The ties that bind

While the world braces itself for the next convulsion in financial markets, south-east Asia is looking on with painful memories of its own crisis – and an acute sense of irony about the reversal of economic fortunes

  • By Nick Parsons
  • 10 Oct 2008
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On the same weekend as US financial authorities and lawmakers huddled in Washington DC in a frenzied attempt to thrash out a bail-out for their financial system, Asian central bankers congregated in Bangkok for a more reflective regional meet.

Discussing the effects of the crisis on their financial sectors must have brought back painful memories of the Asian crisis that began 11 years ago, but the overriding emotion was less one of panic than relief – this time it wasn’t happening to them.

“At a glance, the root causes of both events are strikingly similar: investors taking excessively high risks creating asset price bubbles, against the background of lax prudential and monetary policy,” said Tarisa Watanagase, governor of the Bank of Thailand, opening the Seanza (south-east Asia, New Zealand, Australia) Governors Symposium. “What is unfolding right now is taking place in the world’s largest economy with the deepest capital markets, most sophisticated financial instruments – and, let me also add, the most advanced risk management tools.”

Except this wasn’t a dig: it’s true. And it’s precisely these facts that emerging markets, such as those in south-east Asia, have been traditionally defined against. So the Asian central bankers asked, to what extent are the governments, businesses and banks of south-east Asia immured from contagion in the western banking system?

Just posing the question shows how the world has turned on its axis in the last decade. Or has it really? What lessons have south-east Asian countries learnt? “Some lessons were learned since the Asian crisis in 1997,” says Anwar Ibrahim, the leader of the opposition in Malaysia and former finance minister at the time. “Some steps have been taken to improve practices in the banking and financial sector; and at this point our currency reserves are much stronger than they were a decade ago.”

But he warns that “it is foolish for our leaders to go around the world with an ‘I-told-you-so’ attitude, pointing fingers at the US for its hypocritical stances on bailing out Wall Street. Our bail-outs were directed towards corrupt, crony companies, and there was no system of governance or accountability to account for the disbursement of funds.

“Rather than bragging, our leaders would be better served by taking a humbler approach, preparing the nation for the medium-term impact of the financial crisis and addressing the increasing problems of joblessness and capital flight that we see taking place in Malaysia.”

His comments are a stab at the continuous Umno (United Malays National Organization) leadership of his country. But then Malaysia’s single-party political system is in disarray, with Anwar likely to take over government – unless something happens to stop his momentum.

Thailand too may have resolved problems in its business and banking sector, but its growth has stultified in recent years, partly because of a political impasse. Both countries face potential upheavals that could threaten the fabric of their societies.

Then and now

Compare a snapshot of south-east Asia 10 years ago – the days before China and India leapfrogged them to become the drivers of the region’s economy – and nowadays, where only the Philippines remains unchanged, missing out on the ‘new tigers’ boom and still not moving.

Hong Kong has since become China. Singapore has attempted to jazz up its dull persona while maintaining discipline and family control – long the safe haven for Asian cash, it has just spectacularly launched Formula One’s first night race and will join the Macau bandwagon in becoming a gambling hotspot for rampant new liquidity from the region.

Then there is Indonesia. The country began 1998 with its humbling at the hands of the IMF, captured for posterity by the iconic photo of the age: the IMF director-general Michel Camdessus watching, arms folded, as a crouched President Suharto signed the IMF bail-out agreement that signified the humiliation of a nation and – following widespread riots, internecine killings and archipelago-styled political squabbling – the fall later in the summer of the dictator and his system. Indonesia was beginning its long journey from the abyss.

Lessons for all

Sri Mulyani Indrawati is finance minister and the country’s overall economic tsar. Does the approach of the IMF – for whom she once worked – offer any lessons for the US? “I accept that the IMF prescription was not perfect for Indonesia, but the government’s failure to negotiate the political environment was also to blame,” she tells Emerging Markets. “The US is facing the same thing now, but maybe it is blessed by its democracy being more robust and developed than Indonesia.

“But it is the same question that governments face: how much is socially and economically acceptable?” Homi Kharas and Johannes Linn, senior fellows at the Brookings Institution, wrote in Emerging Markets earlier this year that, “It took Indonesia eight years to regain pre-crisis income level. Meanwhile, most foreign banks escaped with minimal losses, thanks to the current account surpluses that were produced by the draconian macroeconomic programmes.” That is not a legacy easily forgotten in Indonesia.

Foreign banks are still largely absent, with the exception of the Malaysian and Singaporean banks and a few other players such as Standard Chartered. Similarly the large pre-1997 corporate debtors (typically ethnic-Chinese) tend still to live offshore as the domestic (especially state-owned) banks have struggled to clean up their non-performing loan books.

From the jaws of defeat

It has been a long haul, but today – amazingly perhaps – Indonesia is maybe south-east Asia’s best example of a functioning democracy, with a comparatively decentralized bureaucracy and a relatively sound banking system. The lesson it has learnt from the Asian crisis is not to be dependent on the outside world (including the IMF) and to build up a domestic economy.

“It is very difficult for many countries with commodities prices rising, and the financial crisis in the US, all giving us the new environment that the global economy cannot be relied upon as a safety net,” says Indrawati. She wants a domestic economy that expands not just rapidly but also widely and deeply – that is to say, growth that is sustainable.

Perhaps an even greater achievement is that Indonesia has rebooted its economic momentum while introducing business, banks and the people in this vast country to the novel idea of a working democracy – without resorting to the authoritarian models of China or Vietnam.

“We feel frustrated here sometimes that we are perceived as a messy country compared to having an authoritarian or closed system,” says Indrawati. “But we have our own Indonesian characteristics and are looking for the best system for us: checks and balances and democracy are important, and people are getting used to it; we have learned a lot in one decade, and there have been some good performances in the last few years, like institutions working properly.”

“It is hard because you try and liberalize and create an environment that reflects that, but that can mean less regulation and lack of enforcement.”

The balance between control and liberalization – politically as well as financially – is the core issue for the Association of South-East Asian Nations (Asean), which means it is rarely addressed for fear of offending neighbours.

In today’s global financial crisis – with the mother of all government bail-outs and rival accusations of crony interest groups – it may not be the cut and dry issue that it has often been. But it will still be a central issue for governments in the region.

Indrawati says a last ingredient is needed in any policy mix. “As policy-makers, you try to formulate good policy; you are struggling to build up good institutions – but in the end you need good luck.”

  • By Nick Parsons
  • 10 Oct 2008

All International Bonds

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
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1 JPMorgan 157.04 523 10.03%
2 BofA Securities 132.43 435 8.45%
3 Citi 120.91 417 7.72%
4 Goldman Sachs 92.71 268 5.92%
5 Barclays 81.29 319 5.19%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $bn No of issues Share %
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1 Deutsche Bank 9.12 38 6.73%
2 UniCredit 7.48 35 5.52%
3 BNP Paribas 7.39 42 5.46%
4 BofA Securities 7.32 28 5.41%
5 Credit Agricole CIB 6.01 35 4.44%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $bn No of issues Share %
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1 Credit Suisse 3.10 7 10.45%
2 Morgan Stanley 2.55 14 8.60%
3 JPMorgan 2.53 18 8.54%
4 Goldman Sachs 2.43 15 8.18%
5 Citi 2.07 16 6.97%