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."