Fri, Dec 22, 2006 - Page 9 News List

Has Asia come far since 1997?

Almost 10 years have passed, but the claim that Asian nations are less vulnerable now should be taken with a grain of salt

By Andy Mukherjee  /  BLOOMBERG

Approaching the 10th anniversary of the Asian financial crisis, we must brace for a round of self-congratulatory backslapping.

In the months ahead, expect policy makers in the region to wax eloquent about how much more resilient their economies and capital markets have become since those dark days of 1997.

Is Asia really less vulnerable now? We won't know the answer to that question until the money that's betting on Asia's strength has undergone famed investor Warren Buffett's "naked swimmer" test.

The outward signs do support an optimistic appraisal.

The US$1.6 trillion buildup in foreign-exchange reserves in Asia, excluding Japan, in the past decade makes the fortress appear better protected against speculators than in the past.

Yet, it's reasonable to ask if reserve acquisition beyond a point is good use of local taxpayers' money, and whether it can ever be a substitute for prudent economic policies, a strong banking system and the rule of law. It's equally important to query if Asia looks stronger than it is because of a protracted slump in investments.

Asian emerging markets -- with the exception of China -- aren't saving much less than the 30 percent of GDP they were putting away before 1997.

Yet investment rates, which used to be as high as 35 percent of GDP, are about 10 percentage points lower now.

The excess of savings over investments is the current-account surplus, which is responsible for the bulk of the increase in Asian reserves.

Swimming naked

It's fine if lower investment rates reflect a new-found aversion for dubious projects funded by short-term overseas borrowings. Corporate-governance standards have improved in most parts of Asia, as has the quality of bank supervision.

Correspondingly, however, Asia's openness to global trade and capital flows has intensified. Economies and markets in the region are more closely integrated with the world -- and with each other -- than ever. Shocks emanating in one country can hit another faster and with greater ferocity than in 1997.

"It's only when the tide goes out that you learn who has been swimming naked," Buffett said in his annual chairman's letter to shareholders of Berkshire Hathaway in March 1993.

The much-quoted -- and misquoted -- comment was about inadequate preparedness in the US insurance industry to deal with catastrophes. Those words are also of immense value in making sense of the exuberance in everything from Chinese and Indian equities to Indonesian corporate bonds and Singapore property.

No Dearth of Money

Investors recently offered more than 450 billion yuan (US$58 billion) for the shares of a rail operator in Guangdong Province, China. Guangshen Railway needed only 10 billion yuan.

Six real-estate companies have tapped London's Alternative Investment Market this year to raise money to invest in India. Their pickings? More than ?1.2 billion (US$2.4 billion).

According to Singapore's Today newspaper, an investor who paid about S$14 million (US$9.1 million) last week for an apartment near Singapore's main business district turned down an offer to sell it at a 19 percent profit, or an annualized 1,000 percent profit. He wants more, the paper said.

Structural weaknesses are being brushed aside.

Global investors who snapped up US$2.7 billion in international corporate-bond issuances by Indonesian companies this year aren't at all perturbed about the dubious legality, under Indonesian jurisprudence, of offshore special-purpose vehicles that are routinely used in structuring such deals.

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