Leaders Fumble, Markets Tumble

The resolve needed to stop the Asian carnage is missing

The 10th anniversary of the 1987 global stock market crash passed uneventfully on Wall Street. But across Southeast Asia, bourses kept on doing what they've been doing for months--plunging. As the grim week wore on, declines on currency and stock markets accelerated (charts), leaving panicked traders and governments wondering when the free fall would end.

Taiwan joined other Asian nations devaluing their currencies. That pummeled stocks and pushed the Taiwanese dollar to its lowest level in a decade. Then Hong Kong, long immune to the turmoil in Asia, took one of its steepest-ever one-day dives, falling 6% on Oct. 22 amid fears that it, too, would catch Asia's spreading economic malaise. Especially worrying traders was a round of jitters that the Hong Kong dollar's firm link to the U.S. greenback will not survive, despite official pledges of continued support.

VICIOUS CYCLE? As markets melt down, Asian leaders are fumbling. If they continue to shun forceful measures to curb spending and bolster confidence, markets may continue falling as local and foreign investors flee. Indeed, Morgan Stanley, Dean Witter, Discover & Co. strategist Barton Biggs is advising clients to simply cut their losses and get out of major Asian stock markets entirely--a recommendation that has hit Hong Kong hard as fund managers rush to sell liquid issues first. "I visited Asia thinking there must be some value in the ashes of destruction," says Biggs. "But I now believe a vicious cycle is at work."

To bring the cycle to an end, political leaders need to make hard decisions to show they understand that times have changed. The region's governments long have staked their political legitimacy on delivering economic growth. But in the fat years, governments grew sloppy, politicians and their cronies greedy, and authoritarian rulers ruthless to anyone who dared ask questions. Now, instead of taking tough action, some leaders are scrambling for short-term fixes. On Oct. 22, for example, China slashed interest rates, in what analysts saw as a crude attempt to boost market sentiment in Hong Kong.

Some maneuvers have flopped. Hints by Philippines President Fidel V. Ramos that he might try to change the constitution to allow him to run again only prompted more selling in the stock and currency markets. Thai markets, meanwhile, are plummeting amid signs that the country's leaders appear unable to accomplish anything at all.

Prime Minister Chavalit Yongchaiyudh can't get needed economic reforms passed, and throngs of street demonstrators have been calling for his resignation. Markets panicked on Oct. 17, when the Cabinet backed away from an oil-tax increase designed to help restore fiscal balance. The markets were further unnerved by an announcement on Oct. 19 from Finance Minister Thanong Bidaya that he was quitting--ahead of yet another Cabinet reshuffle.

If Thailand can't get its act together, its $17 billion International Monetary Fund bailout may well end up in shreds. Yet politicians now seem more interested in jostling for position and protecting cronies at bankrupt finance companies. "You'd assume there are no hands on the tiller," says Stewart Matthews, vice-president at Deutsche Morgan Grenfell Securities (Thailand). "In fact, there are a lot of hands."

Even if the Thai bailout goes through and stabilizes the economy, economists say it won't go nearly far enough to help Thailand recoup the phenomenal losses of foreign exchange reserves that the central bank incurred in vainly defending the baht earlier this year.

All around Asia, other tales of inaction in the face of crisis abound. Malaysia's Oct. 17 budget was a blow to investors, who were looking for serious cuts in infrastructure spending and reassurances that the current-account deficit would be sliced. They didn't get either. "Malaysia hopes to ride out the trouble by not doing anything," says Rajiv Malik, senior economist at Jardine Fleming International Securities Ltd. in Singapore. In reaction, the Kuala Lumpur stock market fell 7% in the three days after the budget was announced, and the Malaysian ringgit, which has lost a third of its value against the dollar since July, hit another string of new lows.

QUICK FIX. Indonesia, too, is lagging. Some analysts believe the rupiah is now undervalued by as much as 25%. But one senior Wall Street economist says only a fool would buy it, given the market's foul mood. Before a recovery can begin, analysts want to see wasteful government-supported projects put on the chopping block. The national carmaking project run by a son of President Suharto and costly aircraft and shipbuilding factories run by technology czar B.J. Habibie are prime targets. Yet there has been no action. In fact, Trade & Industry Minister Tunky Ariwibowo vows the car program will be continued "for the long-term protection of the Indonesian economy." Banks are being strong-armed into lending $690 million to the program.

In trying to fix one of their biggest problems, South Korea's bureaucrats may find they've made things worse. On Oct. 22, Seoul announced it was taking over Kia Motors Corp., the country's third-largest auto maker, by converting the debt it owed state-owned banks to equity. Although policy makers hope the intervention will keep Kia's troubles from spreading, the move sends the wrong signals to an economy in need of a thorough purging of poorly performing companies.

If leaders would only administer the right medicine, their economies might emerge stronger. Instead, they're squandering their opportunities and driving their stock and currency markets to new lows as investors stampede to get out of Asia. The longer leaders wait, the harder the recovery will be.

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