How Asia's Economic Miracle Fell Apart

How Asia's economic miracle fell apart

BARRY PORTER

It was supposed to have been a year of celebration for Southeast Asia - 30 years of glorious economic boom.

It was also to have been the year when the Association of South East Asian Nations (Asean) grew from seven members to 10, encompassing the whole of the region.

Instead, it all went wrong.

A coup prevented Cambodia from entering the elite regional economic grouping and just about every market in the region collapsed - some by more than 50 per cent.

Analysts had started the year on an upbeat note. A few were already expressing concerns about Thailand's banking system, but the vast majority were still making bullish forecasts for just about everything in Southeast Asia.

Brokerages had been most bullish on Indonesia, much to their later regret.

The rupiah walked off with the wooden spoon as the worse-performing currency not only in the region but in the world in 1997 - tumbling from Rp2,362 against the US dollar to end the year at Rp5,300, down 55 per cent.

And the Jakarta Composite Index shed 37 per cent.

The first warning the Southeast Asian economic miracle was in danger came in February when Finance One, Thailand's largest finance company, failed to meet its bond repayments, signaling all was not well in the Thai finance sector.

In April, Moody's cut Thailand's sovereign debt rating, highlighting the deterioration of the country's creditworthiness. Stocks began to tumble.

By the end of the month, Philippine stocks were also diving as concerns spread that Manila's banking sector could be in a similar predicament. This was the first sign of regional contagion.

By mid-May, the baht was coming under heavy attack from foreign hedge funds and Thai stocks fell below the psychological 600-point barrier to their lowest level in six years.

Like most other countries in the region, the baht's peg to the US dollar had been viewed by speculators as outdated, over-inflated and supported by inappropriate economic fundamentals. This made it potentially vulnerable.

The Thai central bank went on the offensive, wasting billions of dollars trying to defend its peg. At one point, it tried drying up liquidity to starve speculators of funds by hiking the cost of borrowing short-term baht through the off- shore swap market to 1,200 per cent.

Alerted to the region's mounting problems, the International Monetary Fund (IMF) investigated. It said most of the region's economies might be slowing down but had plenty of room to adjust.

Just two days later, however, a planned bail-out of Finance One by Thai Danu Bank collapsed. This had been intended as a model for the reformation of Thailand's ailing banking sector. Many saw it as a signal that there was no hope.

The speculative attacks intensified. By mid-June, the baht had reached a 15- year low, Thai stocks hit an eight-year low and Finance Minister Amnuay Viravan resigned.

US-Hungarian financier George Soros was first blamed as the main culprit behind the baht attacks.

Little-known Thanong Bidaya was named to replace Mr. Amnuay as Thai finance minister. He quickly shut down 16 troubled finance companies and ordered others to merge.

Within a fortnight, he abandoned the peg his predecessor had so fiercely defended.

The baht responded on July 2 by crashing another 18.6 per cent to Bt29 against the US dollar, dragging down other regional currencies and bourses in its wake.

Contagion intensified during July as speculators grew confident following their success at bringing down the baht and looked for more targets.

Under intense pressure, the region's currencies snapped one by one.

On July 9, Philippine President Fidel Ramos ruled out any devaluation of the peso. Two days later, he gave in.

The same day, Indonesia widened the rupiah's trading bands, an initial de facto devaluation.

Three days later it was Malaysia's turn, with Bank Negara giving up its expensive defense of the ringgit and letting market pressures take hold.

Then, on July 21, Indonesia abandoned its crawling peg altogether. The Singapore dollar was the only leading Asean currency left standing, given that, unlike its counterparts, it had not been US dollar-pegged.

By August, Thailand's economy was in such a bad shape, it turned to the IMF for help.

The IMF mustered a US$17.2 billion international bail-out, which may have been the world's largest since the Mexico package in 1995.

With investor confidence lost, the meltdown ensued into the autumn with vast sums of money withdrawn from the region amid an air of disbelief.

The markets' contagion started spreading to Northeast Asia, then worldwide.

By October, Indonesia was ready to give in and turn for help, attracting US$23.5 billion from the IMF and another US$17 billion in bilateral stand-by loans.

As the year drew to close, there was hardly a company in the region unscathed as the region's long-booming economies switched into slowdown, foreign exchange losses mounted and austerity measures came into place.

Year-end market figures showed Thailand's composite index dived 55 per cent in 1997, Malaysia's 52 per cent, the Philippines' 41 per cent, Indonesia's 37 per cent and Singapore's 31 per cent.

Of the currencies, the rupiah was hardest hit due partly to fears over President Suharto's health in December. It fell 55 per cent over the year.

The baht fell 45 per cent, the ringgit and peso 35 per cent, and the Singapore dollar 16 per cent.