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.