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.