Indonesia's economic recovery wins plaudits

We asked readers last week to rate the quality of economic recovery in the countries most affected by the Asian financial crisis — Indonesia, Korea, Malaysia, the Philippines and Thailand.

Spookily, voters ranked the five countries in alphabetical order, with Indonesia rated as today’s most investable market while Thailand was rated worst. Korea was a close second and Malaysia and the Philippines were separated by just a handful of votes.

Thailand’s lowly ranking is revealing. It was at the epicentre of the crisis in July 1997, almost exactly 15 years ago, when the baht’s collapse created a panic that spread to the region’s other currency pegs. By the end of the year, the baht had halved in value. By 1999, non-performing loans (NPLs) ballooned to around 50% of gross assets, up from a pre-crisis level below 10%.

However, Thailand won praise from the IMF for its efforts in the aftermath and economic growth recovered relatively quickly, as revealed in a recent CLSA study. Comparing average growth rates for the five-year periods before and after the crisis, CLSA noted that Thailand’s gross domestic product (GDP) was just 1.4% lower during the period after 1997 — and that it had recovered to its pre-crisis level by 2001.

In Indonesia, the currency fell even faster than in Thailand, with the rupiah losing 75% of its value between August 1997 and the end of that year. And its banking crisis was also more dramatic. NPLs grew from almost nothing to 85% of banking assets by 1998. A third of the country’s banks disappeared and economic growth was 3.4% lower after the crisis than before.

Part of the problem in Indonesia was that it resisted the IMF’s reforms, casting its banks into an even worse situation. In the end, economic growth took two years longer to recover than in Thailand — an experience that should be instructive for the eurozone, according to CLSA.

“Indonesia relied on supplying liquidity and made matters worse by shutting banks and announcing a partial guarantee of small deposits in November 1997 (full payback had been assumed by savers). Money left the system and a blanket deposit guarantee was reactively announced in January 1998. But by this time confidence had been lost.”

Indonesia’s resurgence shows that even severe crises can be surmounted, though it clearly helps to have a large, youthful population; commodities aplenty; and a growing middle class.

Europe is not so lucky.