Can Southeast Asia Follow Mexico’s Lead?

So far, investors appear to believe that the currency devaluations in Thailand and the Philippines were the right medicine.

In Thailand, the main stock market index has surged to 628.55 from an eight-year low of 464.77 on June 19, for a gain of 35%.

In the Philippines, the composite stock index rocketed 190 points on Friday, or 7.6%, to 2,701.14, immediately after the nation’s central bank stopped defending the peso. The index still is down 15% year-to-date, however.

Many investors are undoubtedly expecting a rerun of the Mexican experience: After a 50% devaluation of the peso in late 1994, the Mexican stock market plummeted more than 40% in peso terms. But stock prices quickly began recovering in 1995, and by the end of that year the Bolsa stock index stood at 2,778, up 17% from year-end 1994.

The Mexican market continued to zoom in 1996 and again this year, as rising exports have helped revive the economy. As of Friday, the Bolsa was at 4,821.62--a 103% gain, in peso terms, from the level just after the 1994 devaluation.

For investors, the question is whether Thailand, the Philippines and--assuming devaluation spreads--other Southeast Asian nations can gain enough export benefit in the relatively near term to offset the pain their governments and leading companies will suffer from devaluation, in terms of higher import costs and more onerous debt burdens.

In that respect, Mexico had a big benefactor: Uncle Sam, who lent many billions of dollars to keep the country afloat.