Currency speculators

Currency speculators

The recent bashing of so-called "currency speculators" in
Southeast Asian countries deserves to be looked at from another
perspective.

These players are labeled speculators because there is no
certainty that their actions will be profitable. It is known that
international banks have lost money on their foreign exchange
dealings and even George Soros lost considerably when he tried
his hand with the German mark not so long ago.

Instead of trying to criminalize these currency speculators,
one has to thank them for telling the various governments in
Southeast Asian that they have not been managing their economy
well.

More often than not, these players have big stakes in the
economy of the countries they concern themselves with. If you are
a fund manager with a substantial portfolio of investments in a
country and its economy is not healthy for a variety of reasons
-- be it huge foreign debts, a large current account deficit,
unsustainable high inflation, undermanaged growth or, more
likely, a combination of all these reasons -- you need to do
something.

If they perceive that the economy is not heading in the right
direction and feel that the value of their investments in the
original currency is threatened, they have little choice but to
sell this currency rather than dispose of the investment, which
could still represent good value and compensate them for the
exchange loss.

Their simple preventive or self-preserving action will be seen
as speculative. And if enough people are taking the same action,
the result is predictable. But then again, it simply means they
all believe there are problems with the economy.

In short, the currency speculators hedge the currency because
they are concerned about the economy and the value of their
investment.

Instead of accusing the currency speculators of disrupting the
monetary wellbeing of a country, the government should examine
the reasons behind the speculations and take remedial action to
correct the country's weakness.

The Southeast Asian countries at the mercy of the currency
speculators share a common factor: an economy needing attention.
But the government did not face up to the problem for political
reasons or it believed the market economy would adjust itself.

If it is the latter, then what happened is the market's
reaction to reflect the currency's correct value. The outcome may
have been different if actions had been taken earlier to prevent,
for example, the overbuilding of properties, growth of an
unsustainable and chronic current account deficit and foreign
debt -- all of which are the consequences of the prolonged,
strong growth experienced over the past decade or so.

The actions needed for adjustment are usually quite
unpalatable and unpopular with voters. But this is the price they
must pay if they do not take timely corrective measures to deal
with an economy which grows unimpeded.

P.H. LOO

Jakarta