Fw: Thailand and the Emerging Asian Crisis

Ulhas Joglekar ulhasj at SPAMbom4.vsnl.net.in
Fri Aug 4 08:38:46 MDT 2000


----- Original Message -----
From: <alert at stratfor.com>
To: <redalert at stratfor.com>
Sent: Monday, July 31, 2000 9:40 AM
Subject: Asia/Thailand - Economy


> Stratfor.com's Weekly Global Intelligence Update - 31 July 2000
> _________________________________________
>
>
> Thailand and the Emerging Asian Crisis
>
> Summary
>
> Signs are emerging in Southeast Asia that strongly suggest a
> relapse of the economic crisis that struck the region in 1997.
> Ironically, events in Thailand - where the crisis began - are
> leading indicators of a larger regional trend. The region is caught
> in vicious cycle: unable to muster the political will to reform
> economies and steadily unraveling economies that undermine
> political will. The question now is whether events will be
> contained in Southeast Asia - or spread north to China and Japan.
>
> Analysis
>
> In 1997, the Asian economic miracle came to a very public end.
> Troublesome undercurrents finally became manifest in a financial
> crisis, when Thailand's currency came under intense pressure,
> collapsing and culminating in a general financial panic. Since
> then, Asian economies have struggled to recover.
>
> Some, like the South Korean economy, have done better than others.
> But in general, most Asian nations have been unable to institute
> the radical, fundamental restructuring that a full, regional
> recovery would have required. Some, like Indonesia, have simply
> lacked the wherewithal for reform. Others, like Japan, have lacked
> the political will to endure the wrenching social costs.
>
> Now, Southeast Asian currencies are once again under pressure amid
> political turmoil and a continuously strong U.S. economy. We are
> now seeing signs that, rather than recovering, Asia's economies are
> once again running into rough waters. Indeed, the same country that
> was the first domino to fall in 1997 seems to be leading the way
> again.
>
> The Thai government has been forced to intervene twice in the past
> three months to stabilize the baht, without coming close to solving
> the currency's problems. Last week, the government was forced to
> intervene again. According to Thailand's The Nation, the Bank of
> Thailand intervened in the London market on July 26 in an attempt
> to strengthen the baht, which had fallen to its lowest level since
> September 1999.
> ________________________________________________________________
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>
> Thailand is not alone in the region in having to cope with the
> steady decline of the value of its currency. The Philippine peso,
> which often closely follows the baht on the market, came within
> 0.134 pesos of its weakest crisis point of 45.209 to the dollar on
> July 27. The Indonesian rupiah hit its weakest point since October
> 1998, and the Singapore dollar has reached its weakest point since
> September 1998.
>
> But the baht has taken the most curious and disturbing path of
> regional currencies. The currency has experienced a general
> downtrend since 1998, with intermittent upswings. There was a brief
> rally between March and May 1998, and another between October and
> December of 1999. Neither could reverse the general downtrend.
>
> This general pattern is seen throughout Southeast Asia; the peso
> has declined more sharply than the baht, and the rupiah has
> declined steadily since the presidential elections in October 1999.
> In the face of this pattern, stronger countries, like Singapore and
> South Korea, have been forced to weaken their currencies in order
> to remain competitive with regional rivals.
>
> Three key factors are behind these events. First, Asia has yet to
> truly recover from the economic crash of 1997 and remains
> fundamentally weak. Second, the continued strength of the U.S.
> economy - along with rising U.S. interest rates - has put heavy
> selling pressure on Asia's currencies. Finally, political and
> social instability in Asia - particularly Southeast Asia - is again
> on the rise, decreasing investor confidence in these nations.
>
> This last is the key to understanding the region's problems. The
> issue is no longer economic, but political; the region's economic
> problems are now symptomatic of the region's political problems.
> The economic problems could be solved in many of the region's
> nations if the necessary reforms could be instituted.
>
> But the fragility of the region's political systems makes
> meaningful reform impossible. A regime that imposes the required
> measures cannot survive. Paradoxically, the failure to impose these
> measures has already created a long-term malaise that erodes
> confidence in the regimes' ability to manage the situation. As a
> result, there is a no-win situation in much of Asia.
>
> Consider Thailand. Thailand's ruling party, elected due to popular
> dissatisfaction with the previous government that presided over
> Thailand's epochal financial crisis, was badly beaten in the
> mayoral election in Bangkok on July 23. The election was won by
> Samak Sundaravej, a deputy prime minister during the 1997 financial
> crisis. He beat the main opposition candidate by nearly two to one
> and the ruling party candidate by a margin of four to one.
>
> Samak's victory was particularly troubling for both the ruling and
> the main opposition party. He is dogged by allegations of
> corruption in the Thai press, supports close cooperation between
> government and business, opposes freedom of the press and ordered a
> brutal crackdown on pro-democracy demonstrators in the 1970s. Samak
> is the epitome of the pre-1997 politician-businessman whose
> manipulation of the banking system was a central cause of the Asian
> financial crisis.
>
> Nevertheless he won. He defeated both the party that promised
> reform and the new opposition party that encouraged economic
