Asia feels the bite of higher interest rates

Asia feels the bite of higher interest rates

SINGAPORE (AFP): Asian nations embroiled in financial turmoil
are struggling against interest rates pushed sharply higher to
defend their currencies, but which are taking a toll on their
economies.

But analysts believe monetary authorities will maintain the
steep rates even at the expense of higher mortgage rates, a
squeeze on company earnings, a slide in stock markets and
property prices.

"The first line of currency defense is disciplined monetary
policy and not accelerated disbursement of external aid or
foreign exchange intervention," said Vincent Low, fixed income
strategist at Merrill Lynch.

He said governments had to continue swallowing the "bitter
medicine" in terms of high interest rates despite the bearish
regional economic environment to shed off "excesses" in the
economy.

"It of course depends on the cost governments are willing to
bear and the trade offs they are willing to face," Low said.

High interest rates can help support currencies by attracting
more investors to buy and hold them but can at the same time slow
down economies because companies hold back expansion plans and
individuals cut back on spending due to ballooning borrowing
costs.

Stock and real estate markets across the region are already
reeling from high interest rates that stemmed from a currency
crisis sparked off in July last year when Thailand floated the
baht after running out of reserves defending the currency.

The baht collapsed and sent into a tailspin the currencies of
other Asian countries, which were forced to hike interest rates
to cushion the fall.

Rates in Indonesia now are among the highest in Asia, with the
overnight rate of around 40 percent.

In Thailand, prime rates -- the rates at which bank lend to
their best customers -- are expected to remain at more than 16
percent this year while in Hong Kong, at about 13 percent banks'
three-month borrowing costs are double what they were a year ago.

In the Philippines, prime rates are as high as 30 percent,
double the maximum 15 percent prior to the currency crisis, while
in Malaysia, the benchmark three-month Kuala Lumpur Inter-bank
Offered Rate (KLIBOR) is more than 10 percent -- its highest
level since July 1997.

Analysts say the rates are unlikely to ease as pressure on
currencies remains.

Australia's ANZ Investment Bank warned in a bulletin to
clients that interest rates have "at least another 20 percent
upside to go" in Indonesia where inflation was projected to shoot
up to above 30 percent.

The Indonesian rupiah last week was punished to an all-time
low of 16,500 to the U.S. dollar and pressure on the embattled
currency tugged down the other regional units as well.

Stanley Fisher, the deputy head of the International Monetary
Fund (IMF), indicated at the weekend that there was room for a
further hike in interest rates in the region.

He called for a "sharp but temporary" hike in rates in order
to stem an outflow of capital from troubled Asian economies,
saying that the priority was to restore confidence in the
national currencies which had sharply deteriorated as confidence
eroded.

But Asian economies are already gasping for breath under the
pressure exerted by the current high rates.

In Hong Kong, the stiff rates have pushed down property prices
20 percent lower since October and raised the prospect of more
defaults by borrowers.

In Singapore, U.S. investment house Goldman Sachs shaved the
earnings growth forecast of listed companies in 1997 to six
percent from 9 percent, and in 1998 to 5 percent from 11 percent
because of higher borrowing costs.

"We still have to factor up to 100 basis points increase in
interest rates to about 8.5 percent in Singapore by the end of
the year," said Jacqueline Ong, regional economist with British
financial house IDEA.

In Thailand, as more companies go bust under the weight of
higher rates, the government is trying to help private businesses
obtain cheaper long term funding while the Philippines' central
bank is attempting to loosen foreign and domestic liquidity,
which would ease the pressure on interest rates, reports said.

Malaysia, however, is considering raising rates further in a
bid to rein in credit growth following gentle prodding by IMF
managing director Michel Camdessus while on a visit to Kuala
Lumpur a fortnight ago.