The outlook for '98: Why the tiger is an endangered species

Bangkok's Golden Town stands as a monument to what went wrong in Thailand, the country that kicked off the current financial turmoil in the Far East. Begun in 1989, when the Thai economy was expanding by more than 10 per cent a year, Muang Thong Thani - Golden Town in Thai - was supposed to house half a million people by 2005.

Today, most of Golden Town's 30 skyscraper apartment blocks and hundreds of low-rise condominiums stand empty. Thailand's biggest residential project, funded by easy money from local banks and foreign loans, is now home to miles of silent corridors and unpainted walls. Thirty thousand people live in a community intended for 500,000.

Many of them will be among the million Thais that are unemployed. Few remaining jobs in the country are secure. The government predicts no growth for next year. Most experts, and government economists speaking in private, think Thailand has already entered a recession and the economy next year could contract by as much as 3 per cent.

The government is banking that the falling baht will boost exports and thus lead the way out of the crisis. But so do other governments in the region.

"At first it looked like it might be good," says M Sawanchi, sales manager for textile company Luckytex. "But then everyone else devalued and we were all back in the same boat."

Piti Sithi-Amnuai, executive vice chairman of Bangkok Bank Pcl, the country's biggest bank, says Thailand should never have joined Southeast Asia's rush to industrialisation. "We should never have tried to be a tiger."

Thailand is one of the poorer countries of the region, and therefore likely to feel the pain most acutely, but the other tigers are now also reeling.

On Wednesday for the first time the South Korean authorities overcame their fear of losing face and called in foreign bankers to try to gain their support as the nation hovered on the verge of calling a moratorium on repaying short-term borrowings.

The International Monetary Fund and the Group of Seven leading industrial nations immediately pledged $10bn in accelerated aid to the country, sending stocks and the country's currency soaring - but the rally could easily be reversed.

"Korea managed to douse the flames with the help of foreign fire fighters," said Shin Woo Hyun, a senior fund manager at Dehan Investment Trust in Seoul. "But it's too early to say the fire is out as the embers are still flickering."

To cap a disastrous year for Asian financial markets, not only Korea but Indonesia and Thailand, where the crisis first began, saw their debt dowgraded to junk bond status by the world's biggest credit-rating agencies last week.

Just when they needed it least, these nations will find it more difficult and expensive to roll over their debts as they try to impose austerity programmes imposed by the International Monetary Fund in return for emergency credits.

The Bank of England also stepped in asking British banks to extend the length of their loans - worth about $6bn - to South Korean banks to ease Korea's financial crisis.

The current crisis in the Far East has its roots in years of cheap loans and free spending. Murky banking laws and corrupt business practices have imposed a cost that is being paid with plummeting currencies, high unemployment and thousands of bankruptcies.

"If they do nothing, we could see foreign debt moratoriums, political unrest and we'll see a deep recession," said Karma Wilson, vice president of fund management at Goldman Sachs Asset Management in Singapore.

From Seoul to Bangkok, Jakarta and Manila, interest rates are higher than they have been in decades and foreign investors have fled.

Hardly surprising that Asian equity markets were the 10 worst performers in the world among the 59 indices tracked by Bloomberg as currencies crumbled to record lows. Measured in sterling the Seoul, Bangkok, Kuala Lumpur and Jakarta stockmarket indices all crashed around 70 per cent. Only shares in the Indian sub-continent and in China gained.

The biggest borrowers from the days of the "Asian miracle" have billions of dollars of outstanding foreign loans. Those that can still afford to buy dollars are scooping them up and holding them, driving down local currencies and making their loans even more expensive to pay back.

More than $100bn in emergency loan packages for South Korea, Thailand and Indonesia sponsored by the IMF failed to stem the slide.

Few companies are secure. From Korea's giant "chaebol" company groups to Thailand's family-controlled business empires, many have fallen and more are sure to follow. And on the national level even Hong Kong, which so far at least has successfully defended its currency's peg to the dollar, interest rates have soared and the stock and property markets have collapsed.

As for the walking wounded, veteran South Korean opposition leader Kim Dae Jung won his country's presidential election as the economy stands on the edge of its first recession in two decades. The IMF and selected countries are demanding radical changes in exchange for as much as $60bn in aid.

"The IMF is asking them to change not just their economy, but to change their culture," said David Roche, formerly with Morgan Stanley and now president of the London-based Independent Strategy.

The independent Daewoo Institute predicts growth will decline by two- thirds next year to just over 2 per cent from 6 per cent in 1997. The government itself projects automobile output will be more than halved next year, and steel production cut by a fifth.

Unemployment,the Daewoo Institute forecasts, will exceed 5 per cent. That represents a major shock in a country where workers expect to keep a job for life. And mass layoffs could bring civil strife.

"There is quite a militant union movement in Korea," said Aidan Foster- Carter, an independent Korea analyst. "They had virtual full employment, but now [they enter] the world of downsizing, which nobody enjoys."

In Indonesia, the IMF/G7 emergency package sent the rupiah surging 20 per cent Friday but economists say whatever the industrialised nations do will come too late to stave off the country's first recession in 20 years. Since 1970 the nation had powered ahead at about 6.5 per cent a year.

"It really is a vicious cycle," said Nick Brooks, a regional economist for Peregrine Securities in Singapore. "The rupiah drops; your foreign debt in rupiah terms rises substantially. That forces companies to reschedule debt or default, and no one wants to be exposed to that kind of environment so they start pulling their money out faster."

Some expect a contraction of as much as 5 per cent. That compares with a forecast for growth of about 7 percent made before the rupiah crisis.

Even the Philippines, operating under the scrutiny of the IMF for the last three years, has suffered from the stampede of investors out of Asia. The peso has fallen 33 per cent against the dollar this year.

"Those companies that funded themselves massively with US dollars, if you look at their translation losses, they're quite insolvent," said Sam Chin, analyst for Fitch IBCA ratings agency.

For the Philippines, the threat of recession is a bitter end to a year that began with pronouncements that it might be Asia's next "tiger" economy. Five months after the Philippines bowed to market pressure and let its currency weaken, its benchmark stock index has fallen more than 60 per cent in dollar terms.

The currency decline is a reminder of 1983, when the peso lost more than half its value in the span of a few months and an exodus of capital forced the country to declare a moratorium on its foreign debts.

"The big problem will be asset deflation and deteriorating credit quality," said Scott Gibson, head of research for ABN-Amro Hoare Govett Securities. "The pain is getting sharper, but it's all in the same places."