Thailand Is Only the Tip of Asia’s Iceberg

[pdogg]

Thailand Is Only the Tip of Asia’s Iceberg

Rather than add my voice to the chorus pointing out how much damage ongoing protests are doing to Thailand’s economy, I’m tempted to skip ahead and write its obituary. Cause of death: suicide.

 

What else is there to say about the semi-permanent state of emergency and political gridlock in Bangkok? Sooner or later, foreign companies are going to start voting with their feet, as Kyoichi Tanada, president of Toyota Motor Corp.’s Thai unit, warned this week. Tourists fearing canceled flights and the odd bomb explosion are going to stop filling the beaches. Neighboring countries are going to look for other solutions to their logistical and infrastructure needs.

 

In their give-no-quarter battle for supremacy, Thai politicians aren’t just making Democrats and Republicans in Washington seem reasonable: They are also destroying the country’s potential.

 

Scarily, though, the region may have an even bigger problem to worry about. The circuslike dysfunction in Bangkok is unique. The weaknesses being exposed there are not. From Thailand to Indonesia to Malaysia -- even as far as India -- Asian nations are displaying an extremely worrying set of shared vulnerabilities.

 

Across the region, debt-fueled growth is wrecking household balance sheets. Large subsidies are draining government coffers. Asset bubbles in real estate and equities continue to swell. Current-account worries are eating away at currencies. The gap between rich and poor is widening. And once-frothy markets are dangerously exposed to Federal Reserve tapering and rising political risks.

 

I fear this combination of factors could be pushing the region toward another crash, perhaps in the very near future. This would probably be more of a mini-crisis than a 1997-like meltdown, as the risk appetites of investors veer away from iffy-looking emerging markets. Regardless, governments have no one but themselves to blame. They’ve utterly failed to use the heady growth of recent years to strengthen financial systems, wean their populations off unsustainable

handouts, improve infrastructure, or create safety nets to catch those bound to suffer most from slowing growth.

 

Thailand is merely a microcosm of what ails the region. Take Prime Minister Yingluck Shinawatra’s disastrous rice-subsidy scheme, which has blown a $4 billion (at least) hole in the nation’s fiscal position. Instead of enriching rural areas, it’s distorted commodity markets and caused a buildup of more than a year’s worth of rice for the rats to eat.

 

Meanwhile, a $61 billion infrastructure-improvement plan to increase Thailand’s attractiveness as a business hub remains on hold, as do water projects meant to raise living standards.

 

More than street protests, government incompetence and neglect are to blame. The same holds true in countries that look far more stable on the surface. In investment-darling Indonesia, President Susilo Bambang Yudhoyono has been missing in action for much of his second term. Rather than fix the country’s current-account problem, Yudhoyono has enabled a level of creeping economic nationalism that is turning off foreign investors.

 

Sure, it would be great if mining companies refined mineral ore in Indonesia before exporting it, creating local jobs and increasing revenues. But the way to encourage that is to provide incentives, not to ban exports or institute punishing taxes that drive business elsewhere. Similarly, government attempts to force Google Inc. and Yahoo! Inc. to build data-processing centers in Indonesia send an unintended but clear message to the world’s tech giants: Move to the Philippines instead.

 

Smugness imperils Malaysia, too. Instead of ending the country’s Malays-first affirmative-action scheme -- which impedes foreign investment and warps corporate governance -- Prime Minister Najib Razak has expanded the program. The waning popularity of his United Malays National Organization has slowed efforts to end budget-busting subsidies on electricity, gasoline and other politically sensitive goods.

 

Similar examples of populism trumping progress can be found in such places as Vietnam, Brunei and Myanmar. Even the most first-world of Southeast Asian economies -- Singapore -- has some worried. Case in point: a Jan. 13 Forbes article alleging that the city is headed for an “Iceland-style meltdown.”

 

The common denominator in all these countries is weak leadership, and it’s appearing at the worst possible moment.

 

The rapid growth Asia has enjoyed since the 2008 global crisis had more to do with Ben Bernanke than we like to admit. All that hot money pumped up gross domestic product, boosted asset prices and pushed yields lower to make government debt loads appear manageable.

 

The Fed chairman’s largesse made growth too easy. It bred hubris. Officials in Bangkok, Jakarta and Kuala Lumpur were too busy cutting ribbons, toasting flashy new skyscrapers, applauding splashing initial public offerings, and basking in headlines about Asia having decoupled from the West to do their jobs properly.

 

Thailand may offer the clearest example of how the Fed’s ultralow interest rates helped cover up deep-seated structural problems in emerging markets. But as the Bernanke bubble deflates, officials throughout Asia will regret ignoring the well-nigh suicidal course that they’re on.

http://www.bloomberg.com/news/2014-01-23/thailand-is-only-the-tip-of-asia-s-iceberg.html

[KenW]

Interesting and concerning.

 

As a numbskull on economics I fail to understand however, the links she is making between Bernanke's acts and Asian outcomes. I also cannot possibly see all the countries he mentions as turning to streets and guns as the spoilt Thai brats and government thugs have.

 

Indonesia elects a new President this year, so my guess is that no American or other investor knows what that will mean (but I bet they're doing their research on candidates & policies as I speak). Malaysians these decades don't tend to shoot each other the way Thais do, so the Malay-first dogma will prevail until it is voted out democratically, most likely. Which may not be many elections away. Vietnam may be borrowed & in debt to the hilt, but its government will not weaken. Leadership may be poor, but it is strong. While the Vietnamese don't shoot their citizens, only a very few criminals possess serious weapons, and people are too wise to take to the streets.

