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The currency crisis in East and
South-East Asia The currency maelstrom in East and South-East Asia has drawn attention to the significant fact that high economic growth cannot be taken for granted in the context of globalization. With the liberalization of trade and investment, national markets including financial markets are being increasingly integrated with the world market and consequently highly exposed to global market forces operating in trade and finance. Thus, a shock in one market is easily transmitted to other markets and national governments have little power to insulate their economies on account of their commitment to liberalization. It is hardly a secret that the main players in national markets today are transnational traders and financiers who are beyond the reach of national governments. It is their perception of the national markets that matter and national currencies have no choice other than responding to their judgements. The currency market is faceless even if it is dominated by a few hedge fund operators, but it is what ultimately determines the exchange rates at which we buy and sell goods and services. However, a country may try to defend the value of its currency, it cannot go against the market in the long run. East-Asian 'Miracle' East and South East Asia had the highest average annual economic growth in the world in 1991-1995 — 10.5 percent as compared to 5.0 percent for the developing countries as a whole. Its export growth was 11.8 percent a year in 1981-1994 as compared to 4.9 percent in the developing countries as a whole: rate of inflation in 1991-1995 was 6.7 per cent a year when it was 12.0 percent in the developing countries as a whole and its current account deficit in 1991-1995 was 1.4 percent of GDP in contrast to 2.3 percent in the developing countries as a whole. External debt of East and South-East Asia in 1994 formed only 31 percent of GNP as compared to 38 percent in all developing countries and 42 percent for South Asia while debt service in the same year was 12 percent of exports of goods and services as compared to 17 percent for all developing countries and 26 percent for South Asia. In the period 1990-1995 the average annual GDP growth in Singapore and Malaysia was 8.7 percent, Thailand 8.4 percent, Indonesia 7.6 percent and South Korea 7.2 percent. Such high economic growth rates were sustained by equally high export volume annual growth rates of 21.6 percent in Thailand, 21.3 percent in Indonesia, 17.8 percent in Malaysia and 16.2 percent in Singapore in the same period. Trade expansion was facilitated by a relatively stable exchange rate resulting from pegging the currencies to a basket of currencies dominated by the dollar. Thus, the exchange rate with the dollar remained more or less stable for several years — in Thailand for instance, for 14 years. The stable exchange rates besides promoting trade, facilitated inflows of foreign funds including foreign direct investment. In 1995 for example, of the total inflow of $184 billion of private foreign funds to developing countries, $84 billion or 46 percent was received by East and South-East Asia while South Asia received only $5 billion or 3 percent. The appreciation of the yen led to a relocation by Japan of some industries particularly the labour-intensive ones in East and South-East Asia. Lower labour costs in these countries enabled Japanese goods to maintain their competitiveness and retain or expand their export markets. Some of the other developed countries too followed Japan so as to remain competitive in specific sectors. The result was a large inflow of foreign direct investment to build factories and plants in East and South East Asia. In 1995 for instance, foreign direct investment in these countries amounted to $52 billion or 54 percent of the total foreign direct investment in developing countries; foreign direct investment in South Asia in 1995 was a little below $2 billion. In addition, low interest rates in US induced portfolio equity investors to turn their attention to the emerging stock markets in East and South-East Asia. Thus, nearly $15 billion of portfolio equity investment took place in East and South-East Asia in 1995 alone — or 46 percent of total portfolio equity investment in developing countries; the comparable figure for South Asia was $2 billion. While the higher interest rates in East and South-East Asia attracted portfolio equity investment they also encouraged the private sector to borrow funds, mainly dollars and yens, from abroad at lower rates than at home. In mid-May 1996 for instance, prime lending rate in US dollars was 8.25 percent in contrast to baht lending rate of 13.75 percent, peso lending rate of 14.50 percent and rupiah lending rate of 20.0 percent. In 1995 for instance, net debt flow to the private sector in East and South-East Asia was $18 billion as compared to $1 billion in South Asia. Foreign borrowing was resorted to by both banks and private firms and it was facilitated by the liberalized exchange regime and the eagerness of foreign banks to lend to earn higher profits than from low dollar and yen interest rates. Slowing export and Economic
