DAWN - Business; 26 January, 1998

Soros casts a covetous eye on Pakistan and India

By Dr Jassim Taqui

THE GENIUS money speculator, George Soros, wo has earned about $20 billions from money speculation is eyeing Pakistan and India after he successfully created the stock exchange crash in South- east Asia.

The Hungarian-born US citizen Soros started Quantum Fund in 1969. He broke the British pound, forcing UK out of European exchange rate mechanism in 1992, made $1 billion in the process. His fund is mostly run by Stanley Druckenmiler since 1989. Soros is widely acknowledged as the leading financier of the world today.

He is described as, " the man who moves the markets". Soros' Quantum Fund has the best performance record of any investment fund over the past quarter of a century. He has made a fortune in financial markets, which are inherently unstable and they do not work in the way orthodox economic theory claims.

According to him supply and demand are not independently given but are structured through people's perception of market possibilities, which influence what those possibilities actually are. This two-way influence Soros calls "reflexivity", a notion which has guided his own financial involvement and decisions.

Malaysian Prime Minister Mahathir Mohammad squarely blamed Soros for the stock exchange crash in South-East Asia, through his aggressive currency speculation. Over the last 25 years, the New York City-based tycoon has become one of the world richest men with a personal fortune estimated at $20 billion- by trading currencies that he believes that they are likely to rise or fall.

He started with the Thailand currency, baht, on the assumption that it was seriously overvalued. For two decades Thailand's exports were soaring and foreign investment pouring in by billions. Lately, however, Thailand has faced increased competition in Western markets from cheaper Chinese products. As a result, exports stalled-even as the Thai government and private sector continued to spend massive amounts of borrowed money on real estate development, huge power dams and other megaprojects.

Soros, betting that Thailand was on the verge of economic calamity and that dozen of large companies were at risk of bankruptcy, responding by selling the baht short - an investment tactic that tends to drive down prices.

Currency speculators

Soon currency speculators around the world joined in. It worked: after spending more than $ 20 billion of its foreign exchange reserves in a vain attempt to defend the currency, the Thai government gave up and allowed its currency to float. Since the beginning of 1997, the baht has surrendered 50 per cent of its value against the US dollar.

The financial crisis quickly flared across the region as the traders trained their sights on other Asian tigers-Malaysia, Indonesia, the Philippines, and South Korea. Within months, currency values dropped and stock prices declined, triggering a rash of bankruptcies among borrowers who can no longer afford to repay their foreign debts. On the average, the Asian tigers also lost about 50 per cent of the value of their currencies.

Soros is seen by the states of the region as a link in the great power game of manipulating to undercut the growing financial clout of the Asian tigers.

Mahathir is on record to have protested to the IMF and World Bank by saying, "I am saying that currency trading is unnecessary, unproductive and totally immoral. It should be stopped. It should be made illegal". However, nobody listened to Mahathir. Instead, the IMF and World Bank forced the states of the region to observe their conditionalities including Western-style economic reforms that would force governments to cut speeding, open their market fully for foreign investors and require full disclosure of financial dealings between domestic banks and corporations.

Pakistan and India have fears that the economic crisis in South-East Asia might affect them as well. Pakistan in particular is heavily dependent on foreign capital either to finance large current account deficits or pay for export earnings. That limits policy makers' flexibility and creates an inviting target for speculators. Moreover, the stock exchange crash is not yet over in Southeast Asia. It is slowly creeping towards China and Japan. If Beijing and Tokyo are forced to devalue their currencies, the fallout would be definitely felt in Pakistan and India.

Pakistan has already devalued the rupee by 8.7 percent last year. However, currency speculations continue to affect its value. So far, the government has resisted further devaluation in a bid to resist the currency speculator. But the step has no effect on the rupee, which continues to fall in the kerb market. Many speculate that the government would be ultimately forced to devalue the rupee by 6-8 percent despite strong denial. The very fact the rumours of devaluation continue, the speculators persist unhindered with their game.

One fallout of the stock exchange crash on Pakistan is the threat to Pakistan's exports especially in textile. The crisis is posing tremendous pressure on Pakistan's rupee's exchange rate.

The massive devaluation of the currencies of the South-East Asia is posing a problem for Pakistan in terms of availability of short-term loans on which Pakistan has relied increasingly in handling its economic crisis.

India might be also affected by Soros' currency speculation. India continues to face economic problems. Like Pakistan, it is a signatory to GATT and WTO. Therefore, its economy is linked with the globalisation process, being exploited by George Soros.

It is expected that the battered Indian industrial sector will further decline as a result of the crisis in South-East Asia.

Infrastructure problems

Infrastructure problems, especially electrical power shortfalls in important region, will hinder manufacturing growth, which declined sharply from 14 per cent in 1996 to 6 per cent in 1997 and is expected to fall further this year to under 5 per cent.

High interest rates and lock stock prices impedes the raising of new investment capital. Profit margins are compressed by overcapacity in many sectors. Currency speculations have already affected the Indian rupee.

The rupee has plunged against the dollar from Rs. 36 to almost Rs. 42 in a very short time. Like in Pakistan, the Indian rupee is losing ground against dollar rapidly in expectation of an official devaluation of the rupee. The caretaker government is speculated to take the hard decision of devaluation before the elections since many predict that the elections would produce another hung parliament in India.