Currency crisis seen as retarding SE Asian growth

Currency crisis seen as retarding SE Asian growth

MANILA (Agencies): Southeast Asia's deepening currency crisis
will retard the short-term economic outlook for the region,
economists said here yesterday, with one saying the uncertainty
could stretch into 1999.

Despite the intervention of the International Monetary Fund
(IMF) to save Thailand and Indonesia, Asian Development Bank
(ADB) expert Dilip Das said the crisis "should influence the
economic performance in 1998, and even in 1999."

The IMF last month said that Southeast Asian economic growth
would be three or four percentage points lower for 1997 and 1998,
partly due to the crisis and unsustainable higher rates of
expansion.

However, IMF researcher Francesco Caramazza told an ADB-
sponsored conference here that since then, "the crisis proved to
have been stronger and deeper" and that the outlook for the
region will now have to be "revised down significantly."

World Bank economist Kwang Woo Jun told the forum that
"foreign direct investment flows to this region will continue to
moderate" after fueling high growth in recent years, mainly due
to "dwindling capacity for utilization."

Caramazza said availability and costs are "affected by global
cyclical conditions and are vulnerable to higher interest rates
in world financial markets as well as to perceptions that large
current account deficits may not be sustainable in all cases."

Thailand, Indonesia, the Philippines and Malaysia have seen
their currencies devalued by between 20 and 44 percent since the
first wave of speculative attacks forced Bangkok to devalue the
baht on July 2. Singapore has also been affected but to a much
lesser extent.

"At this stage, it cannot be predicted whether the four
Southeast Asian economies named above will pick up in the short-
term or the medium-term," Das said in a paper presented at the
conference.

"However, it seems reasonable that they will bottom out in
1998. The GDP (gross domestic product) growth rate projections
for 1998 and 1999 will also face similar uncertainty," he added.

A study by World Bank economists Amar Battacharya, Stijn
Claessens and Leonardo Hernandez said that speculative pressures
were partly to blame.

However, the "continued weaknesses" were mainly due to
substantial short-term external liabilities of financial
institutions and corporations, sharp reduction in external
financing, increased demand for foreign currency and the foreign
entities withholding new investments.

"In several Southeast Asian countries, the quality of
investment, both public and private, has deteriorated and has
created risks over the last few years of rapid private capital
flows," it said.

The study faulted Thailand for its "delayed response to the
difficulties" which first came to the surface last year, and said
the fallout on the rest of the region "has been surprisingly
large."

"In the next months, reductions in external financing and
lower business confidence are likely to slow the growth," the
study said.

Investment

"Higher interest rates will reduce private investment and
consumption," while the impact of weaker asset prices, slower
growth and devaluations on the financial and corporate sectors
"will be aggravated if high interest rates have to be sustained
for a long period to stabilize exchange rates," it added.

Das said Southeast Asia's real GDP growth would slow down to
between 4.9 and 5.7 percent this year, compared to 7.4 percent in
1996. Growth should bottom out to between 4.0 and 5.5 percent
next year and rise slowly to between 5.2 and 6.3 percent in 1999,
he added.

Thailand, the worst affected, should post GDP growth of
between 1.6 and 1. 9 percent this year, between 2.0 and 2.5
percent next year and between 3.3 and 4.0 percent in 1999, he
said.

In Tokyo, a senior economist at the Export-Import Bank of
Japan said yesterday Southeast Asian nations, under pressure from
currency turmoil, could emerge from their current slump in two to
three years.

Hajimu Yamashita, senior economist and director of country
risk analysis department at the bank, said at a seminar that if
economic structural reforms are implemented successfully and
political conditions stabilize, it would be possible for the
region to return to sustainable growth.

"The ASEAN four can be free from serious impact (from the
current economic woes) in two to three years and then there's a
chance of a high economic growth -- although the rate of the
growth may stay slightly lower than that of the early 1990s,"
Yamashita said.

These nations will be able to enjoy high economic growth in
the long term if ample domestic savings can be effectively
utilized for investments in beneficial projects, he added.

In the short term, sharp depreciations of the Asian currencies
against the U.S. dollar could increase inflationary pressure in
their economies, forcing these nations to tighten credit and
causing an economic slowdown, Yamashita said.

At the same time, however, the depreciation of their
currencies were making exports more competitive overseas and
giving these nations incentives to implement economic reforms
seriously, he said.

In the medium term, the focus is on whether the U.S. and
European economies can continue to expand briskly enough to
absorb exports from the Southeast Asian nations, he added.

He said these nations should not return to a policy of linking
their currencies to the U.S. dollar, even though such practice is
an effective way to attract short-term foreign capital.