The Asian nightmare lingers on

Far Eastern economies aren't learning from history, warns Stephen Vines in Hong Kong

If ever there were a demonstration that financial market memories are short, it will come this week when most market players shrug off the second anniversary of the start of the Asian financial crisis. Indeed with Asian stock markets rising, and currencies regaining some of their lost value, there is a feeling that it was no more than a fleeting bad dream. The reality is that the nightmare lingers.

Many of the causes of the crisis have not disappeared and the rise in financial markets might lead to neglect in tackling the underlying problems which caused the crisis.

"The pickup has encouraged some, perhaps, to hope the problems are permanently over; and there is no need for more painful reforms," said Lee Hsien Loong, Singapore's Deputy Prime Minister, in Hong Kong last week.

There is so much confusion about the aftermath of the crisis that few people even know when it really began. It is generally stated that the markets collapse was triggered on 2 July 1997 with the devaluation of the Thai baht.

In fact, the real trigger came on 25 June, 1997, the day when Thanong Bidaya, recently installed as Thailand's Finance Minister, discovered that his country's foreign reserves had dwindled to a mere $1.14bn (pounds 0.71bn) - equivalent to the cost of two days' worth of imports. On top of that, he discovered the central bank had made loans totaling $8bn which were not being serviced, and that the bank was printing money to cover the shortfall.

The problems had been well disguised, but Mr Thanong, just five days into his new job, was confronted with the reality of a government default if a decision was not quickly made to float the local currency. That was finally taken by the cabinet on 2 July and the consequences reverberated all over the region. Dr Mahathir Mohamad, the Prime Minister of Malaysia, said the net result was to wipe some $200bn off the wealth of South-east Asian nations.

So terrifying was Asia's financial crisis that even the most candid of G7 leaders consistently understated its significance. Just over a year later Michel Camdessus, the managing director of the International Monetary Fund (IMF), said: "I think the worst has passed."

Now Western bankers are voting with their money. They are beginning to invest in Asia again - sending share prices in Asia up during the last nine months. In Malaysia share prices have almost tripled.

Even the debt-ridden, hollowed-out Indonesian stock market has risen by about 100 per cent. South Korea and Thailand, both of which had to be bailed out by the IMF, have seen stellar performances in their stock markets.

"The rise in share prices," said Mr Lee, "reflects easier domestic liquidity, lower interest rates and returning confidence, more than an improvement in their underlying fundamentals."

But the fact remains that, since the start of the Asian crisis two years ago, the region's stock markets are still down. If the performance of Asian markets since the start of August 1997 is measured in US dollar terms - how most international funds calculate their revenues - every single Asian market has registered a loss.

That includes the star-performing Malaysian market which is down by 46 per cent, according to figures from Hong Kong-based CEIC Data.

Out in the real economy, the figures look even more shaky. East Asia's "miracle economies" can no longer even dream of the kind of double-digit growth they enjoyed in the early 1990s. Indonesia and Hong Kong will probably end the year in recession - as will Japan, which has been in recession since its stock market bubble burst in 1990.

Most estimates - those being made by private sector economists and the number crunchers at the IMF - predict Malaysia, Singapore and Thailand will manage growth of no more than 1 per cent; South Korea and the Philippines should be able to put on about 2 per cent. Only China and Taiwan, which both escaped the ravages of the financial crisis, can hope for continued economic growth at a reasonable level.

Growth is expected to go on next year but, as Andy Xie, an economist at Morgan Stanley Dean Witter in Hong Kong, argues in a recent report, it'll be very much export-dependent, and so dependent on the expansion of global trade.

If this does not materialise, the current problems of over capacity will be exacerbated and the new credit supply advanced to Asian borrowers on the assumptions of rising exports will fuel yet another cycle of bad- debt problems.

Indeed, it is clear that the previous cycle of corporate debt problems has yet to be flushed out of the system. While this is being worked out, governments in the region - excluding the Malaysians - are pursuing tight monetary policies that make it hard for companies to invest in the equipment that will upgrade their output and make them more competitive.

Mr Xie adds: "The problem in east Asia is mainly structural, rather than cyclical." He believes the root cause of the Asian crisis "lay in financial systems and political economies that allocated capital to industries (mainly commodity industries and property) with declining pricing power".

David Roche, the Hong Kong-based chief strategist for Independent Strategy, puts the problem more bluntly: "What caused the Asian crisis was excessive debt and unproductive investment."

Now that life is returning to the region's financial markets, Mr Roche sees another danger looming: "Higher consumption and investment, with bigger fiscal programmes, will drive national savings down and investment up. External balances will deteriorate and excess liquidity in the financial system will dry up."

He believes that countries such as China, Japan and Malaysia, which have failed to confront the fundamental issues of bad debt and banking reform, will suffer most.

As matters stand, it is Japan and Malaysia that are being advanced as examples of rebounding economies while China is seen as a miracle of sustained economic growth in the face of decline elsewhere around the region.

As ever, little is being learned from history.