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."