Asia's recovery from crisis is uneven

By THOMAS HOGUE and MALCOLM FOSTER, AP Business Writers Wed Jun 20, 12:02 PM
ET

BANGKOK, Thailand - Ten years ago, a plunge in the Thai baht sparked a wave
of recessions across Asia's high-flying economies, bankrupting entire
nations, putting millions out of work and shaking markets around the world.
Some feared that decade of growth would be lost.

Today, the region as a whole has bounced back from the 1997-98 crisis and is
better equipped to deal with financial emergencies. Banking is more
transparent, corporations are better managed, poverty rates have dropped and
the region's collective economic growth has doubled.

Still, the recovery has been uneven. The three countries hit hardest by the
crisis that began July 2, 1997 - Thailand, Indonesia and South Korea - have
charted sharply divergent paths over the last 10 years, reflecting their
differing responses to the crisis and policies since then.

South Korea, which received a humiliating $58 billion bailout arranged by
the International Monetary Fund, quickly cleaned up its banking system and
started reforming its heavily indebted family-owned conglomerates. The
economy shrank and the jobless rate soared, but by 1999 it was robustly
growing again.

The crisis, while painful, forced South Korea to make changes that paved the
way for more stable long-term growth. Today, it is one of Asia's
powerhouses, led by Samsung Electronics Co. - the world's biggest memory
chip maker - and Hyundai Motor Co.

Indonesia, however, continues to struggle. The crisis helped bring about the
downfall of former dictator Suharto and greater political freedom, but the
economy remains beset by rampant corruption, a weak legal system and
lackluster foreign investment. Economic growth has been ticking along at
about 5.5 percent the last two years, but unemployment is rising.

Thailand hovers somewhere in between. Bangkok, where hundreds of skyscrapers
froze in mid-construction when the crisis erupted, now has an elevated
Skytrain, a subway, a brand new airport and dozens of glitzy malls. Japanese
investment has made Thailand a major auto and electronics exporting hub.

But a rise in the baht and political uncertainty caused by a tainted
election in 2006 and military coup last September has dragged on growth.

In the wake of the crisis, Thai authorities shut down dozens of insolvent
financial firms, vastly improved banking supervision and updated archaic
bankruptcy laws. However, it can still take years for creditors to pursue
claims, and further reforms of laws governing bankruptcy and repossession of
assets from recalcitrant debtors haven't gone beyond the drafting stage.

"Korea restructured its financial sector, but the problem in Thailand has
been the inconsistency of reforms," says Sompop Manarangsan, a professor of
economics at Bangkok's Chulalongkorn University. "This is not good for the
longer term."

Investors got a flashback to the 1997 crisis in December when the Thai
central bank imposed capital controls in an attempt to weaken the currency,
sending stocks plummeting 15 percent in one day and rattling regional
markets.

Authorities quickly exempted stocks and foreign direct investment from the
rules, helping the market bounce back. Investors were also reassured to know
that Thailand had $65 billion in foreign currency reserves, far more than in
1997.

Still, Thailand's bungled effort to impose capital controls underscore the
lingering challenges that Asia's emerging economies face in handling
international money flows in search of higher returns.

It was the dramatic outflow of funds from Thailand that forced the central
bank on July 2, 1997, to finally cut the baht's peg to the dollar, causing
the Thai currency to plummet, triggering the crisis.

Unlike today, many Thai companies at that time were burdened with huge
dollar-denominated debts. When the local currency plunged, the value of
those loans suddenly ballooned in baht terms, forcing many companies to go
bankrupt.

That kindled speculative pressures that also forced currencies in Indonesia,
Malaysia, the Philippines and South Korea to fall, driving more companies
out of business, including one of South Korea's largest conglomerates, the
Daewoo Group.

The turmoil rippled around the world, affecting markets as far away as
Brazil and Russia.

In ensuing months, the IMF orchestrated emergency loans of $17 billion for
Thailand, $50 billion for Indonesia and $58 billion for South Korea - and
imposed austerity measures such as raising interest rates and cutting public
spending that many believe exacerbated the crisis.

Since then, Asian nations have taken steps to protect themselves by bulking
up their foreign currency reserves and set up regional agreements to supply
emergency funds through bilateral currency swaps.

South Korea's effective use of the IMF funds to repair banks' balance sheets
and moves to improve corporate transparency set the stage for a rapid
recovery. After contracting 7 percent in 1998, the economy jumped 9.5
percent in 1999.

Many of the major conglomerates survived, but not without changes. The
Samsung Group streamlined its business structure, shedding its automobile
unit and reforming its financial structure by reducing debt. The Daewoo
Group, however, collapsed spectacularly under mountains of debt.

South Korea also responded by opening its economy wider to foreign
investors, bringing changes virtually unimaginable before the crisis.

For example, U.S. private equity fund Newbridge Capital in late 1999
purchased a controlling stake in Korea First Bank, becoming the first
foreign investor to acquire a South Korean financial institution.

But the outlook for Indonesia - hardest hit by the crisis - is mixed.

The turmoil accompanying Suharto's ouster in 1998 made it difficult for
authorities to tackle structural problems in the economy, including bad
lending practices to corruption.

Today, greater investment in factories, roads and ports is needed to achieve
economic growth of more than 7 percent - the minimum level needed, experts
say, to create enough jobs to put a dent in unemployment, now around 12.5
percent.

"The country is still dealing with the long-term fallout from the crisis,"
says Peter McCawley, an expert on the Indonesian economy at the Australian
National University.

Progress on improving the investment climate has been patchy and many
businesses prefer to locate factories elsewhere in Southeast Asia, where
wages are lower, setting up is easier and corruption is less of a problem.

Exploration for Indonesia's vast copper, gold and zinc deposits remains
dormant despite record metal prices. Companies say it is too risky investing
millions when there is no certainty they will be able to mine them later. A
mining law aimed at ensuring legal certainty for investors is still being
debated in parliament.

___

Associated Press Writers Grant Peck in Bangkok, Kelly Olsen in Seoul and
Chris Brummitt in Jakarta contributed to this report.

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