The Price of Admission

By DAVID HOLLEY

Aug. 29, 1997 12 AM PT

TIMES STAFF WRITER

TOKYO —

The fall of the once high-flying Southeast Asian stock markets is accelerating dramatically this week with steep declines across the board, and analysts call it the price that developing countries must sometimes pay when joining the world’s hot-wired financial system.

Led by the Philippines--where stocks plunged a whopping 9.3% on Thursday, roughly the equivalent of a 700-point drop in the Dow Jones industrial average--markets in Malaysia, Indonesia, Singapore and Thailand all fell steeply, dragging Hong Kong down with them.

Wrenching adjustments are underway in many countries that were hit by the ripple effects of the July 2 devaluation of the Thai baht, which forced the region’s key economies to let their own currencies fall.

But broader, global forces are also at work. Much of the turbulence in Southeast Asian markets can be traced to “seismic economic and financial shifts in the world economy,” said Kenneth Courtis, chief economist for Deutsche Bank Group Asia Pacific in Tokyo.

Among the factors buffeting the region are the dramatic crash and then recovery of the U.S. dollar’s value over the last four years and the entry of the labor forces of China and India into global competition, Courtis said.

“As economies have developed in Asia over the past decade and a half, discipline has been relaxed, policy incoherence has developed and excesses allowed to grow,” he said. Shifts in the world economic environment now generate “brutal volatility” and force “overdue and difficult adjustments.”

Many Southeast Asian stock markets began falling months--or even a couple of years--before the baht’s devaluation. Then currency turmoil this summer scared away growing numbers of foreign investors, turning declines into steeper plunges and finally Thursday’s rout.

For the region’s five major economies--the Philippines, Thailand, Malaysia, Singapore and Indonesia--key stock indexes are down for the year 17% (in Singapore) to 38% (in Thailand) in local currency terms. In dollar terms, Thailand’s decline is 53%.

On Thursday, Malaysia’s index tumbled 4.2% to a four-year low in the largest one-day fall in more than three years; Indonesia fell 4.5% to the lowest level in a year; Singapore, 3.6%, the sharpest drop in 31 months, bringing the index to a four-year low; and Thailand dropped 2.3%, to its lowest since June 25.

“The markets have fallen off the wall,” said James Mitchell, an analyst at Salomon Bros. Singapore Ltd. “The key question is whether they bounce like a tennis ball or splat like an egg.”

Yet in the long run, adjustments being forced on these increasingly important economies, including the currency devaluations, are likely to strengthen prospects for solid growth, analysts say.

“It’s rather painful,” said Stephen Jen, an analyst at Morgan Stanley Asia in Hong Kong. “[But] this is an integral part of becoming part of the global financial community.”

Plunges in Southeast Asian stock markets the last two months reflect a vicious circle in which fears of currency depreciation and falling equity values have prompted investors, especially foreigners, to flee--often to Latin America or Eastern Europe. Their exit in turn has driven currency and stock values down further in a self-fulfilling prophesy, analysts say.

The Malaysian ringgit hit a 25-year low Thursday of 2.837 to the dollar, and the baht hit a record low of 34.2 to the dollar, down 28% from July 2.

One factor in the fall of stocks even before the baht’s devaluation was a reversal in the attitude of U.S.-based mutual funds. Salomon Bros. calculates that 68 U.S.-based mutual funds, which put a net sum of $2.3 billion into non-Japanese Asian stocks during 1996, have pulled back out a net $2.1 billion through Aug. 20 of this year.

Tim Buckley, head of research for Deutsche Morgan Grenfell in Singapore, said Singapore stocks are down largely because they simply went up too high a few years ago, at the height of enthusiasm over “the Southeast Asian growth miracle.”

Both the Malaysian and Singapore markets have fallen this year mainly because they had previously overshot justifiable values, Jen said. Based on price-earning ratios, “the Kuala Lumpur stock exchange . . . was just overpriced, period,” he said.

Jen attributed much of the Philippines and Indonesian markets’ falls to a “vicious circle driven by negative sentiments” triggered by the baht’s devaluation, though Thailand’s stock market plunge reflects very basic problems, including a troubled financial sector and too much external debt.

With key currencies now devalued, export competitiveness is likely to be restored and basic structural problems--especially inefficient financial systems--will have to be addressed, many analysts say. That means the long-term economic outlook may not be bad, although even solid growth won’t guarantee that stock values will shoot back up soon.

“The reconstruction plan that Thailand is working on with the International Monetary Fund will put the country in a tough situation for the next few years,” said Keizo Kuroda, chief economist at the Sakura Research Institute’s Center for Pacific Business Studies in Tokyo.

“But if it succeeds, Thailand’s economy will be very healthy and strong after that,” Kuroda added. “I am optimistic about the whole situation.”

For many years, Jen said, high growth rates in much of Southeast Asia were powered by “shockingly high” savings rates--often up to 40% of gross domestic product. Banking systems focused on the quantity of funds loaned out rather than the quality of the borrowers. And in most of the region’s key countries, currencies were pegged to the U.S. dollar.

All this provided superficial stability but allowed severe imbalances to develop over time.

For example, in Thailand and other countries, local investors borrowed foreign funds at interest rates much lower than were available domestically, changed that money into domestic currency and invested in real estate without fearing foreign exchange losses.

This produced overbuilding in Thailand, a resultant glut, plunging property prices and the eruption of a bad loan problem threatening the country’s financial institutions. That triggered the baht crisis, which, in turn, set off the volatility in currency and stock markets throughout Southeast Asia.

“It will take them a while to recover, but it’s my view they will have learned a very useful lesson,” Jen said. “They will pay more attention to the structural deficiencies that have always been there but were hidden by rapid growth.”

Successfully dealing with the challenges, analyst Courtis said, will set in place “the basis for a powerful new cycle of expansion.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Asian Markets Plunge

Currency devaluations, banking problems, overbuilt property, high interest rates, slowing export growth, high corporate debt and other woes are causing a dramatic sell-off of stocks in the once-hot markets of Southeast Asia. Thursday’s especially steep declines spread to Hong Kong, where the market has remained strong. Monthly closes since July 1996 and latest in these markets’ key indexes:

Hong Kong

Hang Seng index

Thursday: 14,876.10

Down 657.85

Philippines

Philippines composite index

Thursday: 2,071.97

Down 212.06

Thailand

Thailand Stock Exchange index

Thursday: 571.76

Down 11.98