Indonesian crisis fuels new Asia contagion fears

Indonesian crisis fuels new Asia contagion fears

HONG KONG (Reuters): Indonesia is a wild card with the
potential to damage the entire region, but analysts are divided
on whether its economic turmoil will drag Asia back to the brink
of economic chaos.

"I think it will have an impact, but it's a hard call," said
Andrew Ballingal, equity strategist at Schroders Investment.

"People look at Indonesia very differently than they do Korea,
or the Philippines, or Thailand. They see it as a bit of a wild
card. Indonesia hasn't really kowtowed to the great American
capitalist way."

And at times heated stand-off with the International Monetary
Fund (IMF) has fueled fears of another slide in the Indonesian
rupiah and a new period of regional market mayhem reminiscent of
late last year, when currencies plunged in unison.

But some analysts felt investors would view Indonesia's
problems as separate from other Asian markets, which have shown
more resilience since the beginning of the year.

"Indonesia will put a nervous tone to the regional markets but
I think there's a bit of delinking that's taken place," said Eric
Nickerson, head of currency research at Bank of America.

"As long as the currency bounces around in a range at levels
we've seen before, I don't think it is necessarily going to pull
down the rest of the region," he said.

Most Asian financial markets have stabilized since the
beginning of the year. Stock markets have gained and credit risk
premiums have declined while currencies stabilized.

But recent gains in many financial instruments could prove
unsustainable, particularly if the rupiah succumbs to another
sharp slide from current levels of around 10,000 to the U.S.
dollar.

Analysts saw potential for further weakness on fears that re-
elected Indonesian President Soeharto would try, but fail, to
implement a currency board system (CBS), an idea that lies at the
heart of the IMF's reluctance to disburse a US$3 billion tranche
from a more than $40 billion aid package.

Most analysts believed the CBS would push interest rates sky-
high in the short term, destroying Indonesia's fragile financial
system. Low foreign exchange reserves could also invite further
speculative attacks that could drive the currency back down to
record lows of around 17,000 to the dollar.

But views were divided on whether sudden weakness in the
rupiah would infect other Asian currencies and markets.

One equity strategist said the Asian financial crisis had been
driven by competitive devaluations, and it seemed unlikely that
current Indonesian policies would enhance the nation's
competitiveness against its neighbors.

"What Indonesia is about to do, or may be about to do, in no
way wins any market share back," he said.

But other analysts said most Asian markets were overbought at
current levels, and vulnerable to a sell-off -- perhaps sparked
by a sudden slide in the rupiah.

"The situation in Indonesia has therefore put the whole issue
of stability to the test," C.S. First Boston wrote in a recent
research note.

Recent comments by U.S. Federal Reserve chairman Alan
Greenspan seemed to support this view, CSFB said. The Fed
chairman said some Asian currencies had fallen to levels
understandable only in the context of a collapse of confidence in
an economy.

"The fact the Fed Chairman was so open in voicing his concerns
suggests he believes the implications for another down-leg in
Asia may be worse than the markets had at first thought," CSFB
wrote.

One analyst also noted that Southeast Asian currencies showed
renewed signs of trading as a group after weeks of divergence,
indicating a heightened regional sensitivity to the rupiah's
movement.

"We have had renewed, general selling across the board and
that harks back to one of the previous stages where we had panic
across the board," said Callum Henderson, managing analyst at MMS
International. "But we aren't there at the moment."

Henderson said he believed rioting on the streets of Jakarta
or a declared default on external debt would be required for
Indonesia to have a major impact on regional markets.