Business

Asia's growling Tigers

TOM FENNELL October 6 1997
Business

Asia's growling Tigers

TOM FENNELL October 6 1997

Asia's growling Tigers

Business

TOM FENNELL

The Buddhist monks in flowing orange robes had assembled at the ancient shrine to exorcise a very modern demon. As thousands of Thais, including several cabinet members, crowded around Bangkok’s Temple of the Emerald Buddha on Sept. 20, 100 clerics chanted and prayed for a way out of the country’s economic crisis. The two-hour ceremony— broadcast live on national television—was intended to dispel bad Karma and promote positive feelings. But it had little effect.

Last week, financial turmoil continued to swirl around Thailand and the once-vaunted economies of Indonesia, Malaysia and the Philippines as international investors dumped their currencies and fled their stock markets. And despite the monks’ fervent prayers, hundreds of thousands of people appeared destined to lose their jobs throughout the region as scores of debt-swamped companies are pushed into bankruptcy. “It will be very painful,” Thai Foreign Minister Prachuab Chaiyasan told Maclean’s during a visit to Canada last week. “The bubble has burst.”

Millions of angry Southeast Asians hold one man responsible for their recent woes: billionaire currency speculator George Soros. Over the past 25 years, the New York Citybased tycoon has become one of the world’s richest men— with a personal fortune estimated at over $1 billion—by trading currencies that he believes are likely to rise or fall. Earlier this year, his instincts told him that Thailand’s currency, the baht, was seriously overvalued. For the past two decades, the self-proclaimed “Kingdom of Growth” has been on an economic tear, with exports soaring and foreign investment pouring in by the billions. Lately, however, Thailand has faced increased competition in Western markets from cheaper Chinese products. As a result, exports stalled—even as the Thai government and private sector continued to spend massive amounts of borrowed money on real estate developments, huge power dams and other megaprojects.

Soros, betting that Thailand was on the verge of economic calamity and that dozens of large companies were at risk of bankruptcy, responded by selling the baht short—an investment tactic that tends to drive down prices. Soon, currency speculators around the world joined in. It worked: after spending more than $20 billion of its foreign exchange reserves in a vain attempt to defend the currency, the Thai government gave up on July 2 and allowed its currency to float. Since the beginning of the year, the baht has surrendered 35 per cent of its value against the U.S. dollar. “Soros attacked us twice in July,” says Virasakdi Futrakul, Thailand’s ambassador to Canada. ‘We fought back because it was a matter of national pride. But we have now learned that the free market must decide the value of the baht.”

The financial crisis quickly flared across the region as traders trained their sights on several of the other so-called Asian Tigers—Malaysia, Indonesia and the Philippines. Over | the past three months, currency values have dropped and | stock prices have plummeted, triggering a rash of bankrupt^ des among borrowers who can no longer afford to repay their g foreign debts. So far this year, the Malaysian ringgit has £

given up 25 per cent of its value against the U.S. dollar; the Philippine pe so has fallen 27 per cent and the Indonesian rupiah has lost 28 per cent Meanwhile, emotions throughout Southeast Asia are running high During the annual meeting of the International Monetary Fund anc the World Bank in Hong Kong last week, Malaysian Prime Ministei Mahathir Mohamad lashed out at Soros and accused the “great pow ers” of conspiring to undercut the growing financial clout of the Asiar Tigers. “I am saying that currency trading is unnecessary, unpro ductive and totally immoral,” said Mahathir, a frequent critic of West n governments. “It should be stopped. It should be made illegal.” A day later, Soros denounced Mahathir in a speech to the same asmbly of bankers, economists and politicians. He called the alaysian leader “a menace to his own country” and said his sugestión to ban currency trading “is so inappropriate that it does not eserve serious consideration.” Added the Hungarian-born Soros: le is using me as a scapegoat to cover up his own failure.” Mahathir’s speech did not sit well with other international instors, either. On the markets, currency traders had pushed the iggit to a 26-year low of 3.122 ringgit to the U.S. dollar. Analysts edicted that the pressures would continue until all four countries opt a sweeping list of Western-style economic reforms that would

£ I am saying that currency trading is unnecessary, unproductive and totally immoral 5

'He is using me as a scapegoat o cover up his own failure'

force governments to cut spending, open their markets fully to foreign investors and require full disclosure of the financial dealings between domestic banks and corporations. Ron Richardson, an analyst at the Vancouver-based Asia-Pacific Foundation, said the changes should restore confidence in the region. “Money flowed into their countries and they have done very well out of it,” said Richardson. “But once you get policies wrong, money starts flowing out, causing currency devaluation and stock markets to fall.”

As well as seeking economic reforms, foreign investors are now taking a much closer look at the stability of some of the region’s top corporations. Hundreds of giant monopolies with close links to government officials have run up huge foreign debts to finance megaprojects and to speculate in Southeast Asia’s booming real estate market, which collapsed earlier this year. That money must now be paid back with devalued local currencies. In addition, investors have become increasingly uneasy about corruption and cronyism in the four countries. Huge public works contracts are handed out to friends and relatives of government officials, assets are traded back and forth among a confusing tangle of sister corporations, and millions of dollars in bad real estate loans appear to have been hushed up or buried in indecipherable annual reports.

Despite those problems, the financial crisis has unleashed deep resentment against the West. Like Thailand, Mahathir has defended his country’s currency and stock market. He imposed curbs on short selling and tried to shore up stock prices by ordering the nation’s pension funds to buy up shares of domestic companies, a move that appears to have backfired by convincing more investors to flee.

Although Mahathir is easily the most outspoken political leader in the region, his views are widely shared. In Jakarta, Indonesia’s capital, the newspaper Republika, which has strong ties to a leading cabinet minister, ran a public service announcement recently showing a currency trader with his face concealed behind a mask of American $100 bills. Beside the illustration, the text asked, “Are you a terrorist of this country?” and urged local investors to “defend the rupiah—defend the nation.” Although he did not identify Soros by name, Thai Foreign Minister Prachuab told Maclean’s there is deep animosity towards currency speculators. “Only a few do it, but they hurt a great many people,” he said.

Soros plainly disagrees. A renowned philanthropist, he donates some $500 million a year to a variety of international causes, including groups that advocate democracy, battle drug addiction and help poor immigrants. He claims to be motivated by a belief that unbridled capitalism can be damaging to society. But he also insists that he has done investors and the people of Southeast Asia a great service by forcing governments and corporations to become more open in their financial dealings. “I want to express my sympathy for poor Malaysians who were hurt,” he said last week in Hong Kong, “but not for Dr. Mahathir, because he is responsible.”

In the end, the region’s governments seem destined to accept a package of financial reforms modelled on a deal struck in July between Thailand and the IMF. That arrangement will see Bangkok receive $23 billion in exchange for raising taxes, setting aside nearly $55 billion in foreign exchange reserves and closing scores of insolvent banks and other financial institutions. In addition, the country has pledged to adopt transparent accounting practices, making it easier for investors to understand the finances of a company. “Austerity is the name of the game,” said Prachuab. ‘Tight monetary and fiscal policies are being employed and spending has been curbed.”

With the exception of Thailand, which could be pushed into a recession, forecasts for the region remain generally positive. Among the optimists is Mark Arthur, president of Royal Bank Investment Management, which runs one of Canada’s largest Asian mutual funds. The $136-million Royal Asian Fund has dropped about 20 per cent so far this year, but Arthur is holding firm to his investment strategy: “China and Southeast Asia are markets that will continue to grow. This is not a long-term scenario.” The monks at Bangkok’s Temple of the Emerald Buddha pray that he is right. □