Pakbase

The great stock market meltdown by Dr. Manzur Ejaz

With an amusing exception of Istanbul, from Manila, Philippines, to
Caracas, Venzvala, stock markets tumbled from 2% to 10% in an
internationally connected financial system of the world. The epidemic of
sick currencies taken a heavy tool on the region and the rest of the
world. The European and North American investors are pulling out fast
from the Asian markets and taking refuge, either in U.S. bonds or the
emerging markets in the South America. East Asian economies are perceived
to be built on a shaky basis, dangerous for foreign investments. Such an
environment will have an extremely adverse effect on Pakistan's economy
which is in dire need of foreign investment. Instead, for inconsequential
help from the IMF, the pressure to restructure the economy will increase.
        The East Asian miracle, started losing its shine when Thailand's
currency started losing its value. The efforts to support the currency
proved counter productive and bhat (Thailand currency) was overrun by
international currency dealers. A similar scenario was replayed in almost
all of the countries in the region. Explaining this situation Mr. Chiang
Yao Chye, head of Asia Pacific research at CIBC in Singapore said that
"There is an argument to be made that if you have a 40 percent decline in
the baht (Thai currency), then it makes sense that other regional
currencies do have to be weaker," And when such conditions are created "
currencies tumble over each other downwards." he added
        Consequently, between July and October this year, Malaysia's
ringgit has fallen by 24.88%, Indonesian rupiah by 32.09% and Philippine
peso by 19.42%. Mighty Hong Kong dollar, that stood tall for some time,
lost about 20% of its value in last few days. Ironically, every country
tried to defend its currency but failed. Further, in the process of
defending the currencies, the countries' economies got battered from
allover. Chinese government that took over Hong Kong from the British a
few months back, is trying to do everything for face saving. Sitting on
huge foreign currency reserves mountain, it has captured the slide for
the time being but economic fundamentals will determine the long-term
future.
        The lashing of East Asian currencies' devaluation and (hence)
fears of rising inflation can and will cut into the profits of the
foreign investors who have been the main force behind the enviable growth
of the region (Dow Jon Industrial average (the main gauge for U.S.
stocks) has shed over 350 points or about 5% in two days). Further, to
check the inflation and firm up the currencies, every country has been
raising the interest rates. These factors have scared and forced the
foreign investors to flee, putting the stock markets on a tailspin. The
economists and other financial analysts argue that the Asian markets'
doldrums have resulted from fundamental weakness of the economies. In
that, they point out the following factors:
        -Most of the economies have unsound and week financial
institutions. The banks and other financial companies have been financing
run-away and unsustainable real estate market. The real estate bubble
created overnight millionaire and billionaire and go-go culture of
consumerism. However, when the real estate bubble burst, the financial
institution were left with huge losses.
        -To satisfy the rising needs of the consumers, the imports
increased faster than the exports widening the widening the trade deficit
gap. As the trade deficit increased, the value of the local currencies
declined. But, instead of correcting the primary causes of weakness, the
countries tried to protect the currencies. This strategy miserably
failed.
        -Most of the East Asian countries have been carrying huge budget
deficits also. While the economies were expanding, the gap between
expenditures and revenue was ignored but with changed circumstances, all
countries have been forced to institute austerity programs. This, in
turn, may cause political instability. It is already visible in Thailand.
        To stabilize e the chaotic Asian markets IMF and other rich
countries have pumped huge amounts into these countries. Only Thailand
got $17 billion from IMF, Japan and Burundi. Similarly, Philippine and
Malaysia were aided by international agencies and other prosperous
countries. The industrialized world has a high stake in these countries
because a large portion of the profits of their multi-national companies
(and their economies) depend upon the healthy growth of these economies
as consumer markets and as producers of cheaper goods that helps the rich
countries to keep a lid on the inflationary pressures. A heavy sell off
of technology companies on the U.S. markets reflects this reality.
        Therefore, in the long run, the industrialized governments will
make every effort to prop up the badgered East Asian economies.
Furthermore, capital accumulation in the west is at its highest levels in
a long time. It cannot fetch profits beyond a certain limit if it remains
in the confines of the industrialized world: it will be looking outward
for higher returns. Unfortunately, there are not many places where this
venture capital can go. Therefore, sooner or latter, a large portion of
this capital will come back to East Asia. Nevertheless, in the short run,
the investors are looking somewhere else for their profits. Can Pakistan
attract the capital that is fleeing East Asia. Probably, not.
        When the countries (East Asian) with much broader production
base, many times per capita incomes and excellent social indicators
cannot retain this venture capital, how will Pakistan draw their
attention. For now, South American markets are considered to be in much
healthier shape than their Asian counterparts. Analyzing this trend Mr.
Fernandez of the Emerging Markets said that " we go with the
fundamentals when we select a country. We start with a top-down approach
before we look at individual assets and any time a country has a
significantly overvalued currency -- any time their current account
deficit is too far out of whack -- we just walk away. There is always
another country we can look at." Again, it is evident that Pakistan is
not that ountry.
        The factors that brought down the East Asian currency/stock
markets are much too familiar to Pakistanis who have been living through
this hell for more than a decade. Not only the trade deficit is expanding
sharply, enforcing devaluation and triggering inflation, but also the
budget deficit remains out of control, the government's tall claims
notwithstanding. In addition, to a never ending political instability and
sectarian/ethnic violence, Pakistan has a serious credibility problem
with the international agencies and investors.
        According to very credible sources, almost all the members of the
Board of Directors of the IMF, in its latest meeting, had serious
reservation with regard to granting ESAF to Pakistan. It was learnt that
the IMF directors accused Pakistani government of fudging the numbers,
lying and acting like a rogue government. Therefore, they will not be
encouraging foreign investors to go to Pakistan, despite the fact they,
for the time being, grudgingly approved EASAF program for the country.
Instead, they will tighten the rope around Pakistan which will be another
negative indicator for the foreign investors. Therefore, whether foreign
investors flee from East Asia or not, Pakistan will not benefit from it.
On the contrary, it will face more difficult problems in the aftermath
of the great meltdown of 1997.