The ‘Tigers’ of Asia Stumble

Southeast Asian stock markets and currencies are in deep trouble, roiling the economies of Thailand, Malaysia, Indonesia and the Philippines, once dubbed the tigers of international trade. Confidence is deteriorating in the ability of the four governments to manage the situation. This is a timely alert for the region. A decade of export-driven prosperity has masked domestic problems, overheated economies and eroded financial discipline. A new game plan is needed.

Plentiful and cheap labor fueled the economic boom, and the business sector borrowed overseas--where interest rates were lower--to finance their operations and investments at home. Credit was easy, and borrowed money was plowed into real estate and construction projects. But then came the inevitable--China. The Asian behemoth offered its own cheap and plentiful labor to attract foreign manufacturers, and the tigers found their exports slowed by stiff competition.

In these troubled times came the July 2 devaluation of the Thai currency and the steep sell-off on the Bangkok currency exchange. The other Southeast Asian countries let their own currencies follow the Thai baht down in relation to the U.S. dollar.

Borrowers holding dollar-denominated loans suddenly found repayment schedules decidedly more expensive. Interest rates soared and the stock markets tumbled, aggravating the underlying weakness in the economies, and yet another corner of the world fell victim to uncontrolled growth.

In Thailand, the devaluation set off a fiscal crisis that required a bailout from the International Monetary Fund, led by Japan and joined by other Asian countries. The $16.7-billion salvage plan came with tight strings attached, forcing the Thai government to raise taxes and cut government spending.

In Malaysia, hit by the Thai shock waves, the government’s snap decision to ban short selling of shares to discourage stock market speculation proved no solution, and its currency fell too, a big setback to a decade-long effort at liberalization.

Malaysia, unlike Thailand, will have to come up with a recovery plan of its own. The same goes for Indonesia, whose currency initially plunged as well, exacerbating problems for the regime’s highly protected industries. In a first step last week, the Jakarta government unveiled new economic reforms.

It is too early to suggest the demise of the Southeast Asian economic powerhouse. But changes will be required, some of them fundamental, like better education and training beyond basic manufacturing skills in the work force. Financial sectors need reform. To the north, the Chinese giant is flexing its industrial muscles, and the tigers will have to work on their claws.