MIT's Dornbusch says SE Asian turmoil not over

MIT's Dornbusch says SE Asian turmoil not over

NEW YORK (Reuters): Rudiger Dornbusch, professor of economics at Massachusetts Institute of Technology (MIT), on Wednesday said the financial instability that has rocked Southeast Asia in recent months has not yet ended.

"In Southeast Asia, it isn't over. And it is very hard to find the exact point (when it will end), Dornbusch said at a Goldman, Sachs and Co. foreign exchange conference here.

Dornbusch said the Southeast Asian countries Malaysia, Thailand, Indonesia and the Philippines had not put into place sufficient measures to address extraordinary levels of leverage in the financial sector, or the loss of international confidence.

"One has no right to expect this is going to work itself out, Dornbusch said. "Going back to 7 percent growth is not going to be the story of the next five years."

Dornbusch said he did not believe the Southeast Asian woes would force the Hong Kong dollar off of its peg to the U.S. dollar, although the instability might weigh on the Hong Kong stock market.

"I don't believe the Hong Kong dollar will go. But I do believe there is a state of siege and the higher the interest rates, the worse the pressure on the stock market," he said.

Dornbusch added that the Hong Kong dollar could not withstand speculative pressure indefinitely, but for the moment, the currency peg seemed as though it would last.

U.S. investment bank Goldman, Sachs and Co. concurred on Wednesday that Asian currency volatility was likely to continue over the near term and advised investors to refrain from "bottom fishing" for now.

"It would be premature to go bottom fishing, i.e. to go long on Asian currencies, even ones that we feel are oversold," said Sun Bae Kim, senior international economist at Goldman Sachs.

Kim, speaking at the firm's annual foreign exchange conference here, said the instability in Asian currencies over the past several months would probably continue.

"Foreign exchange volatilities are likely to persist near- term," Kim said. "Near-term defined as being three to six months, conservatively speaking."