Financial markets in Asia face critical start to 1998

Financial markets in Asia face critical start to 1998

SINGAPORE (Reuters): Asian financial markets, driven to their
sick bed by the events of 1997, face a testing time in the new
year as political and economic events threaten to push them from
the critical list into intensive care.

Heading the chart of political risk factors are presidential
elections in Indonesia. Polls in the Philippines and a new South
Korean government will also play a part.

On the economic front, most countries will start to feel the
impact of the events of 1997 on inflation and growth, while
corporations and banks struggle to find the money to repair their
ravaged balance sheets.

"It's not a pretty picture as we move into 1998, too many
things are unsettled," said Bill Belchere, head of fixed income
and economic research at Merrill Lynch in Singapore.

"The currencies have not stopped falling, and there is still
the problem of how the debt is going to be financed," he said.

Most analysts put the funding crisis at the top of their list
of economic factors because many Asian nations are caught in a
vicious cycle of currency depreciation leading to increased debt
servicing costs which, in turn, leads to more currency weakness.

They say there is a question mark hanging over Asia; will any
governments go down the road of a debt moratorium or capital
controls to break out of the cycle?

On top of this, is the spectre of inflation as the currency
devaluations, which in some Asian countries have been more than
50 percent in less than six months, drive up the cost of imports.
Belchere estimates inflation rates across Southeast Asia will
rise into double digits in the new year?.

Meanwhile, the liquidity crunch, the IMF inspired government
austerity measures and problems in Japan could send most of Asia
into a recession.

"There is clearly going to be a major recession in some
countries and very much lower growth in others," said Bernhard
Eschweiler, head of Asian Economic Research at J.P. Morgan.

If the markets do negotiate the debt crisis, an economic
slowdown and the blow-out in inflation, they face some severe
tests on the political front as social unrest is widely expected
to mount.

Analysts say there is significant potential for urban labor
unrest because of lay-offs and corporate closures, while rural
problems could emerge from the combined effects of the region-
wide slowdown and the drought inflicted by the El Nino weather
phenomenon.

"I would worry about a number of countries, not only because
of elections, but other things like the impact of the bad weather
and the drought on rural employment," Eschweiler said.

But it is the elections which are likely to grab the
headlines, none more so than in Indonesia where the incumbent,
76-year-old President Soeharto, is widely expected to seek a
seventh five-year term.

Soeharto's unbroken 30-year rule must end eventually, and
analysts say pressures are building for him to nominate a running
mate for the election who will be his choice as successor.

Lingering fears over Soeharto's health have also unsettled
investors.

Meanwhile, the president-elect of South Korea Kim Dae-jung and
his new cabinet will be sworn in on Feb 25 to face perhaps the
most testing time of any new government as it inherits massive
debts and empty coffers.

The Philippines faces a presidential election campaign in May
with no incumbent as the president is barred from seeking a
second term in office by the constitution.

But there is a bright side to the current crisis providing
policy makers do the right thing.

Analysts expect the crisis to separate the weak from the
strong among Asian companies and financial institutions, while
the devaluations should provide a powerful boost to exports and
the current account balance.

"If we get through the first quarter then we're done. Things
should be improving by the second half (of 1998)," said
Eschweiler.

The U.S. Federal Reserve Board chairman Alan Greenspan once
said this about America after it had come through its own
recession: "We are facing stiff headwinds. The most critical
being the efforts of households, businesses and financial
institutions to repair and rebuild their balance sheets following
the damage inflicted in recent years as weakening asset values
exposed excessive debt burdens."

It was true of the United States in 1993 and analysts say it
holds true for Asia in 1998.