totters
The Asian Tiger’s once seemingly unstoppable roar is now a meow. The economic meltdown that started a year ago with the devaluation of the Indonesian baht has had a devastating effect on the economies caught in its wake.
Stock markets in the region were decimated. The trouble was that few saw it coming. During the first few months of last year, Indonesia, Malaysia, the Philippines and Thailand were predicting growth rates faster than the rest of the world. With the growth came foreign investors who were falling over themselves to get a piece of the action. Then the bubble burst; currencies collapsed and banks went bust.
It all began with incompetent banking practices in the region. Privileged individuals were allowed access to incredible sums of money, either as bankers or as business borrowers. Few felt compelled to pay it back. Instead, they poured money into speculative investments and over-ambitious businesses.
The result was inflated stock markets and property values which made the banks’ books and the borrowers’ balance sheets look even better. When reality set in, there was a stampede for the exits. The rest is history.
Even the largest of these economies has not been left unscathed. Japan’s banking sector and large financial institutions are in tatters, and its century-old stock market is looking to a new leadership to give the once- mighty yen a badly needed boost and prompt a rebound in stock prices.
Regional stock markets are nervously awaiting the announcement of Japan’s new prime minister. The uncertainty can be seen in the mixed performance of Asian markets. Key stock indices fell in the stock exchanges in Singapore, Bangkok (Thailand), Kuala Lumpur (Malaysia), Hong Kong, Seoul (South Korea) and Jakarta (Indonesia).
But in Tokyo last week the financial markets rallied. Economic gurus attributed this to expectations that the Japanese economy might improve under a new administration.
The turnaround was most welcome: over the past six months, the Nikkei index, the barometer of Japan’s economic health, has been on a losing streak. Much of this has been linked to the fall in the yen.
Last month, Japan got a boost from the United States, who intervened for the first time in six years to sell the dollar on world currency markets to support the yen. This did not come without a price: Japan has promised to reform its economy and markets and the US wants detailed plans. Structural reform usually means deregulation of service industries, liberalisation of capital and labour markets, and a general opening up of the country to foreign competition – moves which Japan has always been loathe to make.
David Komansky, chair and CEO of the US giant stockbroking firm Merrill Lynch, which recently opened its first office in Japan, expects the reform programme to create greater competition and transparency in the financial system, which should help the country’s economy to pick up.
The big unknown is whether the markets think the new reform programme is good enough. If not, will the US intervene again? And if they don’t, what will the impact be on the rest of the Asian markets?
If Tokyo does not take the necessary rapid reform measures, the US will have to carry many of the consequences. It will mean a widening of the trade deficit, more domestic political pressure over the Clinton administration’s support of the International Monetary Fund (IMF), and the threat of financial panic on the New York, Tokyo and Hong Kong markets. The US may also not be able to resist pressure to support the yen again.
Japan’s troubles are worrying, since the immediate fate of the entire region rests on the industrial giant fixing its own mess.
This is not going to be easy: Japanese banks have huge numbers of bad loans on their books, and much of their assets are made up of stocks with sinking values. Now a credit crunch is making it all but impossible for the economy to get a kick- start without the implementation of a strong reform package.
The economies of neighbouring countries are also under internal pressure, struggling to restore economic growth and restructure their financial sectors. One year after the handover to China, Hong Kong should be celebrating its smooth transition. Unfortunately, the downturn in the markets has overshadowed the anniversary and Hong Kong is facing its first recession since 1985.
Malaysia has lost $260-billion from its capital markets this month alone. Its prime minister insists that it is the victim of all those nasty speculators. Indonesia has reached a new agreement with the IMF. South Korea and Thailand are being praised for reforms, but their economic output is still expected to fall this year.
The one bright star seems to be Taiwan. It may be the only country in the region that will show some growth in 1998.
Its central bank is flush with foreign reserves of $84-billion and it has managed to defend the Taiwan dollar with a mix of intervention and pressure in the dealing rooms.
Next week: Latin America