The turmoil in Asean currencies continues unabated. In the last few months, most currencies have depreciated in dollar terms(the Thai baht from 24.52 to 32.35, the Indonesian rupiah from 2,430 to 2,985, the mighty Singapore dollar from 1.422 to 1.516, to name a few), the stock markets have fallen as foreign investors have withdrawn money, and economists are revising growth forecasts downward. Corporates with unhedged short dollar positions are scampering for cover, adding to the pressure on the already beleaguered currencies. The Asean foreign ministers blamed the currency crises on well coordinated efforts to destabilise Asean currencies for self-serving purposes, by speculators. The outspoken Malaysian prime minister has singled out George Soros as the culprit. (The Malaysians are probably still angry with Soros over the 1992 sterling crisis. He shorted the sterling and made a billion dollars "" the Malaysian central bank, then a big speculator in currency markets, was long on the pound). Clearly, pride has been hurt "" pride in the decade long fast economic growth which has pulled millions out of poverty. While the crisis will pass and, indeed, may be beneficial in the medium-term, the loss of confidence may well turn out to be the worst effect of the happenings.
The debacle in south east Asian currencies started in Thailand (see World Money, 2-6-97 and 28-7-97), and that countrys economy remains the worst affected. Confidence in the financial system remains low as depositors continue to withdraw baht 15 to 20 billion every week from the weaker finance companies and banks. To the 16 finance companies whose operations were suspended by the central bank earlier, 42 more have been added, and this may not be the end. After a decade long GDP growth of 8 per cent per annum, the economy is expected to remain flat in the current year. The central bank governor has been sacked along with the permanent secretary of the ministry of finance. While interest rates have increased, monetary policy remains looser than what the central bank would like, in order not to exacerbate the crisis in the finance companies. It may be recalled that it was the weak finance sector which triggered pressures on the currency and forced the central bank to abandon the dollar peg.
The Thais were anxious to avoid calling in the IMF but had to do so early this month, as efforts to get loans from Japan on a bilateral basis did not bear fruit "" and there were no other avenues left to restore international confidence. That the Thais had become desperate despite reserves of $30 bn tends to substantiate rumours that the central bank had sold approximately $20 billion in unmatured forward contracts. The IMF, in cooperation with several Asian countries, hammered out a $16 bn package in a couple of weeks. The loose ends were tied up at a conference in Tokyo in the week starting August 11, and the package was due to be cleared by the IMFs executive board last Thursday. The package totals $16 bn (including $4 bn each from the IMF and Japan, and a billion each from Australia, Singapore, Hong Kong, Malaysia, China, World Bank and the ADB), and is a clear evidence of regional cooperation. A further $5 bn is expected from commercial banks in new money, over and above the rollover of existing loans.
As part of the package, the Thais have promised to increase VAT and balance the budget, maintain minimum reserves of $25 bn, and halve the current account deficit to 4 per cent of GDP. Besides, they will allow greater participation of foreign investors in the financial sector, and resort to a market-determined exchange rate. Capital account controls will be removed. What perhaps hurts the Thais most, GDP growth is to be slowed to no more than 4 per cent "" a humiliating caging of an Asian (and Asean) tiger by foreign lenders?
One immediate effect of the currency crisis has been the increased cost of international borrowings. The Industrial Finance Corporation of Thailand, which paid a premium of 0.9 per cent over US treasuries for a bond issued last January, recently had to hike the margin to 1.2 per cent for a $500 million bond issue.
In the wake of the baht crisis, the Indonesian central bank was also forced to abandon its 12 per cent exchange rate band, after spending more than a billion dollars in support of the currency in the last week of July. The Malaysians have brought in some currency restrictions, and have sold $3.3 bn in market intervention. They are also planning to defer some imports and delay some import-based projects. Taiwans actions are intriguing: it stopped supporting the exchange rate, but then raised interest rates. Even the Hong Kong dollar was not immune "" the monetary authority had to intervene to the extent of US$1 bn in a couple of hours recently to frustrate speculators. Singapores economy is likely to be affected : 27 per cent of its exports go to Asean countries.
If most Asian countries are witnessing slowdown in exports, Chinas grew 26 per cent last year. It seems to be taking over some exports from Asean countries, thanks to lower labour costs. This, despite the fact that the central bank has stopped supporting the dollar, leading to an appreciation of the yuan exchange rate.
Do the events in the exchange market in India last week, when the rupee slipped in a very volatile market, have anything to do with what happened in Asean countries? Not really. To be sure, there are some common features "" huge, unhedged short dollar positions of the corporate sector, and an overvalued currency. The divergences include a much lower deficit on the current account, and an economy far less open to foreign capital. But more about the riddle of the rupee next week.
