Asia told to fuel growth by allowing weaker currencies

Asia told to fuel growth by allowing weaker currencies

SINGAPORE (Dow Jones): Asian governments should tolerate weaker currencies to assist a return to economic growth in the second half of 1999, Salomon Smith Barney's managing director of global emerging markets research said Tuesday.

Given that many Asian countries are now facing an environment of low inflation, or even deflation, real interest rates remain relatively high, said Desmond Lachman, who heads emerging markets research at the Citigroup Inc. (CCI) subsidiary.

To encourage economic growth, he argued, governments should be prepared to lower real interest rates and accept the resulting currency weakness.

"Asian countries can tolerate a certain amount of currency weakening. That would be good for their economies," said Lachman, who was presenting Citigroup's 1999 economic forecasts to reporters in Singapore.

The risk that cutting real interest rates could trigger a fresh runaway spiral of currency depreciation has abated over the second half of 1998, and is now relatively small compared with the risks of failing to restart growth around the region, Lachman said.

Although he acknowledged that depreciation would increase the local currency burden of servicing external debts, Lachman argued that the costs would be far outweighed by the benefits of providing adequate liquidity to domestic economies.

"Getting these economies moving has to be the key priority now," he declared.

Taking South Korea as an example, Lachman said that with inflation forecast to fall to 3 percent in 1999, short-term interest rates of around 9 percent to 10 percent remain unnecessarily high.

What the government should do is calibrate interest rate cuts with an eye on the exchange rate, and when the exchange rate gets to around 1,400 (won to the dollar), slow the pace of interest rate cuts," Lachman proposed.

At the end of domestic trading in Seoul on Tuesday, the U.S. dollar was quoted against the won at 1,211.5.

In addition to lowering real interest rates, Lachman argued that Asian governments should more aggressively pursue debt restructuring and financial sector reform, as essential prerequisites of economic recovery.