Growth in 1996 Internal, the competitiveness of exports particularly labour-intensive exports was being eroded by the rising labour costs. Thai labour costs in textiles, footwear, plastics and garments, for instance are about three times higher than those elsewhere in South-East Asia. The average wage of a textile worker per hour is $1.41 as compared to $0.48 in China, $0.46 in Indonesia and $0.39 in Vietnam. The problem of high labour costs in Malaysia is met to some extent by importing about 1.7 million foreign workers at lower pay for labour-intensive industries, but this has not prevented salaries and wages of Malaysians rising in the modern sectors of the economy. The average wage per hour in Samsung's electronic factory in Sawar, South Korea is $12.70 as compared to $2.00 in Malaysia and $0.96 in China. Externally, the recent appreciation of the US dollar vis-a-vis the Japanese yen affected the Asian exports adversely. The US dollar which had depreciated in relation to the yen from 1990 to 1995 began to appreciate from 1996. The yen which was 145 to the dollar in 1990 appreciated to 94 in 1995 but depreciated thereafter to 109 to the dollar in 1996 and to 117 in August 1997. As most of the East and South-East Asian currencies were more or less pegged to the US dollar, they too appreciated with the dollar thereby reducing the competitiveness of their exports. This was compounded by the depreciation of the Chinese renminbi in relation to the dollar from about 1994. On the top of these, came the slump in the world demand in 1996 for electronics, particularly semi-conductors and personal computers which are major exports of the Asian countries. Electronics form 66 percent of the total exports of Singapore and 30 to 35 percent of the exports of Malaysia, Philippines, South Korea and Taiwan and 19 per cent of Thailand's exports. The electronics industry in addition faces over-capacity and stiff competition. The currency appreciation too may have contributed to their slower growth. Japan for instance, reduced imports of Malaysian made TVs, VCRs and washing machines as the weaker yen made Japanese factories more competitive. While these factors tended to reduce exports growth in 1996 and 1997, booming investment and excessive consumption encouraged an expansion of imports. Domestic investment was as high as 40 percent of GDP in Malaysia, Thailand and South Korea; a substantial part of this investment was in building and construction and infrastructure and in the case of South Korea also in the over-expansion of chaebols or conglomerates. Affluence resulting from rapid growth encouraged lavish consumption patterns and life styles which were import-oriented. Thailand for instance, became the world's second largest market for Mercedes Benz cars. Upper income groups began to spend lavishly on foreign travel and on the education of their children abroad, and the larger firms launched overseas investment programmes. Foreign borrowings increased interest payments. All these combined to widen the current account deficits in the balance of payments in 1995 and 1996. Thailand's deficit rose from 5.8 percent of GNP in 1994 to 8.3 percent in 1995 and 8.1 percent in 1996; Malaysia's deficit increased from 6.1 percent in 1994 to 9.0 percent in 1995 and 6.3 percent in 1996. The increase in the deficits in other countries was less. Indonesia's deficit rose to 3.6 percent of GNP in 1995 and 4.1 percent in 1996; South Korea's rose from 1.8 percent in 1995 to 4.8 percent in 1996 and of Philippines from 3.3 percent in 1995 to 4.1 percent in 1996. The current account deficits except for Malaysia and Thailand were not unduly large; Vietnam's deficit in contrast, was 12.2 percent and Pakistan's 7 percent in 1996. They were large only relative to USA where the deficit was 2.2 percent in 1996. The growing current account deficits were met increasingly by foreign borrowings — mainly by commercial banks. Thus, private foreign funds flows in the period 1994-1996 to Indonesia, Malaysia, Philippines, Thailand and South Korea to fill the current account gap amounts to $211 billion of which $129 billion or 61 percent were commercial bank short-term borrowings; another $35 billion or 17 percent was private credits; portfolio investments were $30 billion and foreign direct investment only $17 billion. Thus, 78 percent of private resource flows were short-term foreign credits. There is no specific level beyond which the current account deficit is considered precarious as it is only one factor among several which need to be considered in appraising economic performance. The World Bank 'World Economic Outlook October 1997' states the