High interest rates prove IMF failure<\/p>\n
HONG KONG (Dow Jones): The grip of high interest rates in
\nSoutheast Asia is showing the failure of the International
\nMonetary Fund programs and will lead several nations to permit
\nhigher inflation, according to a Morgan Stanley & Co. analyst who
\nhas sharply reduced his 1998 expectations for regional currency
\nexchange rates.<\/p>\n
\"The crisis economies need lower real interest rates. The lack
\nof a framework for monetary policy (adjustment under the IMF
\nprograms) means there is no credible means of reducing nominal
\ninterest rates without exchange rates in these countries gapping
\ndown. For this reason, we consider it more likely that real rates
\nwill be reduced by means of an acceleration of inflation.<\/p>\n
Monetization of a larger fiscal deficit will deliver the
\nhigher inflation, in our view,\" said the report from Tim Condon,
\nan economist for Morgan Stanley in Hong Kong.<\/p>\n
The report, published Wednesday, offers a view that Southeast
\nAsian currency exchange rates will sharply fall through year end.<\/p>\n
It forecasts the dollar at 15,000 rupiah, 5 Malaysian ringgit,
\n47 Philippine pesos (PHP), 50 Thai baht and S$2 -- all downward
\nrevisions in the firm's forecasts and lower than current levels.<\/p>\n
The dollar is also seen rising to 1,700 won by the end of this
\nyear, although the prediction isn't a change from previous Morgan
\nStanley estimates.<\/p>\n
The firm's analysis emphasizes the lack of money supply growth
\naround the region as shown by rises in the M1 and M2 multipliers.<\/p>\n
Everyone is holding deposits, with consumers apparently
\nfearing deflation and investors sidelined, the report said.<\/p>\n
Deflation has been seen in two of the past three months in
\nSouth Korea, while inflation has dropped to about zero in
\nThailand, according to the report.<\/p>\n
\"A sharp drop in the velocity of money is terribly
\ndestabilizing to economic activity,\" the report said. \"The IMF
\nprograms have caused the drop in velocity.<\/p>\n
\"The IMF programs are failing, in our view, because they
\nunderestimate the time it will take for foregin capital to flow
\nback into the crisis economies,\" according to the report.<\/p>\n
Crushed<\/p>\n
\"Meanwhile, the stabilization of currencies in the IMF-
\nsupervised countries has crushed economic activity.\"<\/p>\n
Indonesia \"has shown the way\" by letting its inflation rates
\nrise, even as credit remains tight. It will probably become a
\nhigh-inflation economy, although not a hyper-inflationary
\nenvironment, according to Morgan Stanley.<\/p>\n
\"Higher inflation -- not hyperinflation -- need not be
\ncatastrophic. High inflation has been part of the re-
\ncapitalization process following financial crises in many
\nemerging markets. Asia has long been an inflation-resistant
\nregion, and we do not forecast any country moving into
\ndestabilizing high inflation,\" Condon's report said.<\/p>\n
The firm now sees next year's annual inflation rates at 25
\npercent for Indonesia, 9 percent for Malaysia, 7 percent for the
\nPhilippines, 10 percent for Thailand and 2 percent for Singapore.<\/p>\n
South Korea will record 10 percent inflation in 1999, the
\nfirm's report said.<\/p>\n
The higher inflation rates will put downward pressure on
\nnominal exchange rates and make it more difficult for corporate
\nborrowers to repay their external debt, increasing the need for
\nprivate external debt restructuring.<\/p>",
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