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Asia is in better shape than they say

Philip Bowring

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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