ASEAN seeks alarm system to preempt crises

ASEAN seeks alarm system to preempt crises

BANGKOK (Dow Jones): Southeast Asian countries, stung by their
biggest economic crisis in decades, are developing an alarm
system that they say could allow them to defuse future crises
before they erupt.

The system would depend on 'a checklist of triggers of
financial and economic crises,' according to a copy of draft
proposal obtained by Dow Jones.

The triggers would include "currency overvaluation, lending
booms, (and) increases in short-term foreign-currency-denominated
borrowing," the proposal says.

The proposal, presented to Southeast Asian finance ministers
at a meeting in Jakarta last month, asserts that the economic
crisis is the result partly of 'poor banking supervision and lack
of transparency' in the financial system. The ministers approved
the proposal in principle and asked the Asian Development Bank to
develop the ASEAN alarm system.

"Current surveillance mechanisms do not adequately cover
structural factors in the real and financial sectors, the root of
the East Asian crisis," the proposal says. "A regional economic
monitoring mechanism that is close to the source of the crisis
can provide a quicker diagnosis and response."

The Asian economic crisis began last July when Thailand
abandoned its fixed exchange-rate system after nearly draining
its foreign reserves in a futile defense of the currency. It
spread rapidly to other Asian countries that foreign investors
thought resembled Thailand in their financial flaws, and the
contagion eventually rocked financial markets worldwide.

The crisis left three countries -- Thailand, South Korea and
Indonesia -- in recession, and has resulted in lower growth in
most other Asian countries. The International Monetary Fund has
organized bailouts totaling more than $100 billion for the three
countries in recession.

Economists say the devaluation of the Thai baht exposed a
banking system on the verge of collapse: most Thai financial
institutions had borrowed heavily in foreign currencies to lend
to domestic customers, and they had hedged little of their
borrowings. Rather than imposing new regulations to require
hedging by financial institutions, the Thai central bank provided
more than 700 billion baht (THB) to keep them afloat. ($1=40.102)

As the crisis began, some Southeast Asian countries blamed
foreign currency speculators for it. Malaysian Prime Minister
Mahathir Mohamad said the withdrawal of funds by foreign
investors had set his country back by 10 years. But increasingly,
Asian leaders are acknowledging the blame lay with regional
governments.

"The leaders were too preoccupied to notice, let alone
correct, structural imbalances in their financial sector, even
after their private sectors had incurred large external debts and
current-account deficits were gaping," Singapore's Senior
Minister Lee Kuan Yew wrote in a recent article in the Los
Angeles Times.

The ASEAN proposal says such mistakes can be avoided if the
group adopts practices similar to those of the Group of Seven (G-
7) leading industrial countries and ECOFIN, an organization of
European Union finance ministers. Leaders of those groups hold
regular meetings in which they coordinate 'cooperation on
economic-policy issues,' the proposal says.

Finally, the proposal says, the database would help assess
whether capital markets provide adequate incentives to foreign
investors by identifying dysfunctional characteristics such as
operating inefficiencies, poor infrastructure, high transaction
costs, and reduced transparency.

The database would initially be housed in the Asian
Development Bank in Manila, Southeast Asian ministers decided in
Jakarta last month. It will also be financed by the ADB while
cost-sharing arrangements among ASEAN member countries are worked
out.

Five ASEAN countries -- Indonesia, Malaysia, Thailand, the
Philippines and Singapore -- already take part in an IMF
initiative introduced after the Mexican crisis of 1994-1995,
whereby they disclose economic data, and information on the
release times and calculation methods for the data, on an
electronic bulletin board created by the IMF. Some of the
countries, however, have yet to start making contributions to the
bulletin board.