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.