Asian economies to ride out external risks

Asian economies to ride out external risks

HONG KONG (AFP): Asian economies are expected to overcome a
possible U.S. interest-rate increase and a sluggish Japanese
economy to maintain their recovery, according to a U.S.
investment house.

Salomon Smith Barney said in a report received here Wednesday
that it was "difficult to see the Asian recovery becoming
derailed over the course of 1999," even if such risks
materialized.

"There is too much momentum for that," said the report. "The
easing of monetary and fiscal policy, following the stabilization
of external accounts, has created a virtuous circle between
growth, asset prices and foreign and domestic confidence."

Some analysts and think tanks have warned that a move by the
Federal Reserve to increase U.S. interest rates to douse
inflationary pressure, along with the moribund Japanese economy,
could dampen Asia's recovery.

Salomon noted that the Federal Reserve had signaled a tighter
monetary policy ahead. It also cited an increasing likelihood
that the yen could drop to 135 to the dollar over the next six
months as monetary expansion in Japan accelerates along with a
securities outflow.

But the investment house discounted the possibility of Asian
rates increasing on the back of a modest U.S. rate rise, with the
potential exception of Hong Kong.

"The transmission mechanism from U.S. rates to Asian rates
works with the most potency when the country has a pegged
exchange rate regime and an open capital account. Effectively,
that means just Hong Kong," the report said.

"In other economies, the net impact is likely to be a slowdown
in capital inflows, but given how robust these have been in
recent weeks, the impact on domestic monetary policy is likely to
be marginal," it added.

Soft interest rates are unlikely to weaken Asian currencies
significantly at a time when current accounts are in surplus and
capital inflows are reviving, Salomon said.

"Thus, left to them, regional currencies would likely
appreciate," it said, adding however that Asian policymakers
would prefer a weaker currency to boost exports in U.S. dollar
terms.

And potential yen weakness would ease some of the appreciation
pressure. A weaker yen could hurt Asian exports to Japan, but
expanded regional markets should "more than offset that," Salomon
said.

It predicted that financial markets would shift their focus
from the timing of Asia's economic turnaround to the
sustainability of growth, saying it had become clear that a
"rebound is upon us."

In countries such as South Korea, Malaysia and Singapore,
industrial production was back above pre-crisis levels, it noted.

But it warned that without a reduction in corporate debt or
further progress in banking sector recapitalization, the current
growth rebound risked running out of steam.

If reforms remain on track, economic influences on financial
markets could remain positive for a sustained period, it said.

Because they suffered less structural damage in the crisis,
the Philippines, Hong Kong, Singapore and Taiwan appeared better
placed to return to sustained growth, it said.

South Korea and Thailand have made progress in reducing
banking sector fragility, but less headway in corporate debt
restructuring. In Indonesia, the reform process is just getting
under way.

"Paradoxically, the present recovery in emerging Asia could
hinder an early return to a higher growth path if it weakens the
political resolve to tackle thorny structural issues," the report
cautioned.