Financial markets keep analysts anxious

Financial markets keep analysts anxious

By Richard Hubbard

SINGAPORE (Reuter): The crisis in Southeast Asian financial markets eased last Friday after a dramatic U-turn in economic policy by Malaysia, but analysts warned that problems remain in the underlying economies of the region.

Stock markets across Southeast Asia were generally firmer last Friday with most regional currencies up against the U.S. dollar. At last Friday's midday break, Kuala Lumpur's composite index of the top 100 stocks was up 79.90 points to 811.02. And at 0642 GMT, the ringgit was at 2.9500 to the dollar, up from an all-time low last Thursday of 3.0520 per dollar.

The Jakarta composite index was also up by noon last Friday, rising 44.40 points, or 8.32 percent, to 578.27. At 0632 GMT, the Indonesian rupiah was at 2,970.00, well above its last Thursday levels of 3,035.00 to the dollar.

"The feeding frenzy might have died down but attention will soon swing back to fundamentals, where there are still some problems," said Song Seng Wun, regional economist at ABN AMRO Hoare Govett Securities.

The recovery in the markets is directly linked to the decision by Malaysian Prime Minister Mahathir Mohamad last Thursday night to scrap restrictions on stock trading introduced a week earlier; to delay indefinitely some major infrastructure projects including the controversial Bakun Dam; and to crackdown on the imports of luxury consumer goods.

The Malaysian measures echoed a similar package introduced by Indonesia earlier in the week, which included a scrapping of the limits on some foreign share purchases, a rise in luxury goods tax and cuts in some import tariffs.

Both countries made their moves in the wake of an IMF- sponsored package of economic reforms adopted by Thailand last month as part of a $17 billion bail-out deal.

All three countries, along with the Philippines, had been subject to heavy speculative selling in their stocks and currencies as investors lost confidence in the economic policies pursued by each government.

"The markets had been worried by the optimism of these governments in the face of the export slump which hit the region," said Yirou Zhong, assistant Asian currency strategist at NatWest Markets.

According to Zhong, the markets will be encouraged by the fact that these countries have now accepted that they do have problems in their economies.

"They have now done a lot in terms of redressing domestic imbalances, cooling their economies and addressing some of their longer term problems," Zhong said.

But analysts point out that many investors were hurt by the sharp fall in the markets and the often wild policy swings by the region's governments, and say any recovery will be gradual.

"Fund managers won't come back in a big way straight away. It will be more of trickle," said Chiang Yao Chye, Head of Asia Pacific Research at CIBC.

Economists are also cautious about the economic outlook. ABN AMRO's Song Seng Wun points to three concurrent factors which cloud the future for the region.

The first is the impact of the weather phenomenon called El Nino which is causing problems in the agricultural sectors within each Southeast Asian country and could hit food prices.

Second is the impact of higher interest rates introduced during the current crisis, which will put pressure on already fragile property markets and the banks that have lent to them. And third is the implications of region-wide deceleration in growth now on the cards for the next two years at least.

For Song the weak link in Southeast Asia's attempts to recover stability is the Philippines where banks have a heavy exposure to an overheated property market.

"Thailand started the rout, Malaysia sustained it. It could now be back to the Philippines," Song said.