Asia’s Long Road to Recovery
A news article from the New York Times to remind us of the Asian Financial Crisis back then. What have we learnt from history? Are we going to repeat the same mistakes again?
By KEITH BRADSHER
BANGKOK, June 23 — As the founder of a petrochemicals business empire that aggressively expanded in refining, plastics, steel and cement, Prachai Leophairatana once ranked among Asia’s wealthiest men.
But when Thailand devalued its currency a decade ago, on July 2, 1997 — causing a financial crisis that engulfed nearly the entire region — Mr. Prachai’s 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 last 10 years.
His experience speaks volumes about what has happened here 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 last decade, the crisis-affected Asian countries have steadied themselves 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 all 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: all these 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. The economies of all five countries grew more slowly from 2000 to 2006 than they did 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 M. Nag, the Asian Development Bank’s managing director general, attributing slower growth to greater business and government caution about investments.
Many 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 sandwich company would sell shares on the stock exchange within two years.
He is still predicting that a stock listing is just two years away. But he has expanded only 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. “I’m 58 years old — I want this to be a long-lasting business for my children.”
Political instability and a lingering problem of nonperforming bank loans have also held back growth in several countries. A military coup in Thailand last year and 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 in an interview that his country had dealt with its nonperforming loan problem and that the economy would do better after elections, 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 large flows of money sloshing through global capital markets. He 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, he predicted, as its exports begin to saturate world markets.
Optimism about resilience to another financial crisis is now widespread in the region, even if slower growth may be the price of greater caution.
“Korea’s economic policy has become more consistent during the last 10 years,” said Lee Jang Yung, the assistant governor at the South Korean government’s Financial Supervisory Service. “Its financial system has become stronger and sound.”
To be sure, recent economic growth of 4 to 7 percent a year in the five most crisis-affected countries remains better than the performances of many developing countries.But all five countries lag behind the growth rates of 9 to 11 percent in Asia’s 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, which once rivaled Laos and Papua New Guinea as an economic basket case that could barely feed its people, has now surpassed Thailand in annual cement consumption, a key indicator of investment spending.
China is now the world’s 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 many companies, like Mr. Prachai’s empire, to repay money they had borrowed in dollars. Some in the region are still bitter, blaming Wall Street and Western investors.
“The financial people from New York came to attack Thailand; they acted like terrorists,” Mr. 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 international 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 it has 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 Europe.
“We have focused on building in safeguards to be able to pull the reins, if a crisis were to develop,” Kamal Nath, India’s minister of commerce and industry, wrote in an e-mail reply to questions.
The country most battered by sudden capital flows in recent months is once again Thailand. Faced with an incoming flood of stock and bond investments last December that threatened to push up the value of the country’s 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 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 last 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.
These investors are required to buy three-month forward currency contracts on the open market when they bring money into the country, thereby locking in the exchange rate at which they can take money out of Thailand.
The rule has prompted some grumbling among international investors that it limits the opportunity to profit from currency fluctuations. But the Thai baht has been one of the region’s less volatile currencies in recent months.
“There are complaints it creates some costs, but basically it turns out to be an instrument to stabilize our currency,” Mr. Chalongphob, the finance minister, said.
Aside from financial disruptions, another lingering worry for the five Asian crisis countries is that even as their exports to China have increased, they still remain deeply connected to 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 ports.
“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 F. Geithner, the president of the Federal Reserve Bank of New York.
Some executives are trying to do just that, including Mr. Sirivat. He even makes a point now of buying in Thailand all of the tuna for the sandwiches he serves as well as the rice for his premade sushi rolls and the bottled fruit juice he sells — a strategy that insulates him from any future fluctuations in the value of the baht. “I don’t borrow money, I don’t have to pay interest so I slowly save money,” he said, while adding, “My business did not grow as fast as I expected.”