Asia's dollar peg may no longer be helpful: Expert

Asia's dollar peg may no longer be helpful: Expert

TOKYO (Reuter): The pegging of Asian currencies to the U.S.
dollar may no longer bring much benefit to regional economies, a
leading Asian economist said yesterday.

Given the current regional currency crisis, Asia should look
towards the yen as a counterweight to the dollar to ensure
economic stability, C.H. Kwan, a senior economist at Nomura
Research Institute, told Reuters in an interview.

"Given massive capital flows and highly volatile movements
among major currencies, the forex policy of pegging their
currencies to the dollar adopted by most Asian economies may no
longer be consistent with economic stability," Kwan said.

More attention should be paid to the stability of Asian
currencies against the yen, he said.

One of the main factors that forced Thailand's central bank to
devalue the baht early this month was the fact that the country's
export competitiveness weakened after the yen started falling in
mid-1995, he said.

"Although the baht has been pegged against a basket of
currencies in which the dollar carried great weight, the sharp
depreciation of the yen since mid-1995 led to the baht's
appreciation in trade-weighted terms," Kwan said.

For an emerging Asian country, macroeconomic stability depends
more on its trade-weighted exchange rate than its exchange value
against the U.S. dollar, he said.

To achieve macroeconomic stability, an emerging economy should
try to stabilize its trade-weighted exchange rate by pegging its
currency to a basket of currencies in which the major currencies
carry weight consistent with the importance of a country as a
trading partner, he said.

"Judging by this criteria, the weight assigned to the Japanese
yen in the Thai reference currency basket was too low," Kwan
said.

The yen's weighting was estimated to be around 10 percent in
the currency basket before the introduction of a managed float
system for the baht on July 2, he said. The weighting for the
dollar was far greater.

Some Asian nations, such as Taiwan and South Korea, have
already started to loosen their ties to the dollar.

By allowing their currencies to fall in tandem with the yen's
decline over the last two years, South Korea and Taiwan had seen
a sharp recovery in exports, he said.

Kwan said another lesson from the Thai crisis was that a
developing country whose financial sector was still weak should
not hurry to liberalize capital account transactions.

The establishment of the Bangkok International Banking
Facility (BIBF) in 1993, which represented a major step in the
liberalization of capital account transactions, has made it
difficult for the government to control the inflow of funds.

BIBF, unlike other conventional offshore markets, was
primarily engaged in so-called "out-in" transactions in which
funds raised from non-residents were lent to residents.

The bulk of those funds ended up in speculative activity in
the asset markets. When the bubble finally burst, the financial
system was left with massive bad debt.

The baht tumbled to a record-low of 32.70 to the dollar on
Thursday, having lost more than 20 percent of its value since the
introduction of the managed float system.

Kwan said the baht devaluation should in time help boost Thai
exports and suppress imports and, as a result, Thailand's current
account deficit should shrink in the months ahead.

It should also favor inflows of direct investment from
countries that use Thailand as an export base, even though the
increased exchange rate volatility may deter foreign investors.

He said companies with liabilities denominated in foreign
currency would find the repayment burden in terms of baht rising
in proportion to the scale of its fall.

Foreign banks lending to Thailand in foreign currencies, such
as the dollar and yen, would not suffer capital losses resulting
from the devaluation. However, the default risk of their loans
outstanding had increased with the growth in borrowers' debt
burden, he said.