Friday 10 Jul 1998


Currency turmoil spreads beyond Asia

by Martin Khor, Director, Third World Network


When Malaysian leaders, especially the Prime Minister, raised concerns about the damage and chaos caused by currency speculators, leaders of developed countries and international financial institutions as well as "analysts" responded by denying that the Asian crisis was caused by speculation and focused instead on the country's internal weaknesses. Recently, however, many

countries beyond the originally affected East Asian countries have also been subjected to speculative attacks. They include Russia, South Africa, Chile, Japan, even Australia. This has raised anxiety, even among the Western establishment, that the world is facing "unprecedented financial instability". MARTIN KHOR reports. 


Turmoil in international currency markets is on the verge of spreading beyond East Asia and may soon threaten economic stability in several countries.

In the past few weeks, the currencies of Russia, South Africa, Pakistan, Chile and some other countries have come under pressure. Some of these currencies are being defended by government intervention. But the states have limited resources and further speculative attacks could lead to a "free fall" in these currencies, similar to what happened in Thailand, South Korea, Indonesia and Malaysia. 

These recent develoments emphasise the turbulence being generated by unregulated global money markets. This has caused many governments to fear that they may suffer a similar fate as the affected East Asian countries, where the efforts to develop their economies have suddenly been offset by currency depreciation, capital outflows, heavier external debt repayments and deepening recession. 

Russia could be the flash-point for the next major financial crisis. Last Monday its finance minister Mikhail Zadornov warned the government could be forced to devalue the rouble unless tax collection improved in a few months. 

The government is requesting the International Monetary Fund for a huge loan of US$10-15 billion to boost its foreign reserves, which presently stand at about US$15 billion, making it vulnerable to speculative attacks on its currency. 

The stock market has plunged 60 percent on average since the start of the year. Interest rates have shot up to defend the rouble, with the central bank's refinancing rate jumping from 60 percent to 80 percent last week. 

The rouble was on the verge of a collapse at the end of May when a huge wave of speculative attacks forced the government to raise interest rates to 150 percent. A quick round of vocal support from the US and other developed countries helped to reduce the pressures, but since then the rouble has remained vulnerable. 

The South African rand has been the next currency coming under recent attack. On 26 June, it fell by over 5 percent from 5.62 to 5.92 to the US dollar after intense speculative selling. In early January the rate had been about 5 to the dollar. 

According to news reports the government had only US$2 to 6 billion of reserves, after intervention to prop up the rand. This has left the currency defenceless against speculators. 

The pro-establishment Financial Times has come out attacking speculators for derailing the rand. Its editorial of 29 June stated: "Once again, the currency speculators are on the rampage.  

This time the victim is South Africa. The country was left vulnerable by the Asian crisis, as both an emerging market and a commodity producer... "An earlier defence of the rand at the end of May has left the Reserve Bank's reserves seriously depleted...A serious rand depreciation risks damaging South Africa's hard-won international reputation for economic management. And there is little to suggest the rand is overvalued." 

The Financial Times' Lex Column (on 27 June) was evev more critical: "The mugging of the rand is a classic act of bullying; the victim's main sin is its weakness. In South Africa's case, $5 billion of cash foreign exchange reserves is measly firepower when the world's speculators have smelled blood. 

"With unemployment running at 30-40 percent, sustained high interest rates are not a realistic defence either. It is this dilemma that is being so ruthlessly exploited...Whatever the causes, the upshot is bad news for South Africa." 

Also on 26 June, Pakistan devalued its currency by 4.2 percent. The country has been coming under greater stress after economic sanctions were imposed by the United States following its nuclear tests in May. 

The pressures worsened with the weakening of the Japanese yen and the effects of the East Asian crisis. 

Pakistan has US$32 billion of external debt, and only US$1.3 billion in external reserves, according to an Asian Wall Street report (8 June). Although the Central Bank governor has vowed to resist default on the debt, the situation is obviously precarious, especially since sanctions are estimated to reduce aid and loans by US$1.5 billion for the year starting July 1. 

