By Eva Cheng
Massive, dumping of the Thai baht, Philippine peso, Indonesian rupiah and Malaysian ringgit have forced these countries to float their currencies, ending their link with US dollars and slashing their purchasing power by 20-50%. Prices of shares and property (and therefore the value of loan collateral) plummeted. Interest rates and bad loans rose, threatening many businesses, particularly banks, with grave ramifications.
Inflation will escalate and a big drop in the standard of living for the common people in these countries is guaranteed. In Thailand, this process will be spurred by the International Monetary Fund-brokered "bail-out" credit line of US$17 billion. As usual, this requires deep cuts in social spending, reserving the biggest burdens for the poor.
Interest charges and repayment terms have not been disclosed, but Mexico has reportedly paid US$500 million in interest for the US$50 billion line it got three years ago. There is no obvious reason why Thailand might get a better deal. Indonesia is negotiating for a similar rescue line from the IMF.
Billions of foreign exchange reserves had already been spent in the failed attempt to defend the baht. All eventual costs will be paid by the Thai people.
Already feeling the attacks, thousands took to the streets of Bangkok on October 20-22, protesting against the IMF-imposed petrol tax hike. To save his own skin, Prime Minister Chavalit Yongchaiyudh postured as leading the fight against the petrol tax, "promising" the participants of a public rally, "You will never suffer again".
But they will.
US Treasury secretary Robert Rubin and Federal Reserve governor Alan Greenspan warned during the IMF's recent annual meeting in Hong Kong that providers of the rescue package should make sure that the money is not used to cover all the "uninsured losses" of private creditors and investors.
This implies that some of these private losses will be covered. Exactly how the rescue fund will be allocated is not public knowledge, but "the public" will surely foot the bill.
In Thailand, in trouble are 58 finance companies, about half the sector numerically. The head of the special committee set up two months ago to monitor these troubled companies resigned in mid-October, together with two of the remaining five members, citing political interference as his reason.
In all, Thai companies have US$72 billion worth of outstanding foreign currency debts (equivalent to about half of the country's output last year), mostly uninsured against currency risks. Even before the devaluation, Thailand's foreign currency reserves were only US$37 billion.
A main attraction of borrowing, say, in US dollars is that US interest rates are much lower than Thailand's. Private borrowers did well from such deals, and they were not unaware of the currency risks. The biggest of them drew further comfort from their connections with political power.
Not by accident, among those being saved by the rescue package are Japanese creditors, who hold half of Thailand's foreign currency borrowings. The Japanese government contributed US$4 billion to the US$17 billion rescue fund.
Tokyo proposed a month ago to set up a US$100 billion rescue fund, to be funded by Asian countries and for their use only. Which country will dominate such a set-up is obvious. The idea was immediately knocked back by the US and the European Union.
Balance of payments
Indonesia's and Malaysia's situations are different from Thailand's, but their abilities to defend their currencies are equally weak.
Jakarta has allowed the country's foreign debt to climb to US$110 billion — of which US$56 billion is held by the private sector, mostly short-term — while it has foreign exchange reserves of only US$20 billion.
Malaysia's foreign debt is smaller, but in just one day in early September, it reportedly lost US$30 billion in reserves defending the ringgit. Malaysian banks are overextended, lending 1.6 times GDP on collateral the worth of which was seriously inflated.
While Prime Minister Mahathir Mohamad was tirelessly attacking currency speculator George Soros in Hong Kong last month in an attempt to unite the country against a common external enemy, depositors all over Malaysia were withdrawing their deposits from MBf, the country's biggest finance company.
Since the crisis began, it has been fashionable for commentators to blame current account deficits — 8% of GDP in Thailand, 4% in Indonesia and 5% in Malaysia.
But there is a limit to the extent that Third World countries can boost their export income and thus bring the current account into balance.
Despite gains into low value-added manufacturing, the fast-developing Asian countries, except the city economies of Hong Kong and Singapore, still rely heavily on primary commodities. Tin is by far Malaysia's biggest export, and coffee and timber Indonesia's. Thailand's dependence is spread more "evenly" between shrimps, rice, rubber and gems and jewellery.
With no shortage of competition from the rest of the Third World, the price of these commodities, and of labour-intensive manufacturing products, hinges on the buyers, decisively the developed countries. This product structure is largely a legacy of these countries' colonial past, which they can't turn around easily.
Their diversification into manufacturing was hailed until very recently as a key reason for their "miracle" growth, supporting fairytales that they were catching up with the developed west.
Indonesia even ran a US$1 billion trade surplus in July, but the gain was more than outweighed by outward non-trade transfers (mainly dividend and interest payments).
Asian countries were recently blamed for having "overheated" their economies with excessive investments and borrowings. But whether an investment or a loan is made hinges on the investors and lenders. They begged, bribed or blackmailed their way into Asia.
Capitalists from the imperialist countries have too much capital on their hands, hunting for higher returns. They have been pressuring Asian governments for years to open more of their economies for foreign investments — especially the lucrative banking sector.
Their success has been limited so far, but last month Indonesia allowed full foreign ownership of newly listed firms, lifting the previous 49% limit. Thailand lifted the 25% foreign ownership limit for finance companies for five years.
In the World Trade Organisation, a decision on the extent to which the Third World will open its financial sector is to be made in December. The currency crises have greatly undermined the bargaining positions of many Asian countries.
The pegging of their currencies to the US dollar was an open invitation to currency speculators. But floating their currencies will not get them out of trouble.
A stable means of exchange is crucial to world trade. Such an anchor was the US dollar — and the US's huge reserves — after World War II, backed by convertibility into gold at a guaranteed rate. But the US stopped being able to honour that guarantee in 1971.
Europe is trying to address the question with the formation of the problem-plagued Euro, currently set to take off in 1999.
Asia is nowhere near a possible solution, and will have to juggle with all the uncertainties associated with small floating currencies.
At least US$1 trillion of "hot money" — a World Bank estimate — is ready to pounce on them.
This hot money is the most liquid form of the enormous excess capital that can't find a high enough rate of return in productive investment. While many banks and currency speculators are doing very well from Asia's crisis, a further impoverishment of hundred of millions of people has just begun.