Asia must clean house before changing currency systems

Asia must clean house before changing currency systems

TOKYO (AFP): Asia's ailing economies must clean house before playing around with new currency systems, analysts said yesterday, aiming their toughest barbs at Indonesia's plan for a fixed rupiah.

"Sort the mess out first and then start working about these things but don't do it the other way around," said Russell Jones, chief economist at Lehman Brothers.

On Wednesday, the Indonesian government announced plans to establish a currency board to stabilize the rupiah by maintaining a fixed exchange rate with the dollar.

The previous day, Malaysian Finance Minister Anwar Ibrahim told a news conference in Tokyo of plans to allow Southeast Asian trade with Japan to be settled in yen through Japanese banks.

Malaysia has also proposed that trade with the Association of Southeast Asian Nations (ASEAN) be settled where possible in local currencies, although their value would still be measured against the greenback.

While some analysts said the new currency proposals were the first signs of an emerging Asian monetary system, most were cautious, particularly in respect of Indonesia.

There was a tendency to see the currency board as a universal panacea, said Jones, but "the reality is that it replaces currency volatility with a system that is incredibly painful."

"Currency volatility was a symptom of a number of underlying problems -- lack of transparency, cronyism, excessive liquidity in the financial market -- these things still have to be solved," he said.

A fixed exchange rate placed the weight of any reaction to adverse news on the domestic economy through interest rates, the analyst said, warning of sharp and painful moves such as those experienced by Hong Kong.

Moreover, fixed currencies depended largely on overseas confidence that huge foreign exchange reserves were available to defend the currency, as in Hong Kong's massive coffers which are further backed by China's.

Malaysia's proposal for Asian trade to be settled in local currencies pre-supposed a confidence in regional currencies that did not yet exist, Jones said.

"Building a system around the Asian currencies is a pipe-dream -- until they have put their houses in order and confidence has been established."

Andrew Shipley, economist at Schroders Japan, said the underlying problem was overcapacity in Asia.

"Anything which does not point to recovery in return on assets... won't attract overseas capital and as a result their currencies won't be stabilized, " he said.

But Richard Werner, chief economist at Jardine Fleming Securities, said the Malaysian proposals reflected "the fact that Asia has moved from being a dollar bloc to being something different."

"In the end, the currencies will be trade-weighted," he said, adding that such a trend would inevitably lead to greater importance for the yen vis-a-vis the dollar.

"We are seeing the early stages of the creation of an Asian monetary system."

Werner was more cautious, however, on Indonesia's plans for a currency board, particularly if it was to tie the rupiah to the dollar rather than a basket of currencies.

"Previously they were pegging themselves to the dollar. If it is the dollar then they are just re-establishing the peg and history will tell if that is going to work," he said.

The rupiah was allowed to fluctuate in a range of around 12 percent to the dollar until the trading band was abolished in August amid speculative attacks.