In the case of Chile, the government has spent about US$950 million of its foreign reserves in June to fend off speculation against its currency. The country has been affected by Asia's crisis as a third of its exports are to the region. 

According to an IPS report of 29 June, the Chilean peso was at the rate of 430 to the US dollar for most of 1997 but began falling in November. The Central Bank intervened and also raised interest rate ans was able to maintain the peso at the 450 level until mid- June whn the yen fell. On 26 June it had fallen to 470.  

The developing countries are not the only ones falling under the sway of currency volatility. There is, of course Japan, whose yen has been falling significantly. 

A few months ago, the Japanese government reportedly used up US$17 billion of the country's enormous reserves to defend the yen, but to no effect. The yen continued to slide until the joint US-Japan intervention a few weeks ago. Since then it has weakened again, then recovered a little, and the future trend is hard to predict. 

The Australian dollar has come under speculative attack. In the first week of June, the Reserve Bank had to intervene strongly in the wake of intense selling of the currency by a US investment house, according to news agency reports. 

At the time, a senior analyst at Australia and New Zealand Group Ltd, David de Garis, was quoted by Reuters as saying: "It's an Armageddon scenario. The Reserve Bank may have to hike rates to stop the Australian dollar becoming a casualty like the won or ringgit." 

On 26 June, the Australian dollar was worth 60.65 US cents, more than 20 percent below the level a year ago. With external debt in March of 225 billion Australian dollars in March, the country has to spend more in local currency to service its loans. 

Given that so many countries are facing problems relating to currency volatility, the concerns voiced about the damaging role of financial speculation have a sound basis. 

For example, the chief economist of the Central Bank of the hilippines, Diwa Gunigundo, has blamed speculators for the Asian region's currency problem. 

"Whilst not discounting the role of structural weaknesses in the economies affceted by the currency trouble, there was undoubtedly some force that triggered off the concerted attack on the regional currencies," he said in a statement in early June. 

"The pernicious effects of speculation cannot be discounted," he added. "Even in the absence of any weaknening in the fundamentals, players can abandon the local currency in droves." 

A Financial Times report (29 June) quoted a currency strategist at J.P. Morgan in London, Avinash Persaud as saying that "This is as big a currency crisis as we have seen in the past 10 years...After the losses in Asia, investors' appetite for risk has sunk to an all-time low. Because this is being driven by excternal factors, raising interest rates and intervening is unlikely to help, but could even hurt by damaging a country's economic prospects." 

The same report explained the increased speculative activities on developing countries' currencies on the shift by hedge funds to focus on emerging markets, because of concern that the US and Japan might again intervene to protect the yen and thus they could lose money if they bet against the yen. 

Even US Treasury Secretary, Robert Rubin, who is a strong advocate for letting financial markets operate freely, has voiced concern over the recent spate of financial turbulence. 

In a speech in early June to executives of major corporations who serve on the President's Export Council, Rubin said the crucial job now was to stabilize conditions in other countries that have seen their markets swoon as investors have grown concerned about Asian-style meltdowns happening elsewhere. 

He said problems in Russia and South Africa and market turbulence in other parts of the world in recent weeks were attributable in part to fears the crisis could be spreading, according to an AP report of 3 June. 

"I think it would be fair to say that the situation facing the world today with respect to financial stability is unprecedented," Rubin said. 

According to the same report, Standard & Poor's DRI, a major U.S. economic consulting firm, said that a major concern was not only that the crisis would spread beyond Russia to Eastern Europe and Latin America, but that investor nervousness could ignite a second round of instability in Asia, including Japan, which is currently mired in a recession. 

"We think there is a 20 percent chance that we will get a major second round of Asian turmoil," said David Wyss, chief financial economist at DRI. He said such a development could be severe enough to pull the United States and the rest of the industrialized world into a global recession.