1. 2007
alternative investments in the world’s fastest growing markets
Cinderella Revisited
Roman Scott
Managing Director
Calamander Group
Economic Spokesman
British Chamber of
Commerce Singapore
Issue I
15 July 2007
Calamander Capital
Economic Outlook, Q2 2007

2. 15 July 2007
Cinderella Revisited
J uly this year happened to be the tenth anniversary of the Asian economic crisis. Among other
things, it served to remind me of my choice ten years ago to abandon Tokyo’s depression
economics and move to brighter Singapore. Within weeks of my arriving in ASEAN the crisis
began, confirming my long track record of spectacularly bad timing in picking economic space. Signs
of this perverse talent began early, when I chose to start my first job in the London financial markets
a few weeks before October 1987, a dramatic market meltdown endearingly referred to as ‘Black
October’.
The anniversary passed mostly unnoticed in the Western world’s financial capitals, but generated a
lot of media attention in the ASEAN nations. For the ‘Asian crisis’ was really an ASEAN crisis,
although Hong Kong and Korea were also badly affected. What started as an isolated Thai problem
(leading to a sharp devaluation of the Baht in July 1997) rapidly spiraled into an almost complete
meltdown of the ASEAN economies as currency collapse forced a systemic default on the banking
system. As crises go, this one was unprecedented in the suddenness with which a benign market
view soured and in the misery caused both at a macro-economic level and in direct consequences
for individuals. It is easy to forget just how highly regarded the ’tiger economies’ of Asean had been
in the go-go years of the early to mid nineties. Indonesia, widely perceived today as the poorest
performer and the most volatile, was then ASEAN’s star large economy, and their ‘Berkley Mafia’
economic team widely respected. Indonesia served as the World Bank’s poster child for advice to
then struggling Indian subcontinent nations. The club’s champion city state, Singapore, went on to
spend the next half a decade off the radar screen for the world’s investors. Never before in
economic history has a decline and fall been so dramatic.
Despite the well recorded progress in economic recovery and recent strong performances of ASEAN
capital markets, the perception of ASEAN as a successful growth story and its relevance as an
investment focus has never recovered. So, it is no surprise that the majority of the ‘ten years after
the crisis’ commentary has focused on all the reasons why a ASEAN crisis could happen again, or may
be about to happen again, or the parallels that the writer can find with system weaknesses today
and those of the crisis years. The perception is ASEAN the vulnerable, ASEAN the volatile, or simply
ASEAN the irrelevant. It was no accident that ASEAN’s fall from grace coincided with the rise of the
China’s hyper competitive export manufacturing ‘factory to the world’ model, backed by an
artificially weak currency. ASEAN could not complain - China had adopted their own model, and
done it bigger, better, and more consistently, backed by the world’s largest pool of cheap labour
without those troublesome labour laws that had been on the rise in ASEAN. The inevitable shift of
attention and investment to China exacerbated the post crisis decline. Sleeping beauty had awoken,
hair black as stone, lips red as cherries, kissed by the prince of global capitalism. As recently as early
this year respected Morgan Stanley economist Andy Xie was dismissing ASEAN as ‘a failure’,
reflecting a commonly held view that its growth rates and attractiveness for investment fall below
the radar screen compared to China. The Cinderella that is ASEAN remains hidden in the kitchen.
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3. 15 July 2007
The only problem is that this is simply not true, and has not been so for a while. ASEAN remains
underbought, and China oversold. Just as the irrational exuberance of the ‘tiger years’ was founded
on a much weaker base than widely recognized at the time (crony capitalism, poor credit extension,
massive currency exposure etc.); the irrational pessimism that has persisted since simply does not
measure up to the economic data. Even as a perpetual bull on the region, I continue to find that
data has always surprised to the upside in most of the ASEAN economies, and has done so
consistently for over three years. As far back as 2002 the region had finally recovered back to 4% in
output growth (below which a developing nation’s economy, although growing, is not moving fast
enough to enable confidence to recover), and cleared 5% by 2003. By Q2 2004, the core measures
of economic health we look at were remarkably robust; given the crisis recovery process had been
interrupted by the SARS shock in 2003 and the oil price shock shortly after. Restructuring of the
banking systems was largely complete and credit extension was growing again, Indonesia had
settled, inflation was under control. Three of the core nations had undergone a major change in
political leadership without blinking, but the world appeared not to notice. In Indonesia, whose
health determines the regions’, Yudhoyono had replaced Megawati with a popular mandate despite
his lack of a major supporting party. Badawi replaced Mahathir in Malaysia and growth had
returned, and Singapore was back on full growth after being hard hit by SARS and a changing of the
guard from Goh to Lee. The result was uniformly positive. Within a year the data, in our view,
signaled a strong case for reinvestment into the region. Our ‘ASEAN as Cinderella’ summary at the
time, presented at a BCOC economic briefing in November 2005 (see picture one), indicated
improved base performance on key indicators of output growth (GDP), cost of money (benchmark
interest rates), and reserve strength. The three ‘under new management’ nations were posting
growth rates in excess of 5% whilst, in Singapore and Malaysia, maintaining easy money. Indonesia’s
10.78% rate appeared to be a temporary oil price inflationary spike following the removal of energy
subsidies. Both Vietnam and the Philippines, without any changes in leadership, were topping their
normal growth rates whilst maintaining relatively easy money. Only Thailand, with 3.3% output
growth and 3.5% money, was underperforming. Foreign exchange reserves in all nations were
adequate to cover short term debts and liquidity needs.
To be sure this was not China’s overheated and politically maintained 10% plus growth, but here was
a $700 billion dollar regional economy with 500 million people that came at a deep price discount.
At the time, according to one data source, the market capitalization of the whole of the Indonesian
stock market cost less than Google, Inc. And competition for assets and deals was a fraction of that
in China. A tour of major private equity firms who had set up in Asia at the time said it all – every
office turned out to be in Hong Kong, and all the deals being sourced were in China. A comparative
risk investment for ourselves-a mid size bank requiring some heavyweight restructuring- cost nearly
four times book value in China versus one and a half in Malaysia. ASEAN was cheap.
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4. 15 July 2007
True, for the ASEAN naysayers, all the well known risks did remain on the table. It was fair to worry
that the regions GDP growth had been export driven, mainly to the US, and domestic consumption
remained weak. Credit recovery in Asean banking systems, though better, remained on the slow
lane. Domestic property markets remained in the doldrums, including Singapore, although the first
signs of recovery were budding. Currencies were managed in relatively free regimes compared to
1997, but still ‘managed’, or in Malaysia’s case controlled. The era of global ultra low interest rates
appeared to be over as Fed policymakers shifted to tightening. Inflationary signs had appeared
worldwide, amplified by oil prices, with the risk that a significant slowdown in US output would hurt
ASEAN’s export dependent economies.
The worries proved either unfounded, or remain on the table today, whilst ASEAN’s growth has
continued unimpeded. Nearly two years on, we revisited the ‘Cinderella’ data summary in June this
year for the tenth anniversary of the crisis, again for a BCOC event (picture two). Again, the
numbers speak for themselves. Indonesia has surprised to the upside, back above 6% growth,
inflation on the decline and money approaching 9%. Vietnam, the ASEAN star, is now one of the
fastest growing economies in the world (8.2 percent) with a new leader, PM Hung, in power.
Malaysia has maintained growth whilst keeping money easy. Singapore is on a roll as its planned
economic revitalization takes hold, with the latest Q2 growth exceeding 8% -the fastest growth of all
developed economies in the world –and its property sector enters a new, multi year growth cycle.
Thailand again has provided the only concern and investment risk since 2005, with Thaksin replaced
by a military caretaker government and growth still below par. But signs are strong that the
economy would move fast when political normalcy returns, and Thailand could be the best
performer in the medium term. The Philippines, never our favourite Asean economy structurally,
Economic Outlook Q2, 2008 Page 4

