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12. ASEAN: An Image Problem
- ISEAS–Yusof Ishak Institute
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58 Greg Sheridan By: ROS Size: 7.5" x 10.25" J/No: 03-14474 Fonts: New Baskerville 12. ASEAN An Image Problem GREG SHERIDAN Reprinted in abridged form from Greg Sheridan, “ASEAN: An Image Problem”, in Southeast Asian Affairs 1998 (Singapore: Institute of Southeast Asian Studies, 1998), pp. 37–44, by permission of the publisher. There is no way of getting around it and little point in being excessively diplomatic about it. This has been one of the most difficult, if not downright unsuccessful, years for the Association of Southeast Asian Nations (ASEAN) since the triumph of communism in Indochina in 1975, if not since the founding of ASEAN itself in 1967. The regional economic crisis, the political breakdown and fighting in Cambodia, the failure of Cambodia’s attempt to join ASEAN, Western reaction to Myanmar’s membership of ASEAN, and the smoke-haze phenomenon which literally shrouded much of the region in gloom in the latter part of 1997, all combined to make this an annus horribilis par excellence (to mix up my European languages). But undoubtedly the most significant event in the region in 1997 was the regional currency crisis. This really moved through three distinct stages, starting as a currency crisis, evolving quickly into a stock market crisis, and then becoming a banking crisis. It started as a currency crisis in Thailand. The baht was overvalued and pegged to an appreciating U.S. dollar. Thai interest rates were higher than American interest rates so, assuming the tied currency to be safe from radical depreciation, an irresistible temptation was provided to borrow in American dollars and lend and invest in Thai baht to take advantage of the differential interest rates. A vast property bubble was thus built up as much of the investment went into unproductive property as the real motivation for the investment was speculation spurred by differential interest rates in the face of a tied currency. But the appreciating dollar, combined with an earlier Chinese devaluation, affected Thai competitiveness badly. Thus there was a double effect in blowing out the current account deficit and ultimately encouraging speculation against the baht. Although the Thai economy traditionally has been well managed, this particular challenge was not well managed. The Thai economic author012 AR Ch 12 22/9/03, 12:39 PM 58 ASEAN: An Image Problem 59 By: ROS Size: 7.5" x 10.25" J/No: 03-14474 Fonts: New Baskerville ities undermined their own credibility by insisting that there was no problem and they would never devalue. Ultimately they had to cut the tie to the American dollar and move to a floating exchange rate in the midst of a crisis, the worst possible way to undertake these probably necessary and long-term beneficial reforms. The currency crisis inevitably led to a stock market crisis as companies tried to recover money to pay dollar debts and as international investors got spooked by the sudden depreciation. This of course then led to a banking crisis as companies found themselves unable to cope with dollar debts which had suddenly doubled in baht value seemingly overnight, while collateral of property and stocks had lost much of its value. Because the Southeast Asian economies most affected — Thailand, Indonesia, the Philippines and Malaysia — trade in such similar goods, once one currency had experienced such a massive depreciation it was impossible that the other currencies would not also need to devalue if for no other reason than to stop a major competitor achieving such a decisive competitiveness advantage. Certainly a lot of currency speculators thought so and thus immense pressure came on, one currency after another. Thus, the result was a fullblown Southeast Asian regional currency, stock market, and banking crisis. Now, the thing about banking crises is that the world is familiar with them. One knows a lot about them and a lot about how to deal with them. But they are a nasty species of financial crisis. Their solution involves a great deal of corporate and political pain. It is possible for an economy to experience a currency plunge, and even a stock market plunge, without the real economy suffering too much. But a banking crisis is a nasty, nasty business. The real economy is always involved. Once again the crisis was greatly exacerbated by sentiment. Southeast Asia sent out mixed messages. Some leaders spoke of the crisis as a spur to necessary reform. Others blamed the perfidy of international money dealers. The policy response seemed equally confused. Everyone...