Asian banks take steps to prevent 'tequila effect'<\/p>\n
HONG KONG (AFP): Asia central banks are likely to try to
\nstabilize regional currencies to prevent a "tequila effect" from
\nspreading following the Bank of Thailand's move to float the
\nbaht, analysts said.<\/p>\n
The "tequila effect" refers to the impact that resounded in
\nthe region from the Mexican peso crisis of early 1995.<\/p>\n
After resisting the temptation for months, the Bank of
\nThailand (BoT) finally bit the bullet Wednesday and caved into
\nspeculative pressure by introducing a "managed float" to replace
\nthe baht's peg to a basket of currencies.<\/p>\n
The currency immediately sank by almost 20 percent, with
\ndownward pressure on the peso and the ringgit forcing the central
\nbanks of the Philippines and Malaysia to intervene to defend
\ntheir currencies from attack.<\/p>\n
In the longer term, however, other countries could be forced
\nto take similar measures to remain competitive with Thailand.<\/p>\n
"The depreciation is not the most significant aspect of this
\nmove. The aim was not to boost exports but to give the BoT
\nfreedom in monetary policy," said Neil Saker, research director
\nat Socgen-Crosby Securities in Singapore.<\/p>\n
Saker described the baht's float as a "very bad move" and said
\nthat the next likely target for speculative attack was the
\nPhilippine peso.<\/p>\n
"I think the Philippines is clearly the most vulnerable," he
\nsaid, adding that the country's strong-currency policy was
\nundermined by political confusion and poor economic fundamentals
\nincluding a sizable current account deficit. "When speculators
\nfind that kind of situation, they're on the move."<\/p>\n
In a defensive move, the Central Bank of the Philippines
\nraised overnight rates to 20 percent on Wednesday while Bank
\nNegara Malaysia intervened in the foreign exchange market to
\nsupport the ringgit, dealers said.<\/p>\n
But Saker said the Malaysian unit, which is already floating,
\n"probably will survive the current crisis."<\/p>\n
Tony Nafti, regional economist at Credit Lyonnais Securities
\nAsia in Singapore, said the Bank of Thailand finally realized it
\ncould no longer resist the pressures of the market.<\/p>\n
"Even the Bank of Japan, with its considerable foreign
\nexchange reserves, cannot stand up to the market," he said. "Once
\nthe dust has settled, we are looking at 15 to 20 percent
\ndepreciation."<\/p>\n
But while making Thailand's exports cheaper, a competitive
\ndepreciation is by no means a miracle cure for a country faced
\nwith a sharp slowdown in economic growth following the collapse
\nof the local property market and subsequent problems in the
\nfinancial sector.<\/p>\n
In the short term, Thailand should be able to avoid a Mexican-
\nstyle crisis which saw a massive outflow of capital in late 1994
\nand early 1995.<\/p>\n
On Wednesday, the Bank of Thailand raised its discount rate
\nfrom 10.5 percent to 12.5 percent although the central bank is
\nexpected to use its new freedoms to relax monetary policy once
\nthe situation stabilizes.<\/p>\n
But that is not likely to prevent the emerging recession which
\nfollows a decade of spectacular growth.<\/p>\n
Saker reckons Thailand's gross national product (GNP) will
\ngrow by only one percent this year while Credit Lyonnais --
\nrecently reprimanded by the Bank of Thailand for forecasting a
\none percent contraction in economic activity -- is revising its
\nprojections in light of the new exchange-rate regime.<\/p>\n
Notwithstanding a pickup in exports, "it's going to be way
\nlower from the downward revision of 4.8 percent," Nafti said.<\/p>\n
Similar problems face other Asian economies in the longer term
\nfollowing Thailand's move. "They should be looking at the
\ncompetition aspect," he said.<\/p>",
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