Viewpoint: Follow the buzz
International Herald Tribune
SEPTEMBER 25, 2006
William Pesek

You know the world is a bit upside down when investors "should be encouraged" by tanks in the streets of Bangkok. That's what Merrill Lynch strategists in Asia had to say about Thailand's latest coup.

The word "latest" is used because Thailand has seen some 18 coups in the past 60 years, the last one in February 1991. "History has shown that the Thai equity market rebounds sharply after periods of crisis, including previous coups," HSBC Holdings analysts wrote on Sept. 20.

The real question, though, is: What does it mean for Thailand's neighbors when soldiers take over one of the Asia-Pacific region's larger economies? Nobody can miss the irony of Thailand's coup coming the same week as the International Monetary Fund's first meeting in Asia since the 1997 financial crisis; a meltdown in a major hedge fund, Amaranth Advisors; and calls for Asian governments to let currencies rise. Few will have forgotten that the crisis nine years ago began in Thailand.

A 1997-like feeling is again in the air. Beyond Asia, investors have been observing sell-offs in the Brazilian real, Mexican peso, South African rand and Turkish lira. There's more than just a whiff of risk aversion in markets.

The good news is that Asia is a far healthier place than it was in the 1990s, when bubbles began bursting around the region. Banks are stable, foreign-currency debt has been sharply reduced, transparency has improved and stockpiles of reserves have been amassed to protect economies.

The overnight removal of the Thai prime minister, Thaksin Shinawatra, on Sept. 19 was viewed as an isolated event, said Robert Sinche, head of global currency strategy at Bank of America in New York.

Risks of contagion have been reduced. The trillions of dollars of currency reserves sitting in Asian central banks could be deployed to cool things down. Investors also have a far more sophisticated view of Asian markets now than in 1997. Few today would compare the Indonesian situation with the South Korean the way they did back then.

Nor are markets thought to be overvalued the way they were before the Asian crisis.

"We wouldn't recommend investors sell," said Adithep Vanabriksha, a fund manager at Aberdeen Asset Management in Bangkok. "Valuations are still quite cheap."

Now for the bad news: Asia's problem isn't economics or markets, but politics. When you consider the biggest surprises in Asian markets in recent years, most came from politics, not gross domestic product or inflation. The Thai coup is a reminder that investors should expect more of the same in the months ahead.

Standard & Poor's said that events in Thailand could prompt a cut in its credit rating, and it put Thai debt on "watch negative," as did Fitch Ratings. Moody's Investors Service said the situation should be viewed as more political than economic. Is it really a comfort that this is about politics, not economics?

Take the Philippines, where lawmakers are still trying to remove President Gloria Arroyo from office. Bill Clinton's Teflon coating looks almost sticky next to Arroyo's. Neither vote-rigging allegations nor claims of corruption within her family have brought Arroyo down. For many investors, though, political shenanigans make the Philippines a third- rail market.

Investors in Malaysia have been spooked by a war of words between Prime Minister Abdullah Ahmad Badawi and his predecessor, Mahathir Mohamad. Mahathir is angry that Abdullah scrapped some of the megaprojects that the former statesman sees as vital to Malaysian development. Markets are caught in the crossfire.

Tensions between Taiwan and China are another wildcard. So are recent rallies to remove President Chen Shui-bian of Taiwan amid allegations of corruption against him and his family. North Korea is also a constant cause for concern.

And then there are examples of political hiccups in one economy spreading to another. In Thailand, criticism mounted against Thaksin after his family's sale in January of its 49.6 percent stake in Shin, a holding company, to a group of investors led by Temasek Holdings, a state-owned Singaporean firm, for a tax-free $1.9 billion. The deal sparked protests and a boycott of Shin products.

Only time will tell if events in Thailand complicate Temasek's future dealings in one of the most promising Asian economies, which has an unemployment rate of 1.1 percent, among the lowest in the world. It's a reminder, though, of how political events create havoc not only for economic growth and interest rates, but also for big business deals.

The risk is less about financial contagion in Asia than a less tangible political funk that hovers over markets and discourages investors. Reading an economy is hard enough; having one's finger on the pulse of every political zig and zag a world away is an entirely different order.

Such a standoff would be less spectacular than markets dropping 30 percent here and 20 percent there as hedge funds blow up. Yet geopolitics are a big risk to a region that is still figuring out how to compete with a booming China, which itself may be subject to political upheaval one day.

Voters and military leaders may have valid reasons to want to oust elected leaders. Doing so undemocratically can set economies back even more than the questionable acts of politicians. It unnerves the same international investors that companies and governments are trying to impress.

As investors look to Asia to harness its rapid growth, political events are becoming a bigger risk. It could help to pay more attention to the buzz on Asia's streets than to statistics.

Copyright © 2006 the International Herald Tribune