Global changes hoped to reinforce Asian economies

Global changes hoped to reinforce Asian economies

SYDNEY (Reuters): Structural changes to global financial services would reinforce the crisis-driven restructuring of East Asian economies, according to a report by the Australian department of foreign affairs and trade.

"The countries of Asia are now embarking on the most far- reaching transformation of their financial systems since independence," said the report titled "Asia's Financial Markets, Capitalizing on Reforms" and released on Tuesday.

But the report said East Asia's continued recovery, with all regional economies now posting real growth by the end of 1999, depended on the resumption of stable capital flows, particularly from foreign investors, and improved prudential regulation.

"Thailand, Malaysia and the Philippines need to attract foreign capital because they relied heavily on capital inflows before the crisis," said the report.

"And Indonesia, Korea and Thailand need inflows because they are incurring huge foreign and domestic liabilities refinancing their banking systems."

But the report said by late 1999 the most seriously affected economies of Korea, Japan and Malaysia had made considerable progress in resolving non-performing bank loans, refinancing financial institutions and strengthening prudential controls.

It said Thailand, where the Asian crisis started, had made slow but significant progress in reforming its banking sector, but Indonesia had been impeded by political uncertainty.

"By the end of 1999 the Indonesian government will own banks holding 85 percent of banking system deposits," said the report, but added up to 85 percent of loans were non-performing, making the task of restructuring banks massive.

It said that while the Indonesian government had removed most restrictions on foreign ownership of banks, potential investors consider most local banks too risky.

The report said falling regulatory barriers in Asia were driving mergers and acquisitions, increasing competition and encouraging the development of financial conglomerates.

Many Asian nations have liberalized equity levels in local banks, with Indonesia, Korea and Thailand all allowing 100 percent foreign ownership.

"Since January 1998, foreign financial institutions have acquired all or part of 18 East Asian banks," said the report, adding there was considerable scope for mergers citing only 22 of Asia's 1,700 banks merged between 1987 and 1997.

The Internet and electronic banking were also driving Asian reforms, increasing competition from non-banking financial institutions and capital markets.

The report said the Philippines escaped the financial crisis without a systematic banking crisis, but its uncompetitive banking system required consolidation. It said Taiwan was overbanked, with 470 institutions for a population of 22 million.

Asia's underdeveloped capital markets accentuated the financial crisis by forcing governments to rely on short-term, often volatile, domestic and international lending. But as Asian governments refinance banking systems a prudent, corporate bond markets was now developing.

"As most East Asian governments issue more bonds to finance bank recapitalization and stimulate economic activity, they will help to establish benchmark yield curves, thereby developing corporate bond markets," it said.

The report also said Asia's equity markets have undergone reforms, strengthening information disclosure, accounting standards, brokerage, market surveillance and enforcement.

It said Korea had virtually removed all foreign investment ceilings on shares, Indonesia removed its 49 percent foreign ownership limit on firms, except banks, and Taiwan raised foreign ownership to 50 percent.

But the report said Asia's stock exchanges, except Japan, remained vulnerable due to their small size and called for consolidation.

"East Asian exchanges' small size make them vulnerable if NASDAQ or the New York or London Stock Exchanges extend their electronic network to the region and attract top stocks."