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.