Asian countries told to be choosy in accepting foreign capital

Asian countries told to be choosy in accepting foreign capital

SINGAPORE (AFP): Instead of completely slowing down financial deregulation in the wake of the Mexican peso crisis, Asia should be more selective in absorbing foreign capital, US brokerage Merrill Lynch said Monday.

"The key here is to distinguish between abrupt deregulation and prudent liberalization," Merrill Lynch said in its monthly Asian Economic report coordinated at its Singapore office.

Slower deregulation may help Asian governments limit their exposure to external volatility, but it will also limit their access to international funds likely to become increasingly scarce, it said.

The Mexican crisis followed the devaluation of the peso in December. It triggered a wave of mass selling of the so-called exotic currencies of Asia because, reportedly, investors feared the Mexican effects would spread across the Pacific.

Part of Mexico's problem was its heavy dependence on short- term portfolio capital, estimated to account for three-quarters of its total capital inflows. A 20 to 30 percent level is more common in other developing economies.

Merrill Lynch believes Asia may introduce measures to limit the dependence on volatile short-term capital flows.

But it warned that this should be carefully distinguished from a simple rejection of portfolio investment.

"If it is true that highly liquid capital flows could contribute to high volatility, it should also be noted that strong liquidity inflows into an economy can help to lower domestic interest rates," it said.

Merrill Lynch said that the most important lesson from the Mexican crisis was that "international investors should now realize that the days of indiscriminate investment in emerging markets are over."

Similarly, it said, Asia was likely to wake up from the myth of indiscriminate deregulation.

But Merrill Lynch said that as investors turned more mature and discriminating, Asia's emerging markets should benefit, especially if governments improved their management of exchange rate mechanisms and capital markets.

The brokerage ruled out a significant change in Asian exchange regimes but said a closer scrutiny of exchange management and sterilization would be justified.

"Central banks may have to be given more autonomy to reject discretionary monetary policy and to keep their currencies more in line with underlying values," it said.