Sun, Dec 24, 2006 page12

• Thai market correction not a repeat of 1997, analysts say

  Thailand now runs a robust trade surplus and has nearly US$65 billion in foreign currency reserves, far more than it did at the start of the Asian financial crisis

  • AP
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  For many in Asia, the brief spate of market turmoil this week following Thailand's decision to defend its currency by setting limits on foreign investments was eerily familiar.

  Nearly a decade ago, a crisis over the Thai baht dragged much of region into recession.

  But for now, there seems little likelihood of an Asia-wide financial crisis similar to that triggered by a plunge in the baht in July 1997. Nearly a decade on, regional banks and economies are far more robust and better managed than back then.

  

  A Thai bank dealer talks on the phone next to exchange rate boards at a bank branch in Bangkok on Wednesday.

  PHOTO: AFP

  "The risk levels for the two periods are incomparable," says economist Somchai Jitsuchon at the Thailand Development Research Institute, an independent think-tank.

  In the go-go 1990s, many Asian countries were carrying huge overhangs of foreign debt. Crony capitalism trumped risk management at many regional financial institutions.

  "There will be more problems, but it will not be like the crisis in 1997," said Sompop Manarangsan, an economist at Bangkok's Chulalongkorn University.

  "[Back in the late 1990s] we had over-investment, over-consumption and over-borrowing and the macro-indicators were bad," he said.

  Thailand, for example, had big trade and current account deficits. But now, the country runs a robust trade surplus and has nearly US$65 billion in foreign currency reserves, far more than it did in 1997.

  Back then, the baht plunged in value, kindling speculative pressures that forced other nations in the region to allow their currencies to fall as well, making it difficult to repay dollar-denominated debts.

  But this time, Thai authorities acted because the baht was judged to be too strong. Before Monday, it had gained 13 percent against the dollar this year, the most of any regional currency.

  And although Thai manufacturers gripe about the strong baht, which makes their products more expensive overseas, exports are up about 20 percent this year.

  In South Korea, the 1997 crisis hit hard -- but it also forced the country to reform its heavily indebted family-owned conglomerates, streamline its banking sector and improve the transparency of its corporations.

  Indonesia, bankrupted and propelled into political upheaval by the crisis, now has foreign reserves worth US$42 billion. It plans to repay what it owes the IMF for a multibillion-dollar bailout ahead of schedule.

  Still, Asia's rapid economic growth makes it a magnet for inflows of capital seeking high returns -- and that can become problematic.

  For one, it's lifted Asian currencies like the Korean won, Thai baht, Philippine peso and Indonesian rupiah against the US dollar, hurting exporters.

  It also makes those nations vulnerable to speculative pressures given the huge amount of money chasing investments in emerging markets, driving up stock and property prices as well as regional currencies.

  "The problem is that financial markets have become so big and a currency like the Thai baht is so small the market can put it anywhere it wants to," says Andy Xie (謝國忠), an independent economist based in Hong Kong.

  "A small country has a huge problem now," Xie says.

  In the weeks leading up to Monday's announcement of foreign investment controls aimed at fending off the inflow of money, Thailand's central bank governor Tarisa Watanagase complained that broad dollar weakness was the key problem.

  Others point to China's refusal to let its own currency, the yuan, appreciate faster against the US dollar.

  The yuan has gained just 3.6 percent against the dollar since its revaluation in July last year.

  Another factor is the so-called "carry trade," which involves heavy yen-denominated borrowing, thanks to Japan's low 0.25 percent interest rate, for investments in higher-yielding countries like Thailand, where the benchmark interest rate is 5 percent.

  "Investors just jumped on that as easy money on the table," says Jonathan Anderson, chief Asia economist for the UBS brokerage in Hong Kong.

  The conditions made it "very easy and attractive to speculate on the currency, so you get a virtuous or vicious circle, depending on whether you're an investor or a policy maker," he says.
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