Article: 1998.4

Date: 10 January 1998.

A STORMY START FOR ASIA TO THE NEW YEAR

As 1998 kicked off, the Asian crisis showed no signs of
abatement.  Instead, there were very tense moments last week as the
plunge in the Indonesian rupiah led a dive in other regional
currencies as well as stock markets.  The centre of the Asian
crisis has shifted to Indonesia, which will see crucial
developments this week.  Meanwhile, the South Korean government has
agreed to the foreign banks' demand that it guarantee or take over
the foreign debts of its private local financial institutions.


By Martin Khor 



The New Year got off to a bad start for the Asian region, with
sharp declines in currencies and clearer signs that the Western-led
"rescue packages" have not worked.


Even as the razor-sharp tension over South Korea eased, the centre
of the crisis shifted suddenly to Indonesia last week as the rupiah
plunged and an economic collapse seemed possible.


Indeed, Southeast Asia's largest country is the latest patient to
be put in intensive ward, and high-level officials from the United
States and the International Monetary Fund are flying into Jakarta
for crisis talks.


With Indonesia becoming so badly wounded, other countries in the
region again suffered the so-called "contagion effect."  In
Malaysia, the ringgit plunged through the barrier of four-ringgit
to the US dollar and was heading for five ringgit until some
intervention from Bank Negara led its partial recovery to close at
4.56 on Friday.


The Thai and Philippines currencies were also badly affected, and
pressures were also felt in the three financially strong countries,
Singapore, Hongkong and Taiwan.


The Singapore stock market was badly mauled, falling by 97 points
or 7% on Thursday and then by another 7.4% or 94 points to 1,176 on
Friday, signifying investors' fears that some Singapore banks and
companies may be adversely exposed to the Indonesian crisis.


The Hong Kong stock market also fell sharply by 6% on Wednesday
past the 10,000 index level, 3% on Thursday and another 3.9% on
Friday to below the 9,000 index level.


With the three strong markets of Singapore, Hong Kong and Taiwan
being affected, a Hongkong hedge fund manager told the
International Herald Tribune:  "The second phase of the economic
crisis in Asia is now unfolding."


This rather cryptic remark seems to be predicting that the regional
turmoil would also spread to those countries and territories with
strong foreign exchange reserves.


This of course prompts the question whether any country, however
strong the economic and financial fundamentals, can be spared.  


It also demolishes the orthodox argument that market movements are
based on rational grounds, whilst boosting the case that they are
being driven by subjective sentiments that are in this case
irrational and based on herd instinct, expectations and imperfect
knowledge.


In the coming week, the centre of attention will be Indonesia,
which is facing its "moment of truth."  Just as South Korea faced
an acute "crunch" just before Christmas, Indonesia appears to be
facing a similar situation last week and this week.


The Budget unveiled by President Suharto last Tuesday was badly
received by analysts and the market, which perceived the government
was not serious about carrying out reforms.  There was also
continuing doubts about Suharto's health and uncertainty about the
political situation.


The rupiah was savaged, falling from 6,650 to the US dollar on
Monday past the 10,000 level on Thursday, losing 22% on that day
alone.  This prompted a 30-minute crisis call from US President
Bill Clinton to Suharto, and with news of impending visits by US
and IMF officials the rupiah recovered 30% to close at  7,900 to
the dollar on Friday.


In Malaysia, after the ringgit's sharp fall earlier in the week,
the currency improved on Thursday and Friday.


The Bank of International Settlements (BIS) had reported that 56%
of international bank lending to Malaysia at mid-June 1997 was
short-term in nature.  This sparked some concern because if a lot
of the total debt is short-term, it implies the need for more funds
within a short period to service the loans.


However on Wednesday the Bank Negara (central bank) clarified that
as at 30 June, Malaysia's total external debt was US$45.2 billion,
of which medium and longterm debt was US$31.7 billion or 70
percent, the bulk of which (or 63 percent) had remaining maturities
of four to 20 years.


Short-term debts accounted for only 30 percent, and if medium and
long-term debt with remaining maturities of one year is included,
the ratio would be 39 percent.  


This is lower than the 56% ratio reported by the BIS (which
accounts only for bank lending).  This clarification seemed to have
eased the initial concerns.


Two other important developments in the region were the
negotiations between South Korea and its international bank
creditors, and the announcement by Thailand that it was seeking
changes to its IMF rescue package.


At the end of last week, the international banks agreed to roll
over the short-term debt of South Korea's financial institutions
for another 90 days, following an emergency 30-day roll-over of
US$15 billion given in late December.


But this progress in Korea-foreign bank talks came with a very
heavy price.  The banks had insisted that the South Korean
government assume responsibility or guarantee the servicing of the
foreign debts of the South Korean financial institutions (the total
of which is estimated at around US$100 billion).


There was some initial resistance to this, with a Finance Ministry
vice minister insisting that the government would never take over
private debts.


Last week, however, the South Korean Finance Minister Lim Chang-
yeul stated that "we plan to offer government guarantees on the
debt as requested by the foreign institutions as a condition to
converting the debt."


He also said South Korea would provide incentives such as higher
interest rates in order to transfer the short-term debt with
foreign banks to medium and longterm debt.


A senior central bank official also confirmed the government stood
ready to guarantee debts of South Korean banks if foreign lenders
required such guarantees in exchange for converting short-term
debts to long-term debts.


With their key demand met, the foreign banks meeting in New York
are reported to be moving ahead with plans to convert their private
short-term loans (made to South Korean banks) into longer-term
government bonds.


In other words, the South Korean government would have to take over
the mostly sour loans of private banks, whilst the foreign banks
probably get repaid in full.


This has earned critical comments in the past two weeks from even
establishment commentators and the international financial media. 
The foreign banks that made the wrong assessment and committed the
mistake of massive lending to private institutions in South Korea
are going to get off scot free, whilst the burden (likely to be a
fair part of US$100 billion) is shifted to South Korean taxpayers. 
 
So much for the insistence of the IMF and the rich nations that
drive its agenda that the market principle must apply to the rescue
packages, that the governments must not provide aid to private
banks or companies in trouble.  


It is clear from the Korean case that this no-subsidy principle
applies only to local institutions whilst foreign creditors get the
privilege of having the IMF-coordinated aid funds rechannelled to
paying them.


This formula is likely to be proposed also to Indonesia and
Thailand.  Indeed it could be one of the main points that IMF and
US officials will put forward during their visit thus week to the
region.


Meanwhile, a high-level Thai team of officials, led by the Finance
Minister, will be visiting the United States soon and will request
that the terms of the IMF-managed loan (worth US$17 billion) be
altered.


In particular, the Thai government would like to ease the condition
that its budget show a surplus equivalent to one percent of GDP
this year, as plunging revenues make it impossible for the target
to be met.


There has been increasing criticism in Thailand, including from
officials and lawmakers, about the IMF conditions.


Last week, even the World Bank (a sister organisation to the IMF)
added its voice to the still mounting worldwide criticisms of the
IMF's policies for troubled Asian countries.


Implying that the IMF's austerity policies of high interest rates
and sharp cuts in government spending are inappropriate, the World
Bank's chief economist Joseph Stiglitz said:  "These are crises in
confidence. You don't want to push these countries into severe
recession.


"One ought to focus on things that caused the crisis, not on things 
that make it more difficult to deal with."

Martin Khor is the Director of Third World Network.

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