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Asian Currency Crisis, Part Two?

Probably not. But political uncertainty is hitting hard

As he watches his nation's currency weaken by the day, Indonesia's acting central bank chief, Anwar Nasution, can't help feel a sense of deja vu. The rupiah is down 25% since January, making it the world's worst-performing currency, as it plumbs levels unseen since the crisis of 1997-98. "A weak rupiah is like a monster," he says. "We have to tame it."

Similar anxiety is rippling across Southeast Asia. Since the end of March, the Thai baht has fallen 6.5% and the Philippine peso 9.5%. There is even concern that Singapore could get tarred with the same brush as its neighbors. In short, concludes Bank of America analyst Marshall Gittler, Southeast Asia is in a "slow-motion" currency crisis.

Uh-oh. Are we in for Asian Meltdown, Part II? After all, in July of 1997 it was a tanking Thai baht that dragged down other Asian currencies, sparking a crisis that infected emerging markets worldwide. Could the plunging rupiah be another early warning?

Well, probably not. Even though some Southeast Asian currencies seem to be in trouble simultaneously, there's little evidence that the problem will spread to Hong Kong, Korea, and Taiwan. True, rising U.S. rates are making life difficult for Asian central bankers, who are wary of following suit for fear they will choke off a tentative economic recovery. But the main reason Southeast Asia is getting hammered seems to be political uncertainty plus economic problems specific to each country.

GOOD PROGNOSIS. So other currencies are unlikely to catch cold. Indeed, the South Korean won has appreciated about 2% this year on the back of an unexpectedly robust recovery. Says William Cline, chief economist of the Washington-based Institute of International Finance: "It is probably wrong to read into exchange rates some harbinger of a new economic crisis."

That's because much has changed since the 1997-98 crash. Then, dangerously high levels of short-term foreign debt and serious economic mismanagement prompted foreign investors to flee the entire region in droves. Most of those investors never returned. "There's no hot money here," says Chumpol Nalamlieng, president of Thai conglomerate Siam Cement. "It's gone."

This time around, the people putting pressure on Southeast Asian currencies appear to be local companies and banks. Amid continuing political uncertainty, they are protecting themselves against further currency declines.

Nowhere is this more true than in Indonesia. There, corporations holding foreign-denominated debt coming due have been trading rupiah for greenbacks. They suspect the rupiah will tank in late August, when erratic President Abdurrahman Wahid faces a no-confidence vote. Nor does it help that Indonesia is behind schedule in selling rehabilitated loans and assets seized from cronies of former President Suharto.

Thailand is no Indonesia, but it has problems of its own. Investors are jittery about a probable election and the patchy economic recovery. Despite a surge in export-led growth, domestic consumer spending is 20% off precrisis levels. Nonperforming loans are still 36% of total debt. And foreign debt turns out to be $90 billion, not $70 billion as was originally calculated.

Asian Currency Crisis, Part Two?

In the Philippines, the culprit is disgust over management by President Joseph Estrada. Because the Philippines escaped the worst of the crisis in 1997, its exports were expected to recover quickly. Yet new investment has been disappointing. As a result, shipments of semiconductors, which account for two-thirds of its electronics exports, fell by 19% in this year's second quarter. The nation's current account surplus has been falling steadily, and a hostage crisis is further sapping confidence.

While weak currencies help exporters, they are scaring away equity investors, who don't want to see stock holdings eroded by currency tumbles. The Thai index is down 42% in U.S. dollars. Indonesia's bourse is down 43%.

Policymakers hope they need not resort to the austerity measures taken in the 1997 crisis. But if the slide accelerates, Southeast Asia could well be moving in slow motion back into the International Monetary Fund's emergency ward.

— With assistance by Michael Shari

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