Asia on Hot Seat as Hot Money Rushes Its Way: William Pesek Jr.
http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_pesek&sid=av9yAqNZsO1k
Aug. 1 (Bloomberg) -- The scrapping of dollar pegs in China and Malaysia are
posing a familiar, yet daunting challenge to Asia: Hot money.
Back in 1996, speculative capital pumped up Asian economies. A year later, it
helped touch off the worst financial crisis this region had seen for decades.
Even faster than it flowed into Asia, the money fled, slamming asset prices and
economic growth from South Korea to Indonesia.
Currency shifts in Beijing and here in Kuala Lumpur gave speculators ample
reason to return. Both economies scrapped their dollar pegs, yet they did so
ever so conservatively. The paltry appreciation seen in the Chinese yuan and
Malaysian ringgit have markets clamoring for more -- and betting on further
steps toward stronger Asian currencies.
This dynamic poses a major test to Asia's policy makers. Now, more than at any
time since the 1997 crisis, it's time for Asia to stand and deliver -- to prove
to the world its economies can not only handle hot money flowing its way, but
also stand its ground if the money leaves.
Financial Pussycats
The 1997 crisis exposed the Asian tigers as mere financial pussycats. Asset
values throughout the region ended up being more hype than reality -- and in
some cases, Ponzi schemes. It was hot money boosting assets, not economic
fundamentals.
Fast forward eight years and Asia's economies are very different animals than
the pussycats of 1997. In general, financial systems have been strengthened,
foreign-currency debt reduced, foreign-exchange reserves rebuilt and, to
varying to degrees, efforts are afoot to reduce corruption.
``Asia's economies have really grown up since then,'' says Claudia Zeisberger,
program director of the Asia Pacific Institute of Finance.
Yet what's often missed in all the hype about Asia's post- crisis recovery is
that it's a work in progress. Malaysia's experience is microcosm of how far
Asia has come since then, and how far it hasn't. That's why the latest inflow
of hot money to Malaysia may say much about this region's financial health.
Boom Time
At the moment, hot money inflows and private consumption are driving Malaysia's
economic boom. And ``boom'' is an appropriate word, considering that the
European Union, Japan and U.S. can only dream of the 5 percent to 6 percent
growth expected here in Malaysia this year.
Yet here's the risk: Hot money and household consumption aren't necessarily
sustainable engines for Malaysian growth, or Asian growth for that matter.
``Both the hot money inflows and the consumer-driven economy represent serious
economic management and policy challenges for the Malaysian government in the
coming months,'' says Daniel Lian, regional economist at Morgan Stanley. ``Hot
money is fickle and the consumer boom is more cyclical than structural in
nature.''
In mid-2003, Malaysia stepped up efforts to stabilize its fiscal position and
bring the budget deficit close to balance. Progress in doing just that is
boosting the country's debt ratings, making it cheaper for companies including
Telekom Malaysia Bhd. to borrow from overseas.
Private Consumption
Back then, Malaysia's government realized it needed new growth engines to boost
gross domestic product even as it was tightening fiscal policies. Here, the
increase in foreign hot money flows -- related in part to hopes the ringgit
would appreciate -- a global increase in capital expenditures and a boom in
private consumption came in handy.
Something that often gets missed about this nation of 24 million people is the
extent to which its middle class has grown. Even so, Malaysia's increasing
reliance on hot money and household consumption raises two risks that may have
relevance for many Asian economies.
One, a sudden and large exodus of capital could have serious financial and
economic management consequences for Malaysian authorities. Lian estimates that
hot money flows worth between $10 billion and $15 billion have entered Malaysia
since June 2003. Capital outflows of similar size would shoulder check far
bigger economies than Malaysia's.
Two, do Malaysian households have the wherewithal to continue spending to
sustain strong growth rates this year and beyond? Perhaps.
South Korea's Example
Lian worries the ``ballooning consumer appetite'' for everything from
automobiles to houses to luxury goods is limited given the amount of debt
households are taking on. Malaysia's policy makers, Lian says, ``must guard
against excesses, drawing policy lessons from the South Korea consumer boom and
bust in 2001 and 2002.''
Asian Development Bank Chief Economist Ifzal Ali harbors similar worries about
Thailand. ``I think South Korea's experiences since the crisis, its households
borrowing way too much creating a new crisis of sorts, is a cautionary tale for
economies like Thailand,'' Ali says.
Hot money is hardly Asia's only challenge these days. Rising oil prices are
weighing on a region that's arguably more exposed to energy prices than any
other. The specter of slowing U.S. growth amid rate hikes by the Federal
Reserve is another worry, as are sluggish demand in Europe and a Japanese
recovery that's modest at best.
Yet investors should be especially interested in seeing Asia do two things.
One, use today's capital inflows more wisely and productively than it did in
the 1990s. Two, avoid complacency. Why reform your economies when capital
inflows paper over your cracks, offering a veneer of stability and success?
Bottom line, as hot money returns to Asia, this region's economies are on the
hot seat.
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