Asian states' fight to lure foreign funds under way

Asian states' fight to lure foreign funds under way

SINGAPORE (Reuters): As imports rise and erode external
surpluses, Asian countries are eyeing every opportunity to lure
overseas capital to sustain growth.

But investment flows to the region are patchy at best and
analysts say banking and corporate reform remain key to
determining a country's success in attracting capital.

The jury is still out as to whether rising imports really
indicate a pick-up in domestic demand or if a tail-off in exports
is due to what could well be a slowdown in the U.S market.

Nevertheless, the battle for new inflows is on.

"Increasingly, capital inflows will need to come on board to
replace diminished foreign exchange earnings and that will be
determined by domestic factors," said Graham Perry, Southeast
Asia analyst at Lehman Brothers in Tokyo.

A recent Reuters survey shows trade surpluses of Asian
economies, which exported their way out of the 1997 financial
crisis, are on their way down.

Despite a general view that the dwindling surpluses might
signify a pickup in domestic demand which could replace export-
oriented growth, a few analysts argue the optimism could be
exaggerated and even misplaced in some cases.

They say the recovery remains hugely dependent on exports and
fiscal pump priming and Asian governments will need to become
more competitive to cover the shortfall in earnings.

"Data indicate investments, consumer spending and confidence
remained low in most Southeast Asian countries. Real recovery
can't take place without meaningful recovery in these areas,"
said Dominique Dwor-Frecaut, director of Asia research at
Barclays Capital.

Although several countries in Asia are running current account
surpluses, foreign investments are still crucial for overall
growth, analysts said.

On a macro level, the surpluses mean these countries have
enough savings to cover investments. But in reality their
financial sectors are unable to do that.

Figures from the International Monetary Fund show net private
capital outflows from Asia last year of some $27 billion. And
this was despite the re-emergence of foreign direct investment.

Even though that was an improvement from outflows of $43
billion in 1998, it's a far cry from $104 billion of net inflows
seen in 1996 before the crisis erupted.

Economists and pundits have highlighted three major areas of
reform governments must focus on to attract more capital:
financial and corporate restructuring, good governance and legal
frameworks that are conducive to foreign investment.

Their success so far has been mixed, with South Korea, Taiwan
and Malaysia faring much better than laggards Thailand, the
Philippines and Indonesia.

"Certainly you can say that there is a lost opportunity for
the Philippines in particular, Thailand to a certain extent and
it is still lost in Indonesia to step up after the crisis and say
we too can eventually enter into this league," said David
Fernandez, regional economist at JP Morgan in Singapore.

In Thailand, debt restructuring has been slowed by the fact
that the legal definition of bankruptcy is based on the book
value of assets rather than on the ability of companies to
service debt.

Its banking sector remains saddled with hefty non-performing
loans which were around 36.5 percent of total lending at end-May.
Some analysts caution that headline falls in NPLs were caused
more by creative accounting than an actual pick-up in successful
corporate debt restructuring.

Merrill Lynch estimates that around 1.1 trillion baht worth of
NPLs, equal to 20 percent of GDP, are unrestructurable. And this
could hold back foreign investments.

Asia Pacific-based fund managers remain mostly bearish on the
region's economic prospects but hold out hope for Chinese growth
and equity markets, according to the Merrill Lynch Gallup survey
released on Tuesday.

The report showed that while just 32 percent of fund managers
were expecting the Asian-Pacific economy to be stronger excluding
China and Japan, a full 72 percent see a stronger Chinese economy
in the year ahead.

"June industrial production, released after the survey closed,
appears to support the view that China is recovering," said
Trevor Greetham, Merrill Lynch global strategist.

"This may explain why fund managers remain strong buyers of
Chinese stocks but have turned sellers of Malaysia, more of a
global play," he added.