following. "Neither theory nor experience suggests some definitive threshold level for the current account deficit that may be expected to trigger an external crisis. Rather the trigger point is likely to depend upon the circumstances and characteristics of the economy in question, including its exchange rate policy, its degree of openness, its saving and investment behaviour, the nature of the capital flows financing its balance of payments deficit, and the health of its financial system. In addition, changes in the external environment — for example, a rise in global interest rates — and contagion effects from disturbances elsewhere can play an important role." What caused concern in financial markets is not the widening current account deficits itself but the increasing deficit in combination with the appreciating local currencies, slowing export and import growth, rising labour costs, large-scale private foreign borrowing, excessive investment in building, construction, infrastructure are prestigious projects and fragility of financial markets. Unsound banking Easy access to foreign funds enabled commercial banks to expand credit to such as extent so as to equal 150 percent of GDP in Thailand, South Korea and Hong Kong and 105 percent in Indonesia as compared to 37 percent in the USA. The banks extended credit so liberally as they assumed the stable exchange rate pegged to the dollar would continue indefinitely to enable them to borrow foreign funds cheaply and lend in local currency at higher rates. Property loans and lending for stock purchase formed the greater part of this credit expansion; in Hong Kong for instance about 50 percent of the bank loans were for property development; in Malaysia it was about 28 percent although in some banks it exceeded 40 percent. The result of over-investment in property development was property over-supply. there are about 850,000 unsold housing units in Thailand of which 450,000 are in Bangkok alone, when the annual demand in the best of times is less than 175,000. In Bangkok, office vacancy rate is estimated at 10 percent and residential vacancy rate 25-30 percent. In Jakarta, about 15 percent of the edifices are completely vacant. The occupancy rate in commercial buildings in Kuala Lumpur after the completion of the Petronas Towers — the tallest building in the world — had fallen below 85 percent and this is expected to fall further to about 70 percent when some 24 million square feet of new office space is added. The property glut resulted in fall in real property prices. This in turn combined with lower export performance to cause a fall in stock prices in almost all the countries; the fall in stock prices in Bangkok for instance in October 1996 was 19 percent from the level six months earlier and in Singapore and Seoul 9 percent. With losses and absence of buyers in the real estate market, property developers defaulted on their bank loans creating difficulties for the banks. Banks also made larger advances to projects and purposes given priority by government or linked with powerful politicians. South Korean banks extended liberal credits to chaebols or conglomerates on government directives and this resulted in over-investment and over-capacity in several industries. With the slump in exports of personal computers and the appreciating currency, several chaebols began to lose profits and accumulate debts to banks and eight chaebols crashed in 1997. Chaebols have a high debt equity ratio of 280 percent as compared to 209 percent in Japan and 166 percent in USA. In Indonesia all large companies financed their operations to a large extent through bank borrowings and consequently their debt equity ratio too was relatively high. Further, banks had favoured the businesses controlled by President Suharto's family and friends. Liberal lending invariably led to default. Banks were able to be excessively liberal in credit partly because of inadequate supervision by the monetary authorities. In fact the monetary authorities connived at excessive credit creation and assisted the banks when they fell into difficulties. The Thai Central Bank for instance, did nothing to arrest the reckless lending of banks; when the Bangkok Bank of Commerce collapsed it rescued it as it had lent large sums to politicians; it further pumped about $19 billion into banks and finance companies which were in difficulties, so that they could relend to property developers to complete their projects. There existed a close relationship between the Central Bank and commercial banks in Thailand which resulted in the former adopting a too sympathetic attitude towards the latter. In South Korea, the authorities saved ailing banks by giving them soft loans, for example Korea First Bank and 16 merchant banks; they also saved chaebols like Hanbo Iron and Steel Company and Kia Motors by giving loans directly or persuading commercial banks to support them. The IMF too failed to