The financial crisis and ASEAN: root causes, market effects - and a silver lining

AgExporter, August, 1999

Until just a couple of years ago, it was hailed as one of the world's most promising regions, characterized by vigorous general economic growth and steady gains in individual prosperity. Today the countries of the Association of Southeast Asian Nations (ASEAN) are struggling to keep their financial, political and social systems afloat.

The financial crisis that erupted in Asia in mid-1997 led to sharp declines in the currencies, stock markets and other economic indicators in these countries. It threatened their financial systems and disrupted their economies, bringing unemployment hikes and spiraling prices that precipitated a human crisis to rival the financial one.

The crisis was not just a phenomenon of emerging economies-look at Japan-nor were its repercussions confined to Asia. The trouble reverberated around the world (witness Russia and Brazil), sending shudders of volatility through international financial markets. The crisis is expected to have halved the world's economic growth - from 4 to 2 percent-in 1998, and to do so again this year.

ASEAN countries remain mired in deep financial turmoil. With the exceptions of Singapore and Vietnam, huge depreciations in the values of their currencies have spawned increases in nonperforming loans, especially for companies with U.S. dollar loans.

The Seeds of the Storm

What accounts for the reversals of fortune in the economies of these countries? The immediate cause was the devaluation of four currencies: the Thai baht, the Indonesian rupiah, the Malaysian ringgit and the Philippine peso. Plagued by economic miscues and rigid foreign exchange regimes, the foreign exchange market decided that these currencies were overvalued.

Rather than deplete foreign reserves in an attempt to defend their currencies, the monetary authorities in Thailand, Indonesia, Malaysia and the Philippines abandoned undertakings to peg the value of their currencies to the U.S. dollar. This action had the effect of making exports from these countries more affordable, and imports from other countries, such as the United States, more expensive.

But the roots of the crisis go further and deeper than that. They lie in a weak banking sector; poor assessment and management of financial risk; and the maintenance of relatively fixed exchange rates that led banks and corporations to borrow large amounts of international capital. The foreign capital was often used to finance poorer quality investments.

But although private-sector expenditure and financing decisions led to the crisis, it was compounded by government involvement in-and inadequate supervision of-the private sector, and lack of transparency in corporate and fiscal accounting and in financial and economic data.

IMF-Led Reforms

To help quell the crisis, several ASEAN nations appealed to the International Monetary Fund (IMF) for financial assistance. In exchange for this assistance, the IMF is requiring major financial and trade reforms.

While tailored to the needs of individual countries, all of the programs stipulate:

* closure of unsound financial institutions;

* recapitalization of undercapitalized institutions;

* strict supervision of weak institutions; and

* more open financial systems.

To resolve governance issues that contributed to the crisis, the IMF has also put in place measures to improve the efficiency of markets and sever the close links between business and governments.

A Silver Lining...

Many analysts believe there's a silver lining to the crisis. ASEAN nations are already showing signs of pulling out of their financial crises, and all are expected to post positive economic growth rates next year. What will the rates be? Projections vary, but the Asian Development Bank estimates that Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam will have rates averaging 1.3 percent in 1999 and 3.3 percent in 2000.

In the short term, the IMF-led trade and investment reforms in the affected countries are helping to steady the uncertain financial environment, thereby making a critical contribution to maintaining trade. The IMF programs enabled importers in these countries to use more than $2 billion in export credit guarantees made available by USDA in 1998. IMF and USDA credit programs have thereby served to mitigate the impact of the crisis on U.S. farmers and ranchers.

Without the financial stability provided by the IMF programs, importers would not have been able to open letters of credit, which would have slowed commercial trade and prohibited USDA from offering credit guarantees of sufficient magnitude to keep agricultural trade flowing. In the long run, IMF trade and structural reforms will allow U.S. agricultural products greater access to ASEAN markets on a permanent basis.

Meanwhile, investors who are familiar with the fundamentals of the region, and have confidence in its intermediate and longer-term growth, are capitalizing on lower currency values by carrying out acquisitions and other expansion activities.

It's widely believed that the crisis makes implementation of ASEAN's proposed free trade agreement (AFTA) crucial, and ministers from the member states have reaffirmed their commitment to put it in place by 2003 at the latest. AFTA is expected to greatly alter the ASEAN market environment over the next few years, accelerating the trend toward regional sourcing and manufacture of products. On the other hand, regional leaders do not have much choice but to pursue free trade, since their economies depend so heavily on access to export markets.