ASIAN MARKETS LIKELY TO STAY UNSETTLED
HOUGHTON, MI--If you own stocks or an export business and the uncertainty in Asian financial markets has you worried, don't expect any big changes soon.
Economists Terry Monson and Swapan Sen of Michigan Technological University's School of Business and Economics predict instability will characterize Asian markets for at least the next several months. There are good reasons for their cautious outlook.
"For many years the countries of southeast Asia have used government subsidized credit to direct their export programs," says Monson. ":But when they've lent money to corporations, they've had to borrow from world markets and they've tended to borrow short term and lend long term. This is a similar situation to what we experienced with our Savings and Loan programs here in the United States a few years ago. The problem lies in the fact that corporate loans aren't being repaid to state-run banks and the banks in turn are unable to repay their creditors."
Another difficullty, according to Monson, is that many Asian countries have no policy in place to penalize corporations which default on their payments. So there are no regulatory incentives for businesses to pay and the banks that made the loans end up taking the hit.
"Add to that," says Monson, " the fact that in some countries, Indonesia particularly, money has been loaned for some questionable projects--probably because of the banks' connections with ruling families and politicians. As a result, any meaningful financial reform will probably have significant political fallout."
Monson believes the Asian crisis may have been caused by too many non-performing loans coming due at the same time, putting banks in the awkward position of being unable to repay their creditors.
Sen points to another possible cause of Asia's problems. "Unlike the1970s, when majority borrowers were governments and government entities, this time the private sector, aided by capital account convertibility and financial liberalization, borrowed massively in foreign currencies. Much of these obligations were left unhedged. Several currencies depreciated 40 to 70 percent in a short period of time. Monetary authorities sold reserves and wrote forward contracts in unsuccessful attempts to defend their beleagured currencies."
Sen also believes that foreign money increased liquidity in Asian markets, causing inflated property and asset prices. "For the past several years foreign investors have been pouring capital into Indonesia, Maylasia, Thailand, South Korea and other Asian countries to take advantage of their booming economies," he says. "The problem was that much of the foreign money that came into those countries was "hot money" (money that moves around a lot) invested in the financial sectors. Local businesses and governments had relied too much on foreign capital to cover their obligations and now had to pay the price of excessive optimism.
"When boom turned to bust, foreign investors withdrew their money, and interest rates shot up, hurting the real estate and financial sectors alike."
Both economists believe that Japan holds the key to what happens in other southeast Asian countries.
"If Japan holds well, it should be a short-lived crisis of maybe a year," says Sen. "But if Japan falls, we're looking at a possible global crisis."
In the meantime, Monson and Sen believe that financial restructuring such as that required by the recent International Monetary Fund bailout programs for Indonesia and Korea may help those countries manage the crisis in the short run, but further deflation in these economies is likely.
"The idea of the IMF program is to let the market function as much as possible," says Sen. As for reforms, he believes Asian money managers are sophisticated and able, but that not enough safeguards are in place to prevent financial crises from arising periodically.
"I think it's a situation we'll just have to get used to living with," he says.
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For further information, contact Terry Monson at 906-487-3174; e-mail: [email protected] or Swapan Sen at 906-487-3105; e-mail: [email protected].
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