realize the gravity of the emerging situation. If it had pulled up the monetary authorities and pressurized them to curb excessive credit expansion and mounting foreign borrowings, before they reached alarming levels, the Asian financial crisis might have been averted. It appears as if the IMF was indulgent towards private sector credit because of its implicit faith in private enterprise. Had the credit expansion been caused by public sector borrowings, its approach would have been quite different, for the IMF's experience is mainly confined to rescuing mismanaged governments not mismanaged private financial sectors. Bad or non-performing loans constituted 10 to 20 percent of all bank loans in East and South-East Asian countries as compared to 1 percent in USA. The ratio is 15 to 20 percent in Thailand, Indonesia, Malaysia and South Korea, 13-14 percent in the Philippines and less than 5 percent in Singapore. Consequently, the banks were unable to repay their short-term foreign currency loans. When this became known, doubts arose whether the East and South-East Asian countries could repay their foreign debts and maintain their exchange rates at current levels. The market anticipated devaluation: in order to make windfall profits, speculators began to dump local currency to purchase dollars at official rates in order to reconvert them to more units of local currency after devaluation. In addition, big business houses, who had large dollar debts too began to purchase dollars to hedge against any future devaluation and foreign investors sold their shares in the stock markets to transfer their funds elsewhere. Devaluation depreciation Continued tomorrow Three-wheelers and the next millennium It is with great pity for the country that I read the article in the Sunday Observer (17/5/98) on eight-seater three wheelers to be introduced to Sri Lankan roads in the near future. According to this article the launching of these new three wheelers is going to be a remarkable way of approaching the next millennium in the sphere of transport. But I was sacred to think that if this is the way we hope to approach the next millennium how desperate our transport situation is going to be in the future. Although it is true that three-wheelers are an economic way of transport due to the low fuel consumption and definitely much better form of transport than the bullock cart, unfortunately this poor mode of transport is not a safe and steady method and definitely not a suitable mode for the next millennium. The three-wheelers are not accepted as an efficient and safe way of transport in most of the countries where there is a high standard of transport. Looking back from our own experience of the past ten years it is clearly seen that this mode of transport did much harm to the city roads than the good done by them. It is well proved that these three-wheelers are very likely to cause accidents and these vehicles have been responsible for breeding an undisciplined generation of drivers which has caused large number of accidents and done much damage to the smooth flow of traffic in the city roads. I wonder whether there is a complete record of the accidents involving three-wheelers and also whether any attempt has ever been made to estimate the accident costs and human suffering caused by these vehicles. I think no one will dispute the fact that the three wheelers in Colombo roads have become a traffic hazard and the undisciplined driving behaviour of these drivers have become an irritating factor for the disciplined drivers. Stability and safety Experience shows that, a small impact is sufficient to overturn a standard three wheeler to cause severe injuries to the passengers. Hence it is well evident that these extra-long three wheelers may be even more accident prone and finally result in large financial costs by way of compensation to the injured. Legal obligations Conclusion From ‘panchi’ to
casinos Gambling is in born in us. In fact we started it young from our school boy days. We played for cadju nuts, jak seeds and madatiya seeds. Next we played with actual money — ‘Wala Salli’, hitting a small coin with a bigger coin. If one misses to hit the target the chance is to the next man. Whatever coin fallen inside the pit is the player’s. If he hits the target the whole collection is his. Although it is a game of skill, nevertheless there was greed for money — gambling! The game of ‘panchi’ placed with six cowries weighted with lead plunged on the body of a half coconut shell, while records are kept on a chart played on the floor, though essentially a sport of the women folk is nothing but gambling. On the other hand grown up men indulge in a game of ‘Asking and Hitting’ called ‘Buruwa’ or 'Baby Cutting' in Singhala, played with a pack of cards is the real 'Suduwa' or gambling. Those who indulge in this game are liable for prosecution as it is prohibited by law. But during the time of the Sinhalese