> reforms. This provides a sense of the dilemma faced by Thailand.
> The public is simply incapable of accepting the social cost of
> either moderate or radical reform. Faced with the need to change,
> the public is turning back to the politicians who created the
> crisis in the first place. With parliamentary elections mandated
> before November, Thailand appears poised for a return to the
> political status quo ante.
>
> The consequences for international confidence in Thailand's economy
> would be negative, to say the least. Indeed, the currency markets
> are already registering their dismay. Other regional nations are
> facing equally difficult political situations, as dissatisfaction
> mounts over the lack of economic recovery.
>
> Confidence in Indonesia's president, Abdurrahman Wahid, has
> steadily declined since his election in October, and he faces an
> August showdown with a parliament increasingly pressing for his
> removal. In the Philippines, President Joseph Estrada has faced
> continued accusations of corruption and cronyism, and thrown the
> nation's slender resources into a full out military action in the
> south against Islamic insurgents. In Malaysia, too, where
> longstanding Prime Minister Mahathir Mohamad enacted currency
> controls shortly after the economic crisis, competition from the
> Islamic opposition has seriously challenged Mahathir's grip on
> power.
> _______________________________________________________________
>
> For more on Thailand, see:
> http://www.stratfor.com/asia/countries/thailand/default.htm
> __________________________________________________________________
>
> The economic and political instability in Southeast Asia feed upon
> each other, creating a vicious circle that threatens to spiral the
> region once again into the depths of economic crisis. If Thailand
> fails to control the declining baht, the Philippine currency is
> certain to collapse - if it doesn't do so on its own before that.
> Indonesia, too, threatens to trigger a relapse of the currency
> crisis and has called on its neighbors for technical assistance to
> bolster the plummeting rupiah.
>
> Estrada, in his State of the Nation Address on July 24, warned that
> the peso decline was the result of "a new Asian contagion." While
> largely intended to pass the buck for the 15 percent decline in the
> value of the peso since his election two years ago, the Philippines
> appeared cautious of another currency crisis early in the year,
> establishing limited currency controls in January.
>
> Thailand's central bank appears strong enough to delay the
> inevitable for a while, but the nation's economy is large enough
> that when it falls, it will certainly drag the Philippines and
> Indonesia with it. Despite Mahathir's currency controls, Malaysia,
> too, would be unlikely to avoid the regional relapse.
>
> As a result, it appears that Southeast Asia is once again on the
> brink of economic crisis, and its leaders are becoming aware of it.
> Given the political configuration in many of these countries, it
> seems unlikely that internal political intervention will stabilize
> the situation. To the contrary, we would expect the regions'
> political paralysis to exacerbate the problem.
>
> It is equally unlikely that international intervention will provide
> any stability. The International Monetary Fund (IMF) and the major
> powers can stabilize currencies for a while, but currency
> instability is a symptom of the problem, not the problem itself.
> IMF austerity leads to social chaos; lack of austerity leads to
> social malaise.
>
> The real issue is how far north the disease will spread. The two
> major question marks are China and Japan. Japan, the largest
> economy in Asia, also suffers from the Asian disease in its extreme
> form. Japan's political process has prevented meaningful reform
> more effectively than anywhere else in Asia. The very size of the
> Japanese economy has allowed Japanese politicians to buy enormous
> amounts of time, not available to their poorer relations in the
> south, with which to put off the day of reckoning.
>
> If Southeast Asia moves into crisis, Japan will not be far behind.
> Nor will China. China worked very hard to limit the effects of 1997
> on China. Much of the labor was smoke and mirrors. China was hit
> and hit hard. One of the results was an intensification of
> political controls designed to limit social instability resulting
> from economic dysfunction. That bought China some room for
> maneuvering. But time has passed without a fundamental solution to
> China's economic problems. A new tidal wave of Asian economic
> problems could cause massive problems for China this time.
>
> Asia and the United States now appear caught in a zero sum game, in
> which U.S. economic strength costs Asia dearly. This is more
> appearance than reality, though. We have noted the extraordinary
> de-synchronization of the global economic system. The reality is
> that whatever happens to the United States, Asia is feeding upon
> itself.
>
> Its inability to re-capitalize its banking system is reflected in
> its endemic currency crisis. That in turn is rooted in a failure of
> capital formation. So long as Asia maintains inefficient
> enterprises in order to maintain social stability, it cannot
> rebuild its economy. The region's best hope is that the long-term
> malaise will be just that - long term - and will not turn into
> another crisis.
>
> That is what regional leaders are hoping for, and that is a pretty
> dismal hope. It looks like Southeast Asia is headed once again for
> rough waters and that it may well take the Asian economic powers -
> China and Japan - with it.
> _______________________________________________________________
>
> For more on the Asia, see:
> http://www.stratfor.com/asia/default.htm
> __________________________________________________________________
>
>
> (c) 2000 Stratfor, Inc.
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