Asian recovery hinges on japan, IMF believes

Asian recovery hinges on japan, IMF believes

WASHINGTON (Dow Jones): Asia's crisis-hit economies should see recovery in the second half of 1999 -- provided Japan executes proposals to stimulate its economy and reinvigorate its banking system, the International Monetary Fund said Wednesday.

The agency, in its latest World Economic Outlook report, predicted that the hardest-hit of Asian countries -- Indonesia, Thailand, Malaysia and South Korea -- should see average growth of 0.6 percent in 1999 after an 8.7 percent contraction in 1998.

The average for newly industrial Asian countries -- South Korea, Hong Kong, Singapore and Taiwan -- should be 0.7 percent higher after a 1998 contraction of 2.9 percent. Japan should see growth of 0.5 percent after a contraction of 2.5 percent in 1998.

"On current projections, output in each of the crisis countries is expected to bottom out during the first half of 1999, with some pickup in activity by the end of the year," the IMF report said. It said the latest outlook reflects deep reductions in IMF growth estimates, particularly in South Korea and South East Asia.

The region's recovery, if any, will hinge on economic reforms in Japan, the IMF said.

"Japan, the second largest advanced economy in the world and the market for one sixth of the exports of (Indonesia, Philippines, Malaysia, Thailand and South Korea) bears a particular responsibility to support recovery in Asia by ensuring a resumption of solid growth in domestic demand."

The agency, which organized economic bailouts totaling more than $100 billion in East Asia last year, reported "significant setbacks" in the last five months to its efforts to defuse the financial crisis, which originated in Thailand last year and has since tipped a third of the world economy into recession.

It said the setbacks included a deepening recession in Japan and the attendant weakening of the yen, and delays in the implementation of IMF-prescribed reforms in Indonesia. Those and other deteriorating conditions prompted the IMF to cut 1998 growth projections for South Korea and crisis-hit South East Asian countries by as much as 10 percentage points.

The biggest reductions were for Indonesia, which is expected to see a 15 percent economic contraction in 1998; and Malaysia, which is expected to see its economy shrink 6.5 percent.

Malaysia dealt an "important setback" to its own recovery prospects and also those of other emerging-market countries by shutting off the flow of capital in and out of the country this month, the IMF said.

"These policies are having a negative effect on foreign investors' confidence," the IMF report said. "Whether they will improve near-term prospects for economic recovery remains to be seen, but in any event they cannot be a substitute for strong reform and stabilization efforts."

The Malaysian capital controls caused Malaysian stock prices to rise, the IMF said, but it also caused risk premiums on Malaysian bonds to rise to astronomical levels, making it more expensive for Malaysian companies to borrow overseas.

The report said Hong Kong's economy is expected to shrink 5 percent in 1998 after growing 3 percent in 1997. The territory is expected to see zero growth in 1999, the IMF said.

The IMF said China, an economy whose stability is also critical to the region, is showing signs of stress as its economy slows and unemployment rises. The Chinese economy is expected to grow 5.5 percent in 1998, but industrial production is "well below last year's pace" and "deflationary pressures appear to have intensified.

For now, China has a healthy balance of payments that should allow it to withstand external pressures related to the regional crisis, the IMF said. It has large foreign reserves, a current account in surplus, and a closed capital account - all of which have allowed the country to keep its currency stable.

Still, the IMF said, "there is some uncertainty surrounding the overall external position in view of recent increases in recorded and unrecorded outflows" of capital from China.

In 1997, $20 billion flowed out of South Korea, Thailand, Malaysia, Indonesia and the Philippines in such transactions - nearly twice the recorded capital flight.

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