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.