 

The article also completely bypasses the burgeoning middle classes in all these countries which will tend to keep all but Thailand more stable than the author is apparently willing to consider. In the south of Vietnam where I live, while the majority loathe the communists in power, they love the economic consequences. Change is not yearned simply for change's sake, as it appears in Thailand.

[pacman]

The clue that connects Ben Bernanke & Asian prosperity lay in the words "hot money". All that liquidity being pumped into the US economy is chasing a return & the beneficiaries of all that largesse, the big banks & hedge funds don't care where it comes from, they park it wherever someone is paying an interest rate better than they can get at home. Once tapering starts, the slow turning off of the taps in other words, that investment money will dry up & all those projects they are currently funding will wither & die. It's not as cut & dried as that but as I only have a rudimentary idea of the cause & effect, that's all the explanation I can offer.

 

By far the biggest worry in the region is Indonesia. Their new leader is widely expected to be the Mayor of Jakarta who is a strong nationalist who doesn't like the west, particularly Australia & he will be inheriting a slowing economy & will need some distractions to shift the population's attention away from the government's failings. That does not bode well for Australia, this guy may well prove to be our worst nightmare. If Marty Natalegawa, the very popular Foreign Minister of Indonesia is removed & replaced by an Islamic nationalist, the two countries will find themselves at loggerheads from day one. This has so much potential to escalate that it could get nasty very quickly.

 

Thailand will be very small beer compared to how this could play out. With US troops now permanently stationed in Darwin in anticipation of such an event, I think this is going to take a lot of diplomacy to placate.

[pdogg]

they park it wherever someone is paying an interest rate better than they can get at home.

 

That's what I'm doing.  Since the interest rate is higher in Thai banks than American banks, I have more money in Thai banks than I would if interest rates were the same.

 

So I imagine the big boys are doing the same thing.

 

Bernanke's monetary policy have driven USA interest rates to historically low levels so I guess that's the connection.  I'm not an economist but I believe capital flows to where it can earn the highest risk adjusted rate of return.

 

Cambodian banks have to pay higher interest rates than Thai banks since many investors are wary of Cambodia.  And Cambodian accounts in riel pay a higher rate than Cambodian accounts in dollars.  I guess the riel is considered risky  although presently it's more or less pegged to the dollar.  

[KenW]

That's helpful pacman, thanks.

 

Marty Natelagawa is a highly intelligent & articulate minister. I think part of what he is doing at the moment (apart from doing his job well and professionally) is creating a bit higher profile for himself domestically, in order to be seen as necessary in the FM role for whoever is incoming President. I wish him well. Australia, the region and the world need politicians like MN.

[azza33]

Be careful PD. Carry trades are only wise if the currency moves favorably.

You slight edge in thai rates could turn very ugly depending on how the current political situation plays out.

[Snick]

Big money tries to get the most return from its investment with the littlest amount of work.

 

USA Quantitive Easing (QE2) is printing money like crazy and giving it to banks at under 1% interest (sometimes 0%), they then take that money and invest in Emerging markets where they get 5% interest. Now that QE2 is slowing down, banks are taking the money out of emerging markets and putting it back to work in USA ( interest rates still low, but stock prices and real estate returns are up).

 

Places like Thailand were able to borrow money easily and cheaply and invest in silly things like Rice schemes that paid farmers double the market price ( and then stored the rice until it rotted ); or offering money to first time car buyers in bangkok (who after 1 year of no payments, can't afford the car). It also boosts 'normal' things like stock markets and real estate in Emerging economies.

 

Now all of that is going into reverse, it will soon cost Thailand a lot more to borrow money. Of course Thailand wants to borrow 100 Billion dollars for its infrastructure and water projects just as borrowing prices are going up.

 

This is what killed Thailand in 1997, they pegged the Baht at 25 to USD. Borrowed lots of money cheaply, but over time the cost of money went up and they started investing in stupider deals (empty malls, luxury apartments no one could afford...). Finally things broke and Thailand was unable to keep the baht pegged at 25, they floated it and it went to 50. All the money dried up, Thailand defaulted on loans, projects got cancelled etc...

 

Today is a little different in that the Baht is not pegged to the dollar (and has dropped 10% since QE2 started slowing), BUT the government IMHO is making even stupider investment choices than in 1990s (Rice, Water, 40% corruption skimming etc...)

 

"History does not repeat itself, but it does rhyme" - Mark Twain

[azza33]

Well put Snick, so tell me why you are long set? :)

[Snick]

I'm not Long, I just bought on a 10% dip

[azza33]

I'm not Long, I just bought on a 10% dip

 

..ahh.... a member of the kevlar glove brigade :)

[Snick]

we'll see what happens. I bought THD at 62.40, it went up to 67, 66 now but will probably hit 65 today.

I'm still in the Black, but should have got out at 67. I got greedy and was looking for 69 :)

[JaiDee]

hey Snick, you still have a few shares of FB?
 

   Holy shiiiiiite, those assholes somehow went from 18 to 56 in less than a year.....and all the while their usership is going DOWN as teenagers flock in droves to anywhere where their parents are NOT using!

 

    Seems like market manipulation to me, *something* or someone drove that stock up into the mid-50's and when it all comes crashing down, and it will, all those a-holes will be out by then.  Zuck sold enough shares this week at 56 to guarantee he will always be a billionaire;  lucky fucker, had a good idea at the right time is all.

 

 Any thoughts on the correction which started last week? Does the slide continue this week?  My 401K needs to know!

[Snick]

in at 19 !!!

 

We probably have a few more down weeks, but I'm feeling good for the year.

I'm looking at this as a buy opportunity.

[Snick]

hey Snick, you still have a few shares of FB?

 

 

You see FB this morning 

[azza33]

Very nice indeed Snick.

[Snick]

As a prudent financial investor I am considering re-investing my profits wisely and getting the new Sony A7R DSLR