Greed leads to pain in Southeast Asian economies

Greed leads to pain in Southeast Asian economies

By Ram S. Ramanathan

JAKARTA (JP): Every economist has his own theory, now that the
Southeast Asian miracle appears to be more of a mirage. Some feel
that the tigers are only shedding their puppy fat, while others
contend they are just pussy cats masquerading as big cats.

Whatever the theory, the truth is that across this region
countries have lost a walloping 30 to 50 percent of their
national wealth in the wake of the currency debacle.

GDP growth rates in the region have already been revised down
from previous galloping eight percent levels to less than six
percent, but it is anybody's guess whether real growths will
reach anywhere near such figures in the next few years.

Sitting in the epicenter of the meltdown in downtown Jakarta,
one can be excused for not willing to look at anything beyond the
next few months.

The general feeling is that corrections were a long time in
coming, given the fact that costs in the region were escalating
far ahead of productivity gains when combined with Chinese
exports strengthened by the renmimbi devaluation.

Yet, the regional markets were the darlings of fund managers
and investors just a few months ago, when the market and economic
realities were hardly different.

The popular theory that current account deficits were mainly
responsible for the crash, and that these deficits were
facilitated by free and open currency movements is not debatable.
But if one takes into account that all developing countries must
ultimately free their currencies, the question that arises is
what can be done to safeguard them in transition? The short
answer is sound economic policies.

The simple logic is that current account deficits arise mainly
out of greater imports of goods, services and currencies. Of
these, short-term fund inflows into the stock markets of emerging
economies are the most fickle and most dangerous should
confidence dematerialise.

The only way to sustain these inflows, as well as longer-term
investments, is by inspiring confidence, which in turn requires
performing assets which produce value.

Unfortunately in many parts of Southeast Asia, business
philosophies run as follows. Many businesspeople do not even
consider the possibility of having to repay loans, while banks
have perpetuated this belief by perennially deferring principal
repayments.

Again, the original objective of loans often does not match
their usage, and banks invariably turn a blind eye. Once the
money is in hand, whether as a loan or public equity, it is part
of the family wealth -- not a liability that is seriously to be
guarded.

Finally, land is the ultimate asset, with no possibility of
depreciation, and real estate prices by divine ordinance shall
always ascend. Thus, business actions derived from these
philosophies result in the manipulation of markets and banks, and
the diversion of funds to nonproductive uses.

Banks, both local and international, have assiduously fueled
these idle dreams. Bankers are paid handsome bonuses on loan
disbursements -- never mind collections.

In any case, the executive who gives the loan is rarely the
one that has to finally collect. Bankers time and again put their
depositors and shareholders at serious risk through exposure to
non-performable and therefore non-recoverable loans.

The theme has always been the same over the years, only the
locale has shifted from Latin America to Southeast Asia. When
will banks learn that unless they understand the businesses they
lend to, and exercise some management controls, what results is
not profit but serious erosion of capital.

Companies often divert part of long-term funds to other uses,
and use additional short-term loans for fixed assets. Sometimes
evaluation criteria of banks push creditors into this situation
too. Typically, 10 to 20 percent of invested capital "leaks out"
to founding investors.

This vicious cycle of diversion of funds, improper allocation
of funds, non-performance of assets and non-repayment of loans,
results in an accumulation of unproductive short-term loans that
cry out for currencies to be shorted.

As Paul Krugman of the Massachusetts Institute of Technology
has said time and again, unless assets are more productive and
more competitive in the ASEAN region than in developed countries,
the miracle of the tigers is only a myth waiting to die.

Huge inflows of foreign capital and domestic savings sunk in
unproductive assets, especially in idle infrastructure and real
estate, serviced by low productivity human resources, invite only
disaster, not more investments.

Major investments in the region -- in Indonesia, Thailand or
even Korea -- are often opportunistic rather than strategic,
following the basic philosophies outlined earlier.

When Eddy Tansil diverted hundreds of millions of dollars from
the ostensible objective of funding Golden Key in Indonesia to
unknown projects in China, it was news for a while.

Assets of Golden Key in West Java are still unproductive after
five years. While Tansil has disappeared, loans from banks still
wait to be collected.

When bank Summa collapsed in Jakarta, the owners of Astra lost
their business in trying to settle their dues. It was the rare
exception of a proud family that placed honor over debts.

On the other hand, bankruptcy of Hanbo in Korea landed lenders
of US$6 billion in soup and founder Chung in jail. Perwaja's near
bankruptcy due to mismanagement in Malaysia was cleaned up
through the largess of the government. Kia in Korea in its
collapse and default of $12 billion dragged down with it a
hundred subsidiaries and suppliers.

These are only the publicized cases. To every one of these
there are a dozen more in the shadows of the limelight. Perhaps
these are growing pains. But can they be avoided?

Economist Kwik Kian Gie of Jakarta has pointed out that
current account deficits caused each one of the earlier four
devaluations in Indonesia, and the unbridled increase in the
deficit since 1995, has been asking for trouble.

Though no one economic institution can point out what has
changed in the economic fundamentals of Indonesia in the last few
months to cause massive inflows to turn into massive outflows of
funds, once the fall started there was no stopping it.

The sheer size of dollar repayments, between $2 to $5 billion
each month depending on schedules, drove the dollar to dizzying
highs and ground the rupiah to dust. Confidence in the Indonesian
economy and the rupiah is only a wistful memory now.

Jim Rohwer in a recent Fortune magazine article points out
that the exceptionally high domestic savings levels of over 30
percent in this region, at twice developed country levels,
combined with lower taxed and lower welfare costs, account for
strong economic fundamentals.

He feels that given the necessary restructuring of businesses
following the currency collapse and given the free market
economies espoused by these countries, there should be growth in
productivity and profits. He believes that what has happened is a
natural stage of "growing pains". Many share his opinion.

Stock analysts feel optimistic too. They compare the current
turbulence with Latin America's devaluation experiences earlier,
and note that markets perform remarkably well once the structural
problems are addressed squarely.

Moreover, since two years now, regional currencies have held
up despite 30 to 50 percent drops in the values of the Yen, the
Deutschemark and the Swiss Franc. The resulting lack of export
competitiveness will also be addressed now with Singapore,
Indonesia and the Philippines expected to be the gainers.

Wise men ask what have we learned from all this?

Nothing that one did not already know. We learn again that
greed leads to pain. Buddha said this many centuries ago. We
learn that short-term funds in a free economy are fickle, and
that current account deficits invite trouble.

In very recent times, Mexico demonstrated this admirably. We
learned that funds meant for productive purposes should not be
diverted for personal benefit.

In the developed countries this would be termed corruption,
and there would be laws to protect shareholders and lenders. The
"Gnomes of Zurich" who devastated the sterling are now being
called the "wild beasts and morons" marauding the ringgit. So
what's new?

The Economist magazine said a few weeks ago: "One of the
unsung beauties of markets is that, unlike governments, they have
no pride." Perhaps this one factor would keep people safe from
their governments, as long as they are free.

The writer is the chief executive of a group of companies in
Jakarta and writes regularly on business, economy and management
related issues.