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.