Australia plays down Asian financial crisis

Australia plays down Asian financial crisis

CANBERRA (Reuters): Australian Treasurer Peter Costello, buoyed by strong economic data, yesterday rejected economists' warnings that Asia's financial crisis would engulf Australia and stunt economic growth.

Australia's biggest trade earnings came from strong economies outside Southeast Asia, which would help Australia weather a possible export downturn in the region, Costello said.

However, fears of an Asian recession landed on Australia's doorstep yesterday, sparking a sell-off of the local dollar as investors took fright at the pain likely to be felt by the region's closest trading partners.

In the first clear sign of Australia's vulnerability to the Asian crisis, the Australian dollar shed 1-1/2 cents to a 28- month low of US$0.7100.

The stampede out of the currency came after financial market economists issued fresh reports warning Southeast Asia, the eye of the economic storm and a major buyer of Australian goods, faced zero growth or even recession.

Economists have warned the financial and economic crisis that has already forced Thailand and Indonesia to seek foreign help and has hit neighbouring economies could flow on to Australia and wipe up to 1.5 percentage points off growth in 1997/98.

"In relation to Southeast Asia ... about 10 percent of our exports go to the four countries most affected," Costello said, referring to Thailand, Indonesia, Malaysia and the Philippines.

"Our biggest trading partners are still Japan, the U.S., (South) Korea, New Zealand and, of course, they are strong economies ... that won't be affected, as the Australian economy won't be affected, in any large measure by this."

The Australian dollar fell on Wednesday to 71 U.S. cents, its lowest level in more than two years, as investors stampeded out of the currency due to concerns about the impact of the Asian crisis and the chance of another rate cut.

Official data released yesterday showed Australian inflation tumbling to its lowest level in a generation, fuelling speculation of a sixth interest rate cut in 15 months.

The Consumer Price Index measure of inflation actually fell 0.3 percent in the year to September, the data showed.

Australia is contributing US$1 billion to a US$17.2 billion international bailout package for Thailand and has offered to help Indonesia if necessary.

Defending its aid package against critics such as race row politician Pauline Hanson, Canberra has said Australia's own economic interests gained from measures to shore up stability and economic growth in the region.

Asia's ill winds could blow about one percent off Australian economic growth in the fiscal year ending June 1998, they said.

One of Australia's biggest fund managers, National Mutual Funds Management (NMFM), said on Wednesday it believed the economic cost to Australia could even be higher over time.

"Basically we reckon it's going to be something like 1.5 percent to two percent off growth because Asia, including Japan, takes 65 percent of our exports," NMFM's head of international strategy and research, Nigel Purchase, told Reuters.

Brokerage SBC Warburg was reported to have warned of a "full- blown" recession and banking crisis in Southeast Asia, knocking 0.8 of a percentage point off Australian growth.

Other economists were more sanguine, forecasting the Asian turmoil would at worst retard 1997/98 growth by 0.5 percent.

Among the bears, NMFM sees economic growth of only 2.75 percent in 1997/98, compared with the government's forecast of 3.75 percent growth and official talk of perhaps four percent.

Australian companies caught in the cross-fire of the Asian currency crisis may tell a different story, with exporters facing sluggish demand and local manufacturers facing stiffer import competition from Asian rivals, economists said.

Many share market investors have already turned their backs on companies they see as vulnerable.

Soft-drink bottler Coca-Cola Amatil Ltd, which counts the Philippines as its biggest revenue generator, and casino operator Crown Ltd, which draws half its revenue from Asian visitors, have both seen their shares fall heavily.

The Asian crisis has also cast a shadow over current negotiations between Australian iron ore and coal producers and their big Japanese customers on 1998/99 prices. Coal and iron ore are two of Australia's biggest exports.

The prices they fetch in Japan will hinge partly on demand for Japanese exports from the rest of Asia, said Australian think tank National Institute of Economic and Industry Research.

But while some Australian companies are preparing to weather the storm, others now see buying opportunities, especially in Southeast Asia, and a chance to ride the next wave of growth.