Investors eying SE Asia deficits

Investors eying SE Asia deficits

SINGAPORE (Reuter): Global investors continue to watch current account deficits in Southeast Asia and will punish those with low foreign direct investment, high imports and lackluster export performance, UBS Global Research said yesterday.

In its weekly report on East Asia, UBS said investors question the sustainability of current account deficits in Southeast Asian countries, ranging from 4.5 percent of gross domestic product (GDP) in Indonesia to 9.2 percent in Malaysia.

But as long as foreign direct investments were financing these deficits, investors would relax a little, it said.

The UBS report said both Malaysia and Thailand would have to cope with reduced long-term inflows.

Malaysia, in particular, needed to convince skeptics that with only 50 percent of its current account deficit financed by foreign direct investment (against 100 percent in 1994), that it would get its "domestic house in order", the report said.

"Maintaining domestic policy credibility via sufficiently tight fiscal and monetary policies and a helpful exchange rate stance" will be important to Thailand and Malaysia, the report said.

With Indonesia, investors are also expected to monitor export growth, which averaged only 12.3 percent year-on-year for the 11 months ending November 1995.

"The policy challenge is most stark in Indonesia. Unlike the others, export growth has to improve and to that end the rupiah must continue to depreciate to be competitive," the report said.

UBS said it expects a depreciation rate of 5.3 percent in the rupiah this year.

"We do not expect any of the external deficits of these Southeast Asian economies to drop rapidly. As they are all likely to borrow more than they used to in this context, lackluster export performance will be punished by investors. The greatest risk of this is in Indonesia," the report said.