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LONDON-Foreign investors in Southeast Asia are facing potential losses as a result of the currency devaluations that have been rolling through the region since July.
The widely held perception of the Asian "tiger" economies riding on an annual 8% to 10% GDP growth rate has been replaced by worries about bankruptcies, political instability and a backlash against Westerners, who are being blamed by some in the region for their woes.
Zurich, Switzerland-based electrical engineering group Asea Brown Boveri Ltd. is among the first major foreign investors in Asia to detail its losses from the currency crisis. In an Oct. 21 statement announcing its third-quarter results, ABB said it would take a charge of $850 million in the fourth quarter to speed up expansion in Asia to combat losses.
"The present currency weakness in the region and resulting economic problems have reduced customer spending and put increased price pressure on products imported from high-cost countries in Europe and North America," the ABB statement said. "At the same time, local manufacturing and exports from ABB's local production facilities in several Asian countries with depreciated currencies are becoming more competitive," it added.
An ABB spokesman in Zurich said that the company has hedged its currency exposure in Asia, though he did not give further details.
In all Asian countries, various infrastructure projects have been delayed, the most high-profile of which is the $4.6 billion Bakum hydroelectric project in Malaysia.
ABB is the operator of the project and its anticipated delay of one to two years is expected to cost $100 million, the company said.
Political risk insurers believe their business will boom in Southeast Asia as a result of the new risks.
"Some of these countries have been perceived as so good that many companies believed they did not have to insure. Now demand may well increase," said Louis Habib-Deloncle, president and chief executive officer of Paris-based Unistrat Assurances, a political risk insurer. "There is no sign that we will decrease our exposure," he adds.
"The crisis has certainly heightened awareness of the (political risk insurance) product in the region, we've never had such a response," said Kit Brownlees, chairman of Investment Insurance International, the London-based political risk division of Aon Group Inc., upon his return from a two-week visit to the region.
"Whenever we have these events, which are sudden, people want to buy insurance," said John Salinger, president of global trade and political risk at American International Group Inc.
Asia's currency crisis began to manifest itself last year in Thailand with a sharp fall in exports. Malaysia, Indonesia and the Philippines have also been badly affected by the crisis.
Most Asian currencies have been unofficially linked to the U.S. dollar. As the dollar strengthened against the Japanese yen, Asian exports became increasingly uncompetitive, explained David Husum, country risk analyst at London credit insurer Trade Indemnity P.L.C. The situation was compounded by an ongoing recession in Japan, which is the main export market for most of the Southeast Asian countries.
"These countries always had a trade surplus with Japan and an indirect surplus with the U.S. via Japan through exports of finished goods. But now demand was low," he added.
Badly regulated financial institutions, which were exposed to an overheated local real estate market, compounded the problems until the Thai baht was forced into an initial devaluation against the U.S. dollar in July. The baht has fallen 40% over the past four months, and currently it is fluctuating at the low level it reached in mid-October. The baht devaluation was followed by a 40% drop in the value of the Indonesian rupiah against the U.S. dollar and similar 20% to 30% falls in the Malaysian ringgit and Philippine peso.
The four countries have similar problems, said Bruce Gale, an analyst at Political & Economic Risk Consultants Ltd. in Singapore. "All of the countries have current account deficits, all have a huge amount of dollar-denominated corporate debt, a lot of which is unhedged," said Mr. Gale.
Unlike Latin America in the 1980s, where foreign debt problems were predominantly in the public sector, Southeast Asia's foreign debt is owed mainly by the private sector. Thai companies owe more than $60 billion, which is equivalent to 30% of GDP, says Mr. Husum.
"The primary effect of this will be on the export credit insurance area" because companies exporting to the region could face losses, he explained.
"Whenever there is a sudden or significant devaluation, some companies will fail, companies that import more than they export or companies that secure offshore loans and cannot service the debt," said Mr. Salinger. But it's far too early yet to estimate what kind of losses the insurers may expect, he said.
The longer-term effects of the crisis remain unclear, agreed Mr. Habib-Deloncle. "At the moment, it is mainly an economic rather than a political crisis. If (the countries) reduce their imports, then we as insurers may become more selective in the way we cover them."
