Pressure of contagion likely has less bite<\/p>\n
By James T. Areddy<\/p>\n
SINGAPORE (Dow Jones): Southeast Asian financial markets
\nappear to have started 2000 better insulated from regional
\ncontagion than at any time since the 1997-1998 crisis, which
\nanalysts attribute to real financial system improvements made in
\nthe past two years.<\/p>\n
There has already been a lot of political tumult this year in
\nSoutheast Asia to test the theory: Coup rumors and renewed
\nrioting in Indonesia, a squashing of opposition figures by the
\ngovernment in Malaysia and turmoil in the Philippine
\nadministration.<\/p>\n
All have had some impact on domestic financial markets, but
\nnone of these events appears to have made more than a few-days'
\nripple elsewhere. It's a change from 1997 and 1998 when similar
\nagitation fueled forceful selling in financial markets across
\nAsia, leaving investors in one Asian market duty bound to
\nunderstand the details of what was happening elsewhere.<\/p>\n
The key difference now, according to analysts, is that
\nSoutheast Asian economies are stronger and more able to withstand
\npressures of contagion.<\/p>\n
\"The policy makers have learned their lessons that the best
\nway to avoid volatility is to get your (economic) fundamentals
\nright,\" according to Neil Saker, a regional economist at SG
\nSecurities Research Ltd. \"Asia's growth cycle is so strong, there
\nwill be a high degree of resilience,\" he said.<\/p>\n
The so-called contagion that began in 1997 in Asia, and then
\nspread to other emerging markets, was widely cited as proof of
\nincreased international market integration. Some called it the
\nflip-side, or downside, of \"globalization.\"<\/p>\n
Chaos in Indonesia in 1998, for example, was felt in markets
\nworldwide, as investors calculated the disparate risks of a
\npossible cutoff in oil supplies or loan losses for international
\nbanks.<\/p>\n
That this could happen at all was one of the main lessons
\nabout how economies work that emerged in the Asian financial
\ncrisis, according to the International Monetary Fund (IMF). The
\nWashington-based Fund, rattled by the forced rescue of several
\nemerging market economies, now offers contagion insurance -- in
\nthe form of contingency credit lines -- to healthy economies that
\nmight be threatened by the problems of riskier ones.<\/p>\n
But as the economies recover in Asia, the idea of linking the
\npolitical and economic developments between neighboring countries
\nlooks somewhat less advisable to some.<\/p>\n
\"Contagion is an intellectually lazy theory,\" according to
\nAnand Aithal, regional strategist at Goldman Sachs & Co. in
\nSingapore. \"We don't believe in contagion anymore.\"<\/p>\n
Most analysts aren't going that far, noting, for example, that
\nSingapore stocks were hit hard last week when new sectarian
\nviolence flared across Indonesia, including places that attract
\nlots of Singapore tourists and investment.<\/p>\n
But analysts also agree that since Singapore's market was
\nalready worried about higher U.S. interest rates, it is difficult
\nto isolate one bearish factor as being more influential in the
\nselling. Plus, they note that Indonesia's problems didn't much
\nfactor into analysts views about other Asian stock markets.<\/p>\n
Southeast Asian currencies are more intertwined than stocks
\nbecause of the arbitrage opportunities that still exist between
\nthem, according to analysts. But even here, analysts said traders
\nhave become more discriminating -- some use the word
\nsophisticated -- in the past two years about what constitutes a
\nregional call to buy or sell.<\/p>\n
\"In the crisis, one problem fed off another,\" Aithal said. But
\nthe chain reaction is no longer happening so clearly, he added.<\/p>\n
\"I don't think these linkages are as great as they are
\ncommonly held (in the markets) to be,\" according to Adrian
\nFoster, an economist at Nomura International in Singapore, also
\ndismissing the contagion view.<\/p>\n
\"When (Asian performance) was a 'miracle,' we got slapped in
\nthe face\" when any blemish appeared, said Foster. \"All those
\nthings were surprising. All these things aren't surprising,\" he
\nsaid, noting that investors now better understand the forces at
\nplay in the region's markets.<\/p>\n
He said that international investors now understand that one
\ncountry can even benefit from another's trouble. Turmoil on the
\nIndonesian resort islands of Lombok and Bintan last week probably
\nmeans more travelers will consider Thailand's Phuket as a
\nvacation spot, Foster said.<\/p>\n
SG's Saker said he remains a big believer in the forces of
\ncontagion. However, amid economic recovery and government-led
\nrestructuring, he describes it as a \"virtuous circle.\"<\/p>\n
Problems exposed by the regional financial crisis are being
\ncorrected with a vigor that is offsetting the impact of fresh
\nturmoil, so contagion appears weaker and less sinister, according
\nto Foster. Southeast Asian countries are rebounding at different
\nspeeds and investors need to give a second thought to whether a
\nproblem in one country should impact the upward spin of another's
\neconomy, he said.<\/p>\n
Analysts said the change in sentiment amounts to more than
\nfund managers doing their homework about what makes individual
\nAsian economies tick. Nor is it only that there is less \"hot\"
\nmoney sloshing around, that investors ignore politics when
\neconomies improve or that today's political problems are minor
\ncompared with those of two years ago, according to analysts.<\/p>\n
Fundamental improvements have been made since the financial
\ncrisis struck in 1997, analysts say. The market meltdown forced
\ngovernments to tackle problems such as current account deficits,
\noutmoded currency regimes, bad bank lending practices, poor
\ncorporate governance, corruption and a whole host of Achilles
\nheels that were exposed by, and caused, political and social
\nturmoil.<\/p>\n
\"In 1997, the markets were assuming that there was nothing an
\nindividual country could do to avoid (what seemed like)
\nArmageddon,\" said Aithal. \"I think you've got to give credit
\nwhere credit is due. Indonesia's problems are in a different
\nleague from what you've seen in Malaysia and the Philippines,\" he
\nsaid.<\/p>\n
And financial markets are clearly reflecting differences in
\noutlook around Southeast Asia. Kuala Lumpur stocks are up about
\n17 percent this year, while Jakarta's key index has fallen about
\n2.0 percent, Manila is down about 4.0 percent, Bangkok is about
\nflat and the Singapore market is off about 8.0 percent.<\/p>\n
Meanwhile, the IMF has continued playing up the threat of
\ncontagion. \"Whether a county is large or small, any crisis can
\nbecome systemic through contagion on globalized markets,\"
\noutgoing IMF Managing Director Michel Camdessus said in a speech
\nlast month.<\/p>\n
Hong Kong's Political and Economic Risk Consultancy Ltd.
\nthinks it knows why. \"The fact that the upturn has occurred
\nalmost simultaneously in all economies in the region is a good
\nindication that external forces are still at work,\" Perc said in
\na report distributed last week. \"If these forces were to change
\nsuddenly (such as a U.S. recession), Asia would not be able to
\nescape the fallout.\"<\/p>",
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