HONG
KONG Certain hedge fund operators, brokerage forecasters and
their youthful Western news media commentator handmaidens have been
doing overtime in recent days suggesting that we could be in for a
repeat, on a minor scale, of the 1997-98 Asian financial crisis.
The Indonesian rupiah
has been said to be in freefall and currency contagion in danger of
spreading to Thailand and elsewhere. The alleged culprits: the
oil-price hit to Asian trade balances and government failure to do
the bidding of the market by raising local fuel prices and lifting
interest rates. Asia at large is said by some to be in danger of
meltdown from $65-a-barrel oil.
For sure, with the
exceptions of Malaysia and (marginally) Indonesia, Asian countries
are heavily dependent on imported oil. Most also have high ratios of
energy use to gross domestic product, partly attributable to low
energy prices. In China, Thailand, Indonesia, India and elsewhere,
these have been held at or below world market levels. The cost of
energy subsidies has had a serious negative impact on government
budgets and on the profitability of energy distributors. It is
recognized that prices have been held down primarily for short-term
political reasons and that most subsidies should be removed as soon
as possible.
But the exaggerations of
the problem by stock and currency commentators are bringing back
Asian memories of how very real problems in 1997 were turned into an
unparalleled economic rout by financial markets.
Take Indonesia, said to
be the immediate cause of the current mini-crisis. It is an energy
exporter - small net oil imports are more than offset by gas and
coal exports. It was running a substantial current account surplus
even before the latest energy price increase. The impact of high
prices is not on its balance of payments but on the budget, thanks
to a subsidy for domestic gasoline and kerosene users. But even
without local price hikes, the fiscal deficit will be no more than 2
percent of GDP, a negligible level by any standard.
For sure, Indonesia's
energy subsidy would be better spent on new roads and schools. But
price hikes would cut domestic consumer demand, which is the main
source of economic growth. Just a few weeks ago the very same
portfolio and currency investors were piling into Indonesia on the
grounds that President Susilo Bambang Yudhoyono would provide stable
government and sensible economic policies. Now they want out because
he has not done their bidding by raising oil prices immediately and
dramatically, regardless of Indonesia's economic fundamentals.
Take Thailand. The
commentators are ringing alarm bells because it has now has a small
current account deficit, its first since 1997. And even that is
partly attributable not to oil but to the tsunami's damage to
tourism income. Its fiscal position cannot stand permanent domestic
price subsidies, but the modest stimulus to domestic demand that
they provide could be viewed as a temporary cushion against a sudden
fall in consumer spending power. After a long period of monetary
stimulus and oil-induced inflation, higher interest rates may be
justifiable - but not because of the views of currency traders in
Singapore.
Malaysia, too, is said
to be acting irresponsibly by not letting local oil prices rise to
international levels. But again, this helps sustain consumption at a
time when the current account surplus is running at more than 15
percent of GDP, money mostly going to prop up the spending of deeply
indebted households in the United States, Britain and other
developed countries.
Take the biggest energy
importers of Asia: Japan, China, South Korea and Taiwan. Yes, their
trade balances have shrunk. But despite energy costs, they all
continue to run huge trade surpluses.
Most of Asia still needs
domestic demand stimulus - including China, where growth in
consumption is lagging far behind investment in capacity. The demand
of markets run by and for Western investment institutions is for
higher interest rates, lower fiscal deficits and higher domestic
energy prices - all of which would crimp consumption. This may be a
good way of sustaining debt excesses in the West, but it is no way
to right global trade imbalances by stimulating Asian consumption
and investment.
Likewise, the recent
currency mini-crisis can only encourage Asian central banks to pile
up yet bigger foreign exchange reserves as protection against
currency market attacks, thereby damaging their own economic growth
and sustaining today's global trade imbalances.
The reality is that most
of Asia is, despite oil prices, in far better shape than the
currency traders and commentators would have us believe.
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