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.