10 years after Asias financial crisis, worries remain
http://www.iht.com/articles/2007/06/27/business/crisis.php By Keith Bradsher Published: June 27, 2007 BANGKOK: As the founder of a petrochemicals business empire that aggressively expanded in refining, plastics, steel and cement, Prachai Leophairatana once ranked among Asias wealthiest men. But when Thailand devalued its currency a decade ago, on July 2, 1997 - setting off a financial crisis that engulfed nearly the entire region - Prachais company was unable to keep up with payments on nearly $3 billion in debt, much of it denominated in dollars. Today, he has recovered somewhat, but he controls only the cement division and has not built a new factory in the past 10 years. His situation speaks volumes about the experience since the Asian financial crisis, which raised alarms around the world and was probably the most damaging detour along the road to economic globalization of the post-Cold War era. In the past decade, Southeast Asia has steadied itself but never regained the dazzling growth of the mid-1990s. Looking back, an Asian Development Bank review of the five countries most affected - Thailand, Indonesia, Malaysia, South Korea and the Philippines - found that incomes per person had recovered to at least their levels before 1997. Trade balances, foreign currency reserves, corporate governance, depth of financial markets and quality of government regulation, as well as various indicators of public health are now stronger than before. Yet in all five countries, a sense of loss persists: a sense of no longer being the darlings of foreign investors, a sense that the best times may lie in the past, not in the future. Each economy grew more slowly from 2000 to 2006 than from 1990 to 1996, with annual growth rates an average of 2.5 percent below the previous period. The losses we have suffered are really in that sense permanent, said Rajat Nag, the managing director general of the Asian Development Bank. He attributed the slower growth to greater caution about investments on the part of governments and businesses alike. Many others here and elsewhere in the region have been caught up in the aftermath of the crash as well. Sirivat Voravetvuthikun borrowed $8 million in 1995 to build two condominium towers outside Bangkok, but he went broke during the crisis and started a small business selling sandwiches on the streets of the capital. He predicted in early 1999 that his company would sell shares on the stock exchange within two years. Today, he is still predicting that a stock listing is just two years away. But he has only expanded to two coffee shops, two kiosks and 30 sidewalk vendors because he is scared to borrow money. I am afraid that I will fail again, he said. Im 58 years old - I want this to be a long-lasting business for my children. Political instability and lingering problem bank loans have also held back growth in several countries. A military coup in Thailand last year and continuing political violence in the south have hurt investment here. The Philippines faces a Communist insurgency. Indonesia has not entirely recovered from the rioting and toppling of the Suharto government that accompanied the financial crisis there and from the Bali bombings in 2002. Finance Minister Chalongphob Sussangkarn of Thailand said during an interview that his country had dealt with its bank loan problem and that the economy would do better after elections, planned for late this year. The likelihood of going to another financial crisis is now low, he said. But he cautioned that middle-income countries like Thailand still face challenges in coping with the large flows of money sloshing through global capital markets, and suggested that the double-digit growth rates of the mid-1990s were not sustainable for Thailand or any other country over the long term. Even the Chinese economy will slow at some point as its exports begin to saturate world markets, he predicted. To be sure, recent economic growth of 4 percent to 7 percent a year in the five countries remains better than many developing countries. But their performance lags behind growth rates of 9 to 11 percent in Asias three current stars: China, India and Vietnam. Those countries offer greater political and economic stability and now attract much of the foreign investment that once flooded southeast Asia. Vietnam has now surpassed Thailand in annual cement consumption, an indicator of investment. China is now the worlds leading steel producer. India has become a global leader in computer software development and other outsourcing, and is now recording double-digit growth in manufacturing as well. The Asian financial crisis prompted considerable discussion at the time about whether many countries in the region, acting partly on the advice of the International Monetary Fund, had gone too far in opening their financial markets to international investors. Hedge funds, banks, multinational corporations and local companies all began selling local currencies and buying dollars in a mad rush to lock in profits or repay dollar-denominated debts in 1997. The result was a plunge in their currencies value that made it even harder for other companies, like Prachais empire, to repay money they had borrowed in dollars. Some in the region are still bitter, blaming Wall Street and Western investors in general. The financial people from New York came to attack Thailand, they acted like terrorists, Prachai said. More recent economic analyses have suggested, however, that hedge funds and banks were less responsible for the downturn than a spate of sudden selling of Asian currencies by local companies as well as by businesses like Dell and mutual funds like the T. Rowe Price New Asia Fund, which sought to limit their potential losses. Malaysia weathered the crisis better than many countries in the region by imposing restrictions on the movement of large sums of money out of the country. That success has called into question the international economic orthodoxy that countries should keep their markets as open as possible at all times but not reversed the trend toward freer trade and investment. China, India and Vietnam all had severe limits on the entry and exit of short-term foreign investments in place long before the Asian financial crisis. All three weathered it relatively well, although the Chinese economy weakened temporarily as exports flagged. The three are now moving to lighten their restrictions on money flows, but are moving at a very gradual pace that sometimes frustrates trade and finance negotiators from the United States and European countries. We have focused on building in safeguards to be able to pull the reins, if a crisis were to develop, Kamal Nath, Indias minister of commerce and industry, wrote in an e-mail message. The country most battered by sudden capital flows in recent months has once again been Thailand. Faced with an incoming flood of stock and bond investments last December that threatened to push up the value of the countrys currency and undermine the competitiveness of Thai exports in foreign markets, the government imposed a requirement that effectively taxed short-term foreign investments. But when the Thai stock market immediately plunged 15 percent in a day, the government promptly lifted the restriction for investments in equities. In a less noticed move, however, the Thai government has made a series of adjustments over the past few months that have had the effect of keeping limits on foreign investors who bring large sums into the country for the purchase of fixed-income securities. Aside from financial disruptions, another lingering worry for the five countries hit by the financial crisis is that while their exports to China have increased, they remain dependent on American consumers. Many Asian countries used to ship electronics and other goods directly to the United States. Today they tend to ship components to China, where they are assembled and shipped to American households. Asia will need to prepare for a future in which it relies more on the strength of growth at home rather than on the strength of growth in the rest of the world, said Timothy Geithner, the president of the Federal Reserve Bank of New York. ____________________________________________________________________________________ Fussy? 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