian currencies mark the
end of an era for the emerging countries, and economists foresee
serious consequences not only for their economic structures but
also for the international monetary scene.

Hard on the heels of the forced floating of the baht, which
saw a brutal devaluation of the Thai currency, the Central Bank
of the Philippines also had to give in to market pressure last
Friday, letting out the margins of fluctuation for the peso,
which had plunged nearly 12 percent against the dollar.

Late last Friday, Indonesia had followed suit, widening the
band in which the rupiah can float before the central bank
intervenes from eight to 12 percent.

Analysts predict the Malaysian ringgit will be the next
currency in the firing line.

"It is only the beginning. What we have seen so far are the
firecrackers before the big fireworks goes on," said Kenneth
Courtis, chief economist and strategist for Deutsche Bank in the
Asia Pacific region.

According to him, a dozen currencies from emerging countries
in Asia, eastern Europe and Latin America have already seen or
are going to see their links with major currencies, generally the
U.S. dollar, blown apart.

"They are all going to go. All these countries have been
slavishly following the IMF (International Monetary Fund) by
tying their currencies to the dollar and all have the same
characteristics -- big current account deficit, domestic
political issues and structural deficiencies," Courtis said.

They have all also financed their strong growth with credit
banks, using inflated assets as collateral and without
controlling the influx of floating foreign capital.

"What it means is that as part of the high growth, there have
been too many excesses," said Neil Saker, head of regional
economic research for Socgen-Crosby, although he did not feel it
was the end of a pattern.

However, Michael Taylor, chief economist for Indosuez W.I.
Carr, said he believed "the whole credit cycle" was over. A cycle
characterized by the appeal to a cheap U.S. dollar to finance
expansion.

"It is something you only see every 10 or 15 years," he said.
Courtis described it as "another step towards the end of the
dollar region in Asia."

In 1994-95, the Mexican peso crisis highlighted the dangers of
financing, public or private, by using foreign capital in the
short term.

Political tensions and a badly orchestrated devaluation of the
peso had hurled the country in a liquidity crisis, forcing the
IMF, at the insistence of the United States, to put in place a
US$ 50 billion rescue package.

Almost three years latter, the Mexican economy is crawling
toward recovery. Economists now expect no or very little growth
in Thailand this year and the next.

"I sense that what we are seeing now in Thailand and the
Philippines is the last phase of the Mexican crisis," Courtis
said.

In fact, Thailand mirrors very much the Mexican scenario, even
down to the search by Bangkok for outside financial aid of $20
billion to face the looming liquidity crisis.

"But this time Japan is going to be in the driving seat,"
Courtis said.

Jiji Press reported last Friday that Japanese monetary
authorities were preparing to give short term currency support,
and more significantly long term financial aid to Thailand, and
Tokyo was also looking at mobilizing the Asian Development Bank.
And Thailand is going to need money, a lot of money. According to
Courtis, the financial crisis would cost about 15 percent of
Thailand's gross national product (GNP), slightly less than
Mexico where the peso crisis cost 20 percent of GNP.

And a good part of this money will be used to reconstruct a
banking system devastated by the crisis.

Thailand and others countries in a similar situation "will
need a lot of foreign capital to bail out their banking system,"
Taylor said.

And the price they will pay will be to modify an excessively
complacent environment, and to accept the direct presence of
overseas financial institutions.

"The main implication is that regulations must be tightened
considerably," Saker said. The other consequence is that the
banking sector must be open to foreign competition to put an end
to the existing cartel.