ECONOMICS: Asian debt
Far Eastern Economic Review
Feb 12, 1998

Economic Survey:
 Dealing With Debt
  * By Salil Tripathi in Hong Kong
    739 Words

Prosperity will return to crisis-ridden Asia -- but only if it takes to heart the lessons of how its white-hot economies went suddenly cold   Will 1998 be the year Asia's tiger economies regain their growl after a nightmarish Year of the Bull? The answers lie in the REVIEW's annual economic survey debuting this week. In the following pages, REVIEW reporters examine how a potent mix of greed, bad governance and unchecked globalization sent the Asian Miracle careening off course. We then look at what must be done to get it back on track and to get money flowing into the region once again. The package also includes a discussion among regional economists who agree that the crisis is far from over as bankruptcies and unemployment are certain to escalate.  Next week the survey will look at prospects for Southeast Asian nations in 1998. The spotlight will move to Greater China, Japan and Korea in the following week, the survey's final instalment.
   The ghosts of hyper-inflation, debt moratoriums, bankruptcy and unemployment that haunt Asia have left it with a daunting challenge: to slim down its debt and stabilize its currencies. The two are interlinked. Without stable currencies, the debt burden will keep mounting; and without serious prospects of debt reduction, currencies will resume their freefall.   Asia's central bankers can't dismiss the mess as a private-sector problem and step aside. In many ways they contributed to the turmoil by promising fixed-exchange rates and opening the capital account, which encouraged reckless borrowing and lending. Nor can Asia's finance ministers wriggle out of the squeeze by printing more money, reducing interest rates, or running high fiscal deficits. That would incur the wrath of the International Monetary Fund, whose belt-tightening programmes most have promised to follow.   Printing more money would be a mistake. As any economist would point out, it doesn't take long for an inflation rate of 20% to turn into 100%. It would reduce not just the value of a currency, but also the standard of living. Worse, it would add to the debt-retirement bill.  Some analysts have suggested countries adopt a Hong Kong-style currency peg in order to stabilize their currencies. Indeed, Hong Kong's monetary authority has managed to unflinchingly maintain the local dollar's link to the greenback, despite the region's economic turmoil. But a peg is a viable option only if governments practice financial discipline. And that's easier said than done.   Among Asia's crisis-ridden economies, Indonesia is the only one with the requisite foreign reserves to link its currency to the U.S. dollar. Its narrow money (M1) supply is smaller than its U.S. dollar reserves (about $21 billion), which means each note of local currency can be backed by U.S. dollars -- a technical condition necessary to create a currency board to establish the peg.
   However, Rajeev Malik, senior economist at Jardine Fleming in Singapore, doubts whether Indonesia's reserves would expand quickly enough to maintain a peg. With the sharp rise anticipated in interest and debt payments to foreign creditors, Malik says, the net growth in reserves may not be enough to offset the increase in the monetary base.   What of raising interest rates? Opinion is divided on the efficacy of such a measure. Jakarta-based economist Rizal Ramli is not alone in condemning Indonesia's high-interest-rate policy. "The patient is knocked down unconscious, but instead of administering first aid, the ministry is draining away his blood supply," he says.   But others, such as Paul Schulte, chief strategist at ING Baring Securities in Hong Kong, believe keeping liquidity tight is the best solution, as otherwise the agony for businesses that shouldn't have existed in the first place will be prolonged. Most importantly, the IMF wants interest rates to be kept high in order to support local currencies.    Asia's floundering economies would also benefit from the setting upn of a single agency to acquire the foreign liabilities of ailing domestic banks and become the sole negotiator with debtors and creditors, argues Ajay Kapur, regional strategist at UBS Securities in Hong Kong. That agency could then sell the excess-capacity plants and vacant office blocks which form the collateral for most of Asia's bad loans. The banks' remaining foreign liabilities could then be bundled into U.S.-dollar securities to replace the short-term debt.  In this way, short-term debt could be stretched, transforming it into longer-term bonds. That would create something the World Bank has advocated for nearly a decade -- a genuine bond market in Asia.