Confronting the currency crash

March 4, 1998
Issue 

By Sonny Melencio and Reihana Mohideen

[This is an abridged version of a statement originally published in Filipino on January 15 and circulated amongst the mass organisations of the broad democratic front Sanlakas.]

The scenario of the 1930s depression is looming all over south-east Asia. There is no solution being offered by capitalist governments.

But the economic upheaval in 1997 can be transformed into a political upheaval in 1998. This can happen if the people, the different sectors and the various political groups unite to carry out a fierce campaign against the big foreign banks, the multinational corporations and the local governments which collude with them.

They, and not the people, should be made to pay for the crisis of their system.

Portfolio investment

The government and the monetary authorities have been blaming currency speculation for the crash. But behind the currency crisis is the unrestricted outflow of foreign capital in the form of portfolio investments (around $12 billion out of South Korea, Indonesia, Malaysia, Thailand and the Philippines in 1997).

Portfolio investment is pooled capital coming from vast amounts of personal savings, pension funds, government funds, corporate savings, and other funds deposited in banks and investment houses. This capital is usually managed by fund managers experienced in spotting opportunities combining high yields with a quick turnaround time.

Portfolio investments differ from foreign direct investments (FDI), which are long-term capital investments used for industrial expansion. Portfolio investments are pure speculative capital.

Almost 80% of the capital that entered south-east Asia in the 1990s took the form of portfolio investments. Fifty per cent of this came from the United States.

In the early 1990s, according to an Asian Development Bank report, "The declining returns in the stock markets of industrial countries and the low real interest rates compelled investors to seek higher returns on their capital elsewhere". They found south-east Asian economies ready markets for their operation.

Governments in south-east Asia evolved a three-pronged strategy to attract capital: financial liberalisation, high interest rates and a "fixed" exchange rate system. These originated from the structural adjustment plans designed by the International Monetary Fund.

Liberalisation of financial markets is a security measure for foreign investors for the free inflow and outflow of their capital. It includes the elimination of restrictions on foreign exchange and the opening up of all sectors of the finance industry to foreign participation.

The Philippines opened the banking sector to foreign banks in 1995. It is estimated that 20 banks and financial institutions in the country have foreign equity.

High interest rates are designed to attract foreign capital. Investors earn through the difference between, say, 5-6% interest rates in the US and the 12-15% interest rates in south-east Asia.

Fixing the exchange rate is a guarantee for investors against risks stemming from fluctuations in the value of the local currency. Fixing the rate was done through what is called a "dirty float", i.e., allowing the local currency to float within a narrow band, movement outside of which would be countered by the central bank selling or buying dollars.

Speculation

Portfolio investments, as short-term loans, financed the expansion of speculative activity, especially property and real estate.

Thirty to fifty per cent of Thailand's GDP growth, for instance, came from activities related to real estate speculation. By 1995, there was already a real estate glut in the country, with vacant properties estimated at some US$20 billion. The financial crisis in Thailand was signalled by two major finance companies, with high exposure on real estate loans, defaulting on their payments to the banks.

Massive borrowing fuelled the high growth rates in the region. Most of the debts are short term or due for payment within this year.

The short-term debt of the Philippines accounts for 19% of the total foreign debt of US$46 billion.

The withdrawal of portfolio investments took the form of extensive selling by the investment houses of their bonds and stocks to convert the local currency into dollars.

It was estimated that around US$24 billion of "hot money" from portfolio inflows left Bangkok in 1996. It brought down stocks and share prices by about 65%. The rush to convert the baht into dollars led to devaluation.

Foreign equity inflows to the Philippines during the first quarter of 1997 fell by 97% compared to 1996. Foreign investors started to be bothered by the ongoing property crisis, rising private debts and the falling stock market and began to demand dollars for their pesos.

The crash is leading to escalating inflation and massive unemployment in the region. The persistence of high interest rates, which discourage further local investment, constitutes a foolish attempt by governments to keep speculative capital from leaving.

The IMF bailout means additional debts for south-east Asian economies. The bailout is ridden with conditions which give an opportunity to advanced capitalist countries, the US in particular, to enter the economies, and for big foreign banks to take over the local financial sector.

In the Philippines, the US$3 billion IMF fund is the 24th structural adjustment program to be managed by the agency. Part of the loan conditions is the passage of the oil deregulation bill, which will allow the three foreign oil monopolies (Shell, Caltex, Petron) to jack up their petrol prices without limit.

The IMF is also using the bailout to ensure that the external loans contracted from international banks are repaid in full — with the government assuming responsibility for the private sector's foreign loans if need be. The IMF's role in Asia is increasingly seen as chief debt collector for international banks.

Cause of the crisis

The crisis is related to the overall crisis endemic to international capitalism since the early 1970s.

The slowdown of the Japanese economy is crucial. In the 1980s, Japanese FDI played a major role in the partial industrialisation of Asia. In 1985-1990, US$15 billion worth of Japan's FDI flowed into south-east Asia.

In the early 1990s, Japan started to pull its FDI out of the region. In 1990-93, Japan's investment in Thailand dropped by over 50%. Japanese investments also contracted in Malaysia. The pullout is related to the deep recession in Japan.

Japan's growth rate declined from 3.0% in 1996 to 1.9% in 1997. Most economists expect Japan to show zero growth or even a contraction in fiscal 1998.

Unemployment is predicted to reach 5% or worse — giving Japan its first jobless crisis since the second world war. Japan's budget deficit is now more than 5% of GDP, which means that it will be difficult to use government funds to shore up collapsing businesses.

Actual or potential overproduction is burdening most industries throughout the world. The new capital formed every year no longer finds opportunities to secure at least the average rate of profit. This average rate of profit itself is depressed compared to the period from the 1940s to the 1960s.

The fact that capital is not being productively invested feeds speculative activities. And this speculative activity is carried out not only by professional speculators like George Soros — Mahathir's favourite "whipping boy" — but also by big banks and corporations.

What should be the position of our organisation?

We should campaign and mobilise the people around demands that address the present crisis:

  • A moratorium on public and private debts. The government should not use its resources — the people's money — to bail out ailing companies. Instead, it should use the debt repayment money to support displaced workers and to create employment.

  • Rejection of the IMF rescue package.

  • Immediate lowering of interest rates for industrial loans.

  • A halt to trade liberalisation, privatisation and deregulation.

  • Ailing private enterprises should open their books to the public, so we know the real score, because branches of foreign banks and multinational corporations usually report capital transfer as corporate debts.

  • Nationalise the finance and banking industry. State control is the only way to stop speculative activity and to direct investment into productive economic activity.

The campaign should aim to build a broad anti-imperialist people's movement that challenges the entire neo-liberal strategy.

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