How the financial crisis could strengthen the Asian economies
Monday 03 November 1997
As markets in the Far East begin another week of uncertainty, some economists in the region argue that the negative sentiment has been overdone and that the turmoil may even make these countries stronger.
Any nation with the combination of an export-driven economy and a currency whose convertible value has plunged almost in half can hardly fail to become super-competitive. As this applies to Indonesia, Malaysia, the Philippines and Thailand, the four countries hit hardest by the financial turmoil, it must be good news.
They are part of an export boom which outstripped the rest of the world some three times or more and led to the kind of double economic digit growth not seen elsewhere in the first half of the decade nor, for that matter, at any other time in history.
According to World Bank figures, between 1990and 1995 Indonesia's export volume grew on average by over 21 per cent per year, while the value of those exports grew by just 11.5 per cent.
In Malaysia, the volume growth was 17.8 per cent and the value growth just 8.6 per cent. The Philippines did less well, expanding export volumes by an average 10.2 per cent, which in value terms amounted to almost 4 per cent. Thailand's exports rose 21.6 per cent in volume and 18.6 per cent in value, a far better performance than any of its neighbours.
One reason for Thailand's better-than-average record was that its currency maintained a consistently modest exchange rate with major customer nations.
The other countries saw their currencies rise and exports fall after 1995. Now all four countries share the same advantage, only more so. They can even afford price rises in their own currencies which will still translate into price falls for overseas customers.
The negative side of the picture is that falling currencies produce high interest rates and raise the cost of imports, both of which pressures lead to higher inflation. Inflationary fears are behind the scramble by economists to produce downward revisions of GDP growth estimates. The Bank of America, for example, is marking down its 1998 collective growth estimate for the Asean nations of south-east Asia from 7.5 per cent to 5.9 per cent.
However, this may prove to be a short-term phenomenon while in the medium to longer term these economies are going to benefit greatly from an end to the grossly overblown asset values, mainly in the property market, which were the product of relatively cheap credit and cash searching for a home.
The distortion of asset values led to distortions in the economy, producing unnecessarily high costs and, as we have seen, ruinous damage to finance houses who lent money recklessly.
The crash is shaking the dubious finance houses out of the system - just this weekend it was announced that the Indonesian government was closing down 16 insolvent banks.
A wave of bank closures has already swept through Thailand, while in the Philippines, which came under IMF strictures before these two countries, banks are in good shape, having the lowest ratio of liabilities relative to equity of any country in the region.
The IMF is now pouring money into both Thailand and Indonesia, and although it is far from a perfect arbiter of economic probity, many of the measures it is forcing on these countries are precisely those which internal critics have been urging without response for some time.
In Malaysia, which is under no IMF strictures, the government itself has realised that many of its grandiose projects will have to go and that a bout of austerity may be no bad thing.
In other words, the financial crisis could bring these economies back down to earth. The fantastic valuations of Far East stock markets will fade, asset values will start resembling reality and, despite the setbacks, these economies, even in the short term, are likely to continue growing at a faster rate than economies elsewhere in the world.
Paul Schulte, the chief strategist at ING Barings Securities in Hong Kong believes that the markets are finally getting back to "decent valuations" and sees the share slump as a rational reaction to the exaggerated expectations which built up among investors.
"The herd is behaving rationally for a change," he said.
However, it may take a while to persuade the international fund managers that they should return to Far East markets, particularly as the near- term outlook is for more turbulence. "People just want to take their bat and ball and go home," Mr Schulte said.
They may be right to stay away. The shocks delivered to the financial system have been sudden and sharp but the policymakers in East Asia are still reluctant to take many of the hard decisions which are needed to reform their financial markets.
The deflation of asset values will be hard to swallow and the dangers of inflation are ever present. However, to write off the world's fastest growing economies as a spent force seems a tad premature.
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