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OCTOBER 27, 2000 VOL. 26 NO. 42 | SEARCH ASIAWEEK


Edwin Yuyay for Asiaweek.
In the fiancial district, Filipino protesters gathered at the statue of hero Benigno Aquino to rally for the downfall of a president.


Bracing for the Fallout
As Manila's crisis deepens, a nightmare scenario looms: a new Asian Crisis
By RICARDO SALUDO and ASSIF SHAMEEN

ALSO:

Unbowed Under Fire: A powerful coalition builds against him, but Estrada remains defiant
'Confidence is Key': Gloria Macapagal Arroyo says that she can restore it

The thousands who gathered on Oct. 18 in Manila's financial district called for the downfall of a president. Joseph Estrada did not bite the dust — at least, not on Wednesday. He vowed not to quit even as opposition lawmakers sought to start impeachment proceedings after a provincial governor alleged that Estrada got millions from an illegal numbers game which milked mostly poor bettors. Still, something else did tumble as the Philippines' turmoil intensified: the region's currencies and stock markets. Dragged down by the collapsing peso, the Thai baht lost 4.5% in a week, while the Indonesian rupiah shed 4%. The Singapore dollar and the Korean won also fell.

Asian bourses continued their decline of several weeks. Taipei, Tokyo and Hong Kong led losers on Oct. 18, falling between 3% and 5%. "It is very dangerous to go into the market right now," says a Singapore trader. There was plenty of confidence-sapping news. Leaping oil prices. The falling euro and plummeting Nasdaq. Slowing growth in America and Europe. A looming downturn in all-too-crucial electronics exports. Not to mention ethnic wars in Indonesia and the Philippines, Jakarta's own embattled President Abdurrahman Wahid, and faltering reform from Seoul to Bangkok.

Going into October, Asia already had enough bad news to make it fear for its still-fledgling recovery from the 1997-98 Asian Economic Crisis. When Manila stocks began to melt down in the wake of Estrada's corruption scandal, a new nightmare scenario emerged across the region: Crisis 2. "The political crisis could drag on for months," says a Hong Kong-based regional economist. But the region's real fear lies elsewhere: a repeat of the debilitating rounds of competitive devaluation which crushed currencies three years ago. The baht's fall triggered the catastrophe in July 1997; this time the peso could play the villain. Thai Premier Chuan Leekpai has blamed the Philippine currency for the recent weakness of the baht.

Sriyan Pietersz, head of research at SG Securities in Bangkok, notes that some Asian currencies are linked. For export-competitiveness, he explains, "if the peso or the rupiah depreciate, the baht pretty much has to follow." And it's not just the mess in Manila to worry about. Earlier this year, Beijing seemed set to slightly devalue the renminbi, a move widely expected as soon as Crisis-hit currencies and economies had stabilized. Now that they seem fragile again, the Chinese may hold off. But if the rest of Asia devalues drastically again, China may have to follow suit, especially when it is opening to foreign competition under the WTO.

The Philippine crisis comes at time when Asia is grappling with even bigger threats to recovery: oil, the export slowdown, the depreciating euro and Japan's wobbly recovery, among other worries. Euro weakness makes Asian exports to Europe less affordable; if the continent lifts interest rates to defend its currency, that would further curtail demand. A bigger concern is the global electronics downturn. A slump in global demand for computers from 20% anticipated growth to 12%-15% could wreak havoc on major exporters like South Korea, Taiwan, Malaysia and Singapore.

The clouds on the export horizon loom even as spending by Asian consumers and companies remains unimpressive. "The growth momentum has been slowing," says Kim Sun Bae, regional economist with Goldman Sachs in Hong Kong. Banks with huge bad-loan portfolios are still reluctant to lend. Meanwhile, businesses with capital aren't investing for fear that global demand wouldn't hold up.

"There wasn't really much of a recovery after the first Crisis," says Robert Rountree, a strategist with Prudential-Bache Securities Asia. One big reason: lack of post-Crisis reform, which could have brought back much-needed, growth-boosting investment. "Corporate restructuring is half-hearted and far from complete," laments Rountree. "Bank restructuring and recapitalization in many countries have some way to go. Governance and transparency are still a major issue. The region has to address structural problems and bite the bullet."

With reform stalled and global growth slowing, capital inflows are falling. To global investors looking for serious reform in Asia, the shenanigans in Manila send a most disheartening message. And the reform record elsewhere is not much better. Thailand has made little headway on its mountain of bad debt, while Indonesia has raised objections from the IMF and the World Bank for at least one debt restructuring deal. Jakarta is investigating its own presidential scandal, questioning Wahid's masseur over the loss of $4 million in state funds. Investors have criticized Malaysia for bailing out well-connected companies. Even South Korea, the erstwhile star of post-Crisis reform and recovery, is stumbling on such key initiatives as the liquidation of Daewoo Group, the world's largest bankruptcy ever.

The danger now is that global investors impatient with slow reform will bypass much of East Asia, further hampering growth prospects. U.S. companies are "getting frustrated with the rate of change" and beginning to tell offices in Asia to shelve investments — or pack up and go, says Hilton Root, a former Asian Development Bank economist with many years of experience in the region. Now director of global studies at the Los Angeles-based Milken Institute, Root is conducting country studies of post-Crisis Asia, starting with Korea and Indonesia. "People are starting to walk away," he says, adding that after two years of looking for assets to buy, investors find that the owners are still demanding unrealistic pre-Crisis prices.

Looking at the long term, Root warns: "People are saying the second Asian crisis would be a lot more severe, that people would not give [Asia] the benefit of the doubt." He predicts: "The crisis, when it comes, will ultimately have to lead to major social change, a challenge to the ownership structure that can only be more confrontational, especially in countries like the Philippines, where [allegedly] someone claiming to be a friend of the poor ends up stealing from the poor to support a few of his friends."

Stephen Roach, chief global economist for Morgan Stanley Dean Witter now touring Asia, does not expect a second crisis, even if global growth slows. Other analysts are quick to allay fears of an Estrada-driven contagion. "Whether the peso's weakness would lead to outright competitive devaluation no one would rule out," says Goldman's Kim. "But the probability is fairly low."

SG's Pietersz agrees: "This is a completely different situation. You don't have large current-account deficits, you don't have over-extended debt positions." Nor, adds Kim, are exchange rates artificially propped up. "Things are far better today," he concludes. And it also helps, says a Singapore-based currency expert, that "you don't have hedge funds taking big positions, as they did in Thailand in 1997."

Rountree even sees a silver lining in the current regional market retreat. "The good news is all the bad news is now being slowly priced in," he says. "Asian equities will [soon] have nowhere to go but up." Maybe so, but that may not happen if Asia continues to delay or block sweeping change. In that case, the region clearly will not have learned the real lesson in Manila's meltdown. And the Philippine problem of shaky reform will truly become a regional one.

With bureau reporting

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