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.