Asian monetary crises tests will to reform

Asian monetary crises tests will to reform

By Philippe Ries

HONG KONG (AFP): Asia's monetary crises are testing the will
of regional governments to pursue structural reforms, especially
financial deregulation, economists have said.

In theory the response to a regional crisis sparked by the
faulty banking system in Thailand would be simple: press forward
with observation of international standards in financial
institutions, in opening to foreign capital and entities, in
transparency, supervision and risk management.

Instead, said Miron Mushkat of Lehman Brothers in Hong Kong,
"since the crisis may legitimately be viewed as the product of
excessively rapid financial development, it would be realistic to
expect the pace of financial liberalization to slacken in coming
months."

"The possibility that financial reform might be brought to a
halt, or even rolled back, cannot be ruled out at all," he said.
But, he added, the response may be "diametrically opposed":
"Asian countries could allow their currencies to float freely and
accelerate the pace of both financial sector and real sector
liberalization."

The two possibilities were vividly demonstrated Wednesday by
the contradictory stances of Jakarta and Kuala Lumpur.

While Indonesian authorities announced a plan for monetary
stabilization and liberal economic reforms, the Malaysian
government decided to sink tens of billions of dollars in pursuit
of the tough policy adopted by Prime Minister Mahathir Mohamad.

The most significant step announced by Indonesian Finance
Minister Mar'ie Muhammad was the lifting of a 49 percent limit on
foreign ownership in listed firms on the Jakarta bourse.

On the other hand, said the chief economist of a foreign
business bank in Singapore, "basically, what Malaysia is saying
to foreign investors is: We don't want you."

Instead of propping up trading, the creation of a 60-billion
ringgit (US$20.4 billion) public fund to aid local investors led
to a new plunge of the Kuala Lumpur stock market.

Foreign investors are "clearly exasperated" the economist
said, adding, "they have decided they don't want to invest in a
country when they don't know the rules anymore."

He predicted "a blood bath in the currency market" where the
ringgit could drop to 3.2 to the dollar. The greenback breached
the three-ringgit threshold Thursday.

Philipp Moffitt, executive vice president of Tokai Asia
Limited in Hong Kong said there was nothing that could stop the
Malaysian authorities from closing the market.

But other Southeast Asian countries, especially Thailand,
under virtual diktat of the International Monetary Fund, will
certainly not follow in the footsteps of Mahathir, experts said.

"I hope that when growth comes back, financial deregulation
will follow," said Mushkat.

In fact, he said, "the results generated thus far provide very
little support for the view that financial development is a key
factor in driving economic growth."

That is to say the temporary slow-down in financial
liberalization would have only a modest effect on growth in Asia.

"Engineering a recovery, particularly on the export front, is
the principal challenge facing the region," Mushkat said.
But, he said, failure to speedily tackle systemic faults in
banking could delay economic recover, as shown by the experience
of Japan, which has been in semi-stagnation since 1990.

However countries such as Thailand, Indonesia and the
Philippines "are more willing than Japan to open their
economies," Mushkat said, adding, "Japan is a different animal."