5. 15 July 2007
has provided the biggest surprise to the upside in our view, posting 6.9% in the latest quarter and
strong reserves growth.
What happened? ASEAN, and indeed the global economy, has proven considerably more resilient
than the doubters thought. The end of over easy money still leaves rates in most systems
considerably lower in real terms than those businessmen had to live with ten to fifteen years ago.
China and Japan continue with very easy money policies. The $13 trillion US economy has withstood
an energy driven inflation shock because consumer incomes have risen much faster than energy
prices in last 30 years, and energy itself has fallen in its contribution to total output as the economy
has shifted to services and technology. US consumer spending, and thus Asian exports, have held
up, and will continue to do so. The ASEAN consumer economy has finally started to contribute to
domestic growth, and the pace of loan growth has improved. Mr. Xie could argue that growth
remains nowhere near ‘potential’ relative to China or even rising India, but ASEAN’s Cinderella status
with global investors has meant that the FDI that the region once enjoyed has never recovered and
now goes to China, to the tune of $50 billion a year. This supports China’s 10% plus growth rates,
but slows down ASEAN’s maximum potential by two percentage points or more. Given the low level
of investment support, the performance of the region has been very decent. Those who believed in
the region back in 2004/5 and invested in ASEAN have done very well.
Of course, despite our long founded bullishness on ASEAN, we accept that risks remain and that
much of the reform agenda remains incomplete. But another ‘crisis’ similar to 1997- a currency and
banking system collapse- is we believe highly improbable. Most of the economic risks to ASEAN,
including the inflationary signals, appear manageable. US debt loads remain one of our biggest
concerns, but the economic clearing mechanism would likely be the devaluation of the US dollar. A
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6. 15 July 2007
sudden loss of confidence in the dollar would indeed be a crisis given the extent of ASEAN holdings
of dollars. But if engineered on a ‘managed decline’ as seems to be happening, this will play out in
the relative strengthening of ASEAN currencies and perhaps some loss of export competitiveness,
not too bad an outcome. The risks that remain the least manageable, and have the most potential
to return ASEAN to a genuine crisis, are geopolitical and biological, not economic. The risk of a
major pandemic from bird flu or another Asian-centered virus remains real. A major terrorist strike
in one of the major ASEAN city centers, or problems in the Taiwan straits, hopefully remain in the
realms of worst case scenario planning models, but ones with nasty outcomes. So we continue to
believe that businessmen and investors should stay the course with the ASEAN economies and
continue to invest, as we do. Cinderella remains better value than Sleeping (but awoken) Beauty.
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Economic Outlook Q2, 2008 Page 6

7. 15 July 2007
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