ECONOMICS: Asian debt
Far Eastern Economic Review
Feb 12, 1998
Dealing With Debt
* By Salil Tripathi in Hong Kong
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
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
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
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
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
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
Asia's floundering economies would also benefit from the setting
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
longer-term bonds. That would create something the World Bank has
advocated for nearly a decade -- a genuine bond market in Asia.