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The Doctor's Prescription... - Views on News from Equitymaster
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  • Sep 21, 1997

    The Doctor's Prescription...

    Asia. A four-letter word that has messed up the net asset values of many funds across the globe. Since 25 July, most Asian markets have been battered outof shape largely due to concerns about their internal economies which is expected to have a bearing of the values of their currencies. Since 25 July, the Malaysian stockmarket has fallen by 45 per cent and the Ringgit by 10 per cent; the Indonesian stockmarket has lost 30 per cent and the Rupiah by 15 per cent. Even Honk Kong, which is supposedly protected by its $70 billion in foreign exchange reserves, has been rattled by a 10 per cent fall in share prices while venerable Singapore-the safe haven of Asia - has seen a 8 per cent decline in shareprices and a 5 per cent fall in currency value.

    Foreign investors, spooked by fears of a depreciation in portfolio holdings due to potential currency losses, dumped their shares to get cash and then convert the local currency into US dollars before the crisis actually begins. However, the simultaneous action of a herd people selling shares and demanding foreign currency has allowed an expectation to be a self-fulfilling prophecy. Readers of this column will recall a warning sign flagged in "No' to convertibility" (Business India 28 July 1997) which argued that having $29 billion in foreign exchange reserves was a flimsy basis for talking about capital account convertibility when juxtaposed against power of fund managers and currency speculators to sway currencies.

    While some of the damage in Asia is deserved (Thailand apparently has a problem because banks and finance companies give bad loans to property developers), much of it may be undeserved. Malaysia is probably is in the undeserved category with its attempts to move up the value chain and attracting multinational money meeting with success. Yet, a perception of things going wrong led to the actual event of something going wrong and an erosion of over 50 per cent in stockmarket wealth is bound to have an effect on the real economy, not to mention the more lasting effects of a weakened currency.

    The Indian markets, now that we have been sufficiently "globalised", have been rattled by the evaporation of confidence in the Asian economies. While losses on the stockmarkets have been relatively limited to 10 per cent, the psychological damage to the Indian rupee has been done suggesting that, even if we had $100 billion in reserves, we should not opt for convertibility until and unless our "senior officials" understand the simple fact that what they say, when they say it, and how they say it matters more than the currency stashed in vaults. Body language is more important than the label on your clothes.

    While the Asian currencies were being bashed out of shape, the Indian authorities were talking about moving towards convertibility and trying to "talk down" the rupee - an act of sheer suicide in these turbulent times. In addition to statements attributed to officials of the Reserve Bank and the prime minister asking for a weaker rupee, the strike by Indian banks kept the foreign exchange markets closed for crucial days spending the Indian currency into a "no-delivery" and "not available" syndrome, adding to the negative perception being whipped up. All this misguided guided body language already has the experts talking of a dollar at Rs. 40 by year-end. Another few statements from "senior officials" on the overvalued Indian currency and even a Rs. 50 - level may be possible - maybe that will make these officials happy.

    Oh, well, what an expensive lesson this may turn out to be. The Tigers of Asia once profiled by one and all as the next continent of growth, have been pummelled into meek submission. Closer to home, the mandarins in India, misled into believing the power of $29 billion and our ability to withstand currency attacks, should stay locked in their meditation rooms for a few years trying to work out the meaning of life. Meanwhile, those 20-some thing year old foreign exchange traders in London and New York are walking around like modern day versions of victorious gladiators after a successful hunt, spitting out their favourite four-letter word - and I am not referring to "Asia".



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