ABB intends to counter its currency risk in the future by making its local markets in Southeast Asia as self-sufficient as possible. "We build up operations in a market so we can supply at market costs. When a country comes under financial pressure, this is the way to respond," said the ABB spokesman.
But regional political analysts advise corporations to take the opposite tack during time of currency turmoil.
"Whenever possible, keep in dollars. You need to have profits denominated in dollars at all times. And in broader terms, a company must get cast-iron guarantees from a government on how it exits and enters the country," said John Davitt, head of emerging markets research at London-based Institute for the Development of Economic Analysis Ltd., an independent consultant.
Water, gas and electric utility companies operating on long-term contracts from local governments are especially exposed to political and economic consequences of the currency crisis. Their revenues and earnings come in the form of a devalued local currency while capital investment is in dollars or other hard currency.
Two aspects of the risk, noted Mr. Brownlees, are that the utility maylose the ability to repatriate profits because of the crisis, and there could be a possibility that contracts are altered or canceled in government freeze tariffs even though some may have a tariff escalation clause. A tariff escalation clause defines the framework under which tariffs are adjusted and is usually linked to the rate of inflation.
The utilities "can be used as political footballs," noted Mr. Brownlees.
But France's export credit and political risk insurer Coface has foreseen such an eventuality in its coverage.
In a written reply to questions on the crisis, the company said that it asks operators of utilities to implement contingency plans in the case of tariff freezes by any host government. Coface then will provide insurance against such government action.
Insurers believe that eventually the currency crisis could have some beneficial effects, drawing their conclusion from the three major currency problems in the 1990s: the 1992 expulsion of Britain from the European Exchange Rate Mechanism, the 1994 Mexican devaluation crisis, and the current crisis in Asia.
"In Britain it was the best thing that could have happened to the economy," said Mr. Brownlees.
Coface noted that after the Mexican crisis, that country's economy eventually improved.
Unistraat's Mr. Habib-Deloncle said that prospects for the Southeast Asian region will improve when their currencies stabilize at a more realistic level.
Thailand, Malaysia, Indonesia and the Philippines have all introduced austerity budgets to deal with the crisis. Thailand has obtained a $17.2 billion emergency package from the International Monetary Fund, while the Indonesian government is negotiating for a similar package.
Indonesia has lifted restrictions on the shareholding of foreign companies, allowing them to hold 100% in local enterprises rather than 49% as before.
One of the fundamental questions on the currency crisis is that it was not really anticipated by anybody, said PERC's Mr. Gale.
Mr. Habib-Deloncle agreed, noting that six months ago local analysts as well as foreign investors were still bullish on the region's prospects.
Only Coface claims to have predicted the crisis and acted to avoid exposures to certain kinds of private sector importers and banks.
"The Thai crisis did not surprise us. A rigorous selection permitted us to verify which banks could survive an eventual devaluation and we continue to be prudent in this region," the company noted.
Other insurers knew that political problems could begin in the region after the coup one year ago in Cambodia, said Mr. Brownlees.
Coface was better prepared for the crisis because of its access to more than 30 sources of corporate information in Southeast Asia, the company said.
But other insurers, political and financial analysts as well as potential investors have not been so lucky in a region where information is hard to come by. Even supposedly objective data from analysts in financial institutions such as investments banks is selective.
"Analysts are very reluctant to write what they think in reports," said Mr. Gale. The publication of a pessimistic analysis of Malay-sia's economic prospects could be deemed a crime under Malaysia's strict anti-subversion law and fosters a climate of intimidation, he noted
This situation has affected the insurance market.
"The lack of financial information has had an effect. It makes underwriters' work more difficult. That's why the credit insurance market has been slow to take off (in Asia)," observed Mr. Brownlees.
The reactions of some governments to the crisis has not proved encouraging.
"These countries have a limited pluralism," said Mr. Davitt.
"The same people have been in power for 20 to 30 years. They are not flexible enough to adapt. Their reaction in a crisis is to clamp down on free speech and information flow," he said.
Consequently, there is a reluctance on all sides to predict the political consequences and their eventual effect on corporations and their insurers.