New Year days this is extensively played by the villagers as the rules are relaxed allowing the people to enjoy for a couple of days. During early days there circulated in Ceylon a sweep called ‘The Irish Sweep’. Each ticket was valued at one pound which amounted to rupees ten in Ceylon currency. These tickets were sold all over the globe. It fetched fabulous sums of money as winnings. Irish Sweep winners never remained in the country but migrated to England or other European countries to enjoy the newly earned wealth. This was followed by a local sweep called The Galle Gymkhana Club Sweep priced at rupees two resulting in very big prizes. It was very seldom that a winner put his winnings into good use. They frittered away the money in gambling and other unnecessary extravaganza. Gambling money does not hold for long! The writer knows of a carpenter of Ambalangoda who won Rs. 61,000 at the Galle Gymkhana Sweep and was later known as ‘Heta Ek Das’, who gambled his money and became a pauper. At last he was only left with his Tweed coat. He met him last at the Talagasgoda bridge fishing with a rod on with his Tweed coat and his mouth red with betal chewing! The first government sweep was started in early forties called the ‘Hospital Sweep’, a ticket valued at seventy five cents. The income from this sweep was to be spent in improving hospitals and the work of the Medical Department. The Britishers commenced horse racing from colonial days. The original race course was the Galle Face green. Later race courses were established in Galle, Colombo and Nuwara Eliya patronised by the local elite. This business of racing gave employment to many people, while it also ruined those who were addicted to gambling. There were grand stands built with seating accommodation for the rich while the poor gamblers too had an area for small bettings called the ‘Gandhi Section’. Horse racing was abolished in Sri Lanka due to public agitation. Palatial buildings and grand stands belonging to the racing clubs are still in existence in Colombo and Boossa, neglected and going into ruin. Although racing was banned in the country people began betting on horses run in England, the information obtained on Telex. At first this was done secretly, the race sheet being distributed through confidential channels. The centres where this betting was carried out were named bucket shops. They do a rollicking business. As time went by government finding it impossible to curb this trade allowed it to be carried out openly on issuing licences for same as it brought in money to the government coffers. No sooner this was done people started opening up Bucket Shops in every nook and corner in the island. The race sheet is usually printed in English but even the most illiterate punter knew which horse was liable to win. Once a punter always a punter. Gambling is a common human weakness and who is the man who will scoff at easy money? They build castles in the air in anticipation of a fat win failing this mirage it leads people to try over and over again indulging in this unworthy habit that they end up utterly ruined. During President Premadasa’s regime, government sweeps were inaugurated to collect money for development projects. Now there is a lottery every day of the week carrying big prizes. These tickets are priced at ten rupees which the poorest of the poor can afford. There are first prizes and consolation prizes. Millionaires are turned out in this country giving hope to others. Private lotteries are sponsored to raise funds for charitable purposes by social and religious organisations for the construction of schools, hospitals, libraries, playing fields and so on. Sometimes a private raffle is organised to dispose of one’s belongings such as a car, fridge, piano etc. I remember that during my school days a 1928 model Baby Austin was raffled by my family doctor before he left for England for higher studies. We school boys helped him to sell the tickets which ranged from one cent to rupees two in ascending order, which brought him a tidy sum those days more than the worth of the car which amounted to Rs. 309.39 cents after all the tickets were sold. The car was won by the ticket priced at cents seventy five. In Sri Lanka the latest mode of gambling is carried on at Casino Clubs restricted for members only. But people know that anyone and everyone is entertained to be a member. This game was once banned in Sri Lanka during President Premadasa’s regime, but later allowed under a big licence fee. These clubs cater for the rich and elite where very large sums of money are involved but smaller fry are not uncommon there reaching their ultimate ruin. Casino kings do not establish these clubs for fun but there is Big Game hunting. That is why even foreigners come here to open casinos. Many a man is reduced to penury and end up in suicide when there is nothing else to do. |
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