Economic turbulence in SE Asia may be shortlived

Economic turbulence in SE Asia may be shortlived

HONG KONG (AFP): The proud economies of Southeast Asia, buffeted by turbulence since they surrendered their currencies to market forces, may have only a short period of pain yet to endure, experts say.

Governments that have come to view currency stability as the foundation for long-term growth have had a nightmarish week.

Singapore's central bank intervened Friday after the local dollar tumbled 1.5 percent to a 38-month trough against the greenback, and Malaysia did likewise, after the ringgit slumped six percent to a 24-year-low of 2.8250 to the US currency.

The rupiah sank 6.6 percent to another nadir only a day after it was floated by the Indonesian government, while the Philippine peso, after a brief period of strength, weakened by 1.1 percent.

Thailand's baht slipped to 31.795 to the dollar from 31.300, down more than 22 percent from its value prior to the July 2 float that triggered a domino effect among currencies around the region.

But analysts say the volatility, and parallel turbulence in several equity markets, may be short-lived, provided governments and corporations alike adjust quickly to the new era of floating rather than managed currencies.

"This may temporarily have an effect on sentiment, but it really shouldn't be an issue," said Deep C. Kapur, chief regional strategist with Salomon Brothers in Singapore.

"It's a return to economic rationalism that is winning the day. I don't see this as gloom and doom, frankly."

Desmond Supple, head of Asian currency research at BZW in Singapore, said the move to floating currencies was "a welcome dose of reality."

Unless they have a huge war chest on which to draw, central banks that persist in fending off a relentless speculative attack are eventually forced to increase interest rates, thus damaging the domestic economy, he said.

In the new epoch, the biggest challenge for companies, economists said, is to avoid the crunch that comes when borrowings or other commitments are in yen or U.S. dollars but the means of paying for them are in a fluctuating local currency, such as the rupiah.

"More attention will have to be paid to currency hedging than in the past, " said Kapur, referring to the practice of buying US dollars in order to protect against a sudden slump in the currency of income.

The days of easy capital inflows may be over, as foreign investors -- their fingers burned by the de-facto devaluations of local currencies -- pay greater attention to economic fundamentals.

But this in turn should prompt governments to address tough reforms, experts said.

Asia Equity Ltd., a unit of the French bank Paribas, praised Indonesia for its loosening of currency controls, which saw a progressive widening of exchange-rate bands before the rupiah was allowed to float free.

This meant foreign investors suffered less of a shock than in Thailand.

"A flexible exchange rate, interest-rate autonomy, strong growth and few worries within the balance of payments imply a positive market outlook for Indonesia," Asia Equity said in a report last week.

But, it warned, investors still worry over the "unnecessary risk premium" of Indonesia, which was uncertainty about deregulation, trade, favoritism and corruption.

The theory that fundamentals are the best defense will find its greatest test in Hong Kong, the jewel in southeast Asia's currency crown and the region's freest and strongest economy.

Hong Kong is quite different from most of its southeast Asian neighbors, said Ian Perkin, economist at the Hong Kong General Chamber of Commerce.

This is because its service-dominated economy is less vulnerable at a time of currency crisis than those which are based on manufacturing, where governments are tempted to carry out competitive devaluations in order to keep exports up, he said.

The Hong Kong dollar came under some pressure Friday. But speculators are likely to find the tiny but wealthy territory, with 82 billion US dollars in reserve and backed by China, with 121 billion, will be a tough nut to crack.

"It's a very different prospect from the Philippines, with 11 billion in reserves, or Malaysia, with 25 billion," said Andrew Fung, head of capital markets at Commonwealth Bank of Australia here.