Gareth Morgan, director of Gareth Morgan Investments
Controversial Malaysian Prime Minister Mahitmar Mohammed is at it again, raving about the market discipline that is bringing his style of economic management – by decree – to heel. The latest pariah his fertile imagination blames for South East Asian economic mess, is US hedge fund manager, George Soros – a 'monster' according to rational lightweight, Mahitmar.
The outbreak of currency declines gripping the economies of Thailand, Indonesia, Malaysia and the Philippines are nothing more than a direct result of years of economic distortion brought on by economic policy centralism and rejection of market capitalism. One only has to look at Mahatmir's latest folly – the multi-billion dollar information corridor which he's ploughing taxpayer funds and debt obligations into. To the extent his policy of picking winners, in fact picks losers his policy of investment by decree will of course end in tears. Bill Birch could tell him as much from his Think Big experiences.
The economies of South East Asia are in the proverbial simply because they try to defy market forces. In their case it's been a policy of pegging their currencies to the US dollar which over the years of its decline, implied low interest rate policies in order to maintain that parity. On the back of this, investors within these economies borrowed beyond limits that any 'normal' market interest rate would spell imprudence. This easy-money policy, coupled with a raft of government incentives, led to asset price inflation and over-investment in property and building activity – activity which several New Zealand engineering companies have prospered from constructing.
But the effective controls on borrowing costs just let it all run too far – anyone who's visited these economies has seen the evidence – new buildings as far as the eye can see but a decided lack of full tenancies. It may be a fact that developing countries will have relatively heavy investment in infrastructure and building, but any proper economic policy would allow market disciplines to temper this activity to the point where sustainable earning rates of return are preserved. Not so in much of Asia – build, build, build and worry about the tenants later.
This misallocation of resources has been manifest in the balance of payments outcomes for several of these economies. The fruits from their high investment rates have not included sufficient earnings from world trade to match their appetite for world goods. Global capital markets have had enough now and want to adjust the currencies lower. This process will be painful – it inevitably means that the cost of borrowing which South East Asian banks have been making in order to on-lend to their property sector – has leapt overnight, thanks to the local currency collapses. Simultaneously the rise in local interest rates necessary to stabilise the extent of the currency drop, has undermined confidence in local property markets and values are falling. All at once, major economic adjustment is unleashed. The property punters can't repay the banks, the banks can't repay their offshore funders, the financial sector is plunged into darkness, and mad Mahitmar's Think Bigs look doomed too. But who's the villain – world capital markets because they see insufficient return on the capital they've invested, or the local dictator who decreed how economic development should be undertaken ?
In New Zealand, Treasurer Peters claims, "They have got all the things they want, including a government surplus. I have to ask, what now ? Are we expected to kick-start the economy by ourselves?".
Like the squawking of Mahitmar, these are the words of a policymaker with low understanding of what makes capital markets tick. If the general expectation is for policies of irrational interventions such as a burgeoning state sector, compulsory superannuation imposts which see politicians deciding where investment monies should flow, xenophobic attitudes to foreign investment and migration, and a halt to the economic efficiency drive (and accompanying tax cuts) – why would the global capital market back such a donkey. Wake up Winston – "snap out of it".