ASIA`S ECONOMIC MIRACLE stalled in 1997 in a dramatic reversal that threw doubt on forecasts for worldwide energy demand. Despite early predictions that the effects were temporary, conditions worsened progressively during the course of the year.
Early in 1998, the International Monetary Fund (IMF), backed by industrialized countries, was trying to ease a financial crisis that began with a series of currency devaluations.
The first sign of Asia`s unraveling came in February 1997, when investors, worried about Thailand`s burgeoning debt, began to sell Thai baht for U.S. dollars. In defense of the baht, Thailand`s central bank used dollar reserves to buy the Thai currency and raised interest rates. The action sapped values of Thai physical assets. By July, the central bank had depleted its dollars and quit buying baht, the value of which plunged.
Quickly, currency worries spread to Indonesia, Malaysia, and the Philippines, where financial structures and problems resembled those of Thailand. As currencies of those countries plummeted, Hong Kong in October spent U.S. dollars to buy Hong Kong dollars and raised interest rates in an action that crushed values on the Hong Kong stock market.
In mid-November, South Korea`s currency collapsed, victim not only of the regional crisis but also of banks weakened by a spate of bankruptcies by large industrial debtors.
In Japan, which was trying to struggle out of a long recession, a number of large corporations went bankrupt in 1997. Toward yearend, four major Japanese banks, swamped with bad debts, failed.
The Asian crisis put severe pressure on China, where imports from troubled neighbors were suddenly very cheap. If it was to protect Chinese producers, Beijing faced the unsavory need to devalue the yuan. And if that happened, Hong Kong was expected to have to float its dollar, which had weathered the storm into early 1998. There was speculation, however, that Beijing might use the competition from cheap imported goods to force state-owned Chinese manufacturers to improve efficiency.
Financial markets were eager for signs of disciplined response from Asian governments.
South Korea moved shakily in that direction. In exchange for $57 billion in aid from the International Monetary Fund, former President Kim Young Sam had agreed to an austerity program prescribed by the agency. When his successor, former dissident Kim Dae Jung, won the presidency in December promising to renegotiate the terms, South Korea`s currency slumped nearly 10%. By yearend, however, the new president seemed more amenable to the tough action needed to deal with the crisis.
Japanese Prime Minister Ryutaro Hashimoto in December proposed a $15.7 billion tax cut to stimulate his country`s ailing economy. He also proposed $77 billion in support of Japanese banks.
In Indonesia, a budget released early in January 1998 was widely interpreted as an attempt by President Suharto to maintain a status quo in need of repair. Instead of the fiscal discipline required for IMF relief and investor confidence, the budget included a 32% spending hike, an increase in fuel subsidies, and unrealistic projections for economic output, inflation, and currency values.
When equity and currency markets balked at the budget and Indonesians began hoarding consumer goods, Suharto signed an IMF agreement calling for reform of the country`s economic structures, traditionally heavy on patronage and favors for Indonesian monopolies, many of them run by members of Suharto`s family. Suharto had reneged on most terms of an October 1996 IMF pact for $40 billion in aid.
The Indonesian crisis put political pressure on Suharto, who in March 1998 was to be named to his seventh 5-year term as president.
With their economies skidding, the countries of Asia were certain not to have energy and petroleum demand growth as strong as had been projected for them until the crisis began. The question early in 1998 was how much lower their demand would be.
Subdued but continuing economic growth remained likely early in 1998. The combination of large Asian populations and recently liberalized economies was still compelling.
But near term hardship held out the possibility for political instability and, in the worst case, reversion to state-centered economic planning.
Global effects of the crisis had begun to appear by early 1998, mostly in the form of strong reactions to bad Asian news on stock markets in the U.S. and Europe. But deeper effects were likely.
At yearend 1997, the IMF projected expansion in the worldwide economy in 1998 of 3.5%, 0.8 percentage points lower than what it had predicted the preceding September.
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