Fri, 05 Dec 1997

Emerging markets can no longer rely on 'rich uncles'

By Devi M. Asmarani

KUALA LUMPUR (JP): Emerging markets in Asia can no longer rely on the United States, Japan and Western Europe to play the role of "rich uncle" to get them out of a crisis, according to Moody's Investors Service.

Speaking at the Association of Southeast Asian Nations (ASEAN) business forum here Wednesday, the managing director of the U.S.- based rating agency, Vincent J. Truqlia, said the world's three giant markets had gone through significant changes and could no longer be the source of reliance for countries in need of assistance.

"The unwillingness of the U.S. to play the role of world creditor, Japan's unwillingness and inability to the play the role of the world's rich uncle, and Western Europe's inward focus, all together mean that emerging markets cannot count on these markets to provide the stimulus necessary to turn around their economies," he said when delivering his paper Tuesday.

Truqlia said East Asian countries could not get out of their own economic quagmire only through competitive devaluations, but through the simple pursuit of fiscal rectitude.

In the past, Latin America and Eastern Europe could devalue and retrench to turn their fortunes around because the U.S. was profligate enough and Japan confident enough for each to contribute in its own way to maintaining world demand, he said.

If East Asia followed this orthodox approach today, the region could spiral into deflation, which -- if left unchecked -- could prove powerful enough to drag down economies outside the region, he said.

Truqlia said the downward movement in the region's exchange rates would have some very powerful negative effects upon the ability of Latin American and Eastern European countries to compete with the region's economies, he said.

Thus, there would be no way that even the U.S., Japan and the rest of the developed world could avoid the contagion, he said.

Speaking during the three-day forum, Japan's former vice minister of finance, Makoto Utsumi, called on Asian countries to set up a system that would enable them to act in a harmonized way.

Utsumi, also an academic at Kaio University, said that the coordinated action could be taken whenever markets tended to move in a direction that was not supported by fundamentals.

"This kind of action should be backed by constant dialog concerning policy coordination among different countries," he said.

The dialog should not be unilateral in which certain policies of one country are forced onto another, he said.

Utsumi also warned that foreign exchange matters should never be used as a weapon for bilateral or multilateral negotiations.

"We have witnessed how the moves between the U.S. and Germany triggered the so called 'Black Monday' of 1987, or how the 'strong yen card' of the U.S. administration affected and confused the markets," he said.

Utsumi said monetary authorities must not concentrate only on one direction that the market was focussing on, in their effort to strengthen their currencies.

Authorities tended to feel relieved and stopped intervention as soon as the market seemed to indicate a small trend reversal, he said.

"Interventions are not always successful when done against the wind, while its effects are greatest when done with a following wind," he said.

The chairman of the Capital Market Supervisory Agency (Bapepam), I Putu Gede Ary Suta, told the forum yesterday that Indonesia needed to create future and option markets so that both foreign investors and local borrowers could hedge against the risk of unexpected change in the economy.

"In recent years, many Indonesian firms borrowed in other currencies, expecting the continuation of a policy of gradual devaluation of the rupiah," Putu said.

Recent regional currency fluctuations would have affected Indonesian businesses far less if companies had had the opportunity to hedge currency risks in an organized futures and options market, he said.

He said the Surabaya Stock Exchange (SSX) was now taking initial steps to organize such a market.