Asian economies not out of the woods yet

Asian economies not out of the woods yet

SINGAPORE (DPA): The economies of Asia are not out of the woods yet with important and difficult work lying ahead to ensure stable banking and financial systems, a key U.S. banker warned on Friday.

William McDonough, president of the Federal Reserve Bank of New York, said meaningful headway has been made in Thailand, Indonesia, Malaysia and South Korea toward recapitalizing the banking systems, ridding balance sheets of problem assets, and improving supervisory frameworks.

The recovery process from the economic crisis which erupted in mid-1997 is currently at a "critical juncture" with effective supervision the "crucial cornerstone," he told the Monetary Authority of Singapore, the de facto central bank.

On the positive side, the economic contraction that devastated so many in the region has generally been halted, McDonough said, noting that equity markets have rebounded and foreign capital has begun to return.

"It must also be acknowledged that the economies of Asia are not out of the woods just yet," he said. "Important and even difficult work still lies ahead."

While acknowledging there is no quick-fix, McDonough said the essential elements are effective bank-level management, market discipline, and official supervision.

"Here in Asia ... more work needs to be done to improve the quality of disclosures regarding traditional banking activities," McDonough said. "Transparency bolsters the confidence of depositors and other creditors and therefore makes doing business easier and more secure."

Official supervision is needed to enforce compliance with laws and regulations and assure that prompt corrective actions are taken when serious problems are identified, he said.

"Because of the inherently partisan nature of politics, and for other reasons as well, the government or state is not well- equipped to make credit decisions," McDonough cautioned.

He said recent experience in Asia and before that in the former command economies of Eastern Europe "makes clear just how dangerous policy lending can be."

"Decisions as to who gets credit and who does not must be left to private initiative within a context where those making the decisions have a major stake, their own capital and economic livelihood," he said.

If the system is working properly, McDonough said those receiving credit will be the most efficient, competitive, and profitable - those most capable of producing the stream of goods and services that will enable the economy to grow."