More bad news in store for Asian markets

More bad news in store for Asian markets

By P. Parameswaran

SINGAPORE (AFP): Asian financial markets will remain depressed as they undergo a correction after their second phase of recovery from the regional turmoil with analysts unsure when the downward adjustment will end.

"In assessing the fundamental issues confronting Asian economies -- both external and internal -- there is more downside to go," said Fong Cheng Hong, senior vice-president for research at Nomura Singapore Ltd.

She said the current market adjustment appeared steep and if, at the same time, Wall Street suffered a 20-to-30 percent correction, as some analysts predict, Asian stocks could plunge to levels unseen since financial turmoil broke out in the region in mid-1997.

Asian currencies are also expected to shrink in line with a declining yen, according to forecasts by Barclays Bank and ANZ Investment Bank.

Stock markets across the region fell by up to 20 percent since Feb. 10 from their peaks of the second mini rally which started in September 1998, according to a Nomura study.

The first mini rally, which was very brief, began in January last year, six months after currencies in Asia plunged and caused stock and other asset prices to crash and pulled the brakes on the region's rapid economic growth.

Fong said among the external worries that would keep asset prices down were financial chaos in Latin America and Brazil in particular, the unsettled Russian problems, a slowdown in world growth and further deterioration of Japan's economy.

She said easing of debt overhang in the Asian banking and corporate sectors was proving much more difficult and severe than expected.

There was limited room for Asian interest rates to ease in the coming weeks while exports, initially thought to be Asia's savior, were still mostly on downtrend with the exception of South Korea and Malaysia, Fong said.

ANZ Investment Bank said in a bulletin to clients that Japan's central bank, the Bank of Japan (BoJ), would ultimately adopt a monetary stance that would weaken the yen and exert pressure on other Asian currencies.

"We are of the opinion that BoJ will ultimately bow to pressure and start underwriting new issuance of Japanese government bonds (JGBs)," it said.

The ultimate impact of such a monetary expansion in Japan must be to depreciate the yen, most probably back to the 140-150 range against the U.S. dollar by the latest second quarter of this year, ANZ Bank said.

"The impact of such a probable yen move, coupled with no further rate cuts from the Fed (U.S. Federal Reserve Board), must be pretty negative for Asian currencies," it warned.

Most of the offshore players surveyed by ANZ Bank in the past week have indicated that they expect Asian currencies to lose between 5 percent and 8 percent in value against the dollar in line with the yen dip.

U.S. investment house Lehman Brothers forecast the yen could hit 132 by June.

Barclays Capital, a unit of Barclays Bank, warned that the risk of renewed regional exchange rates weakness was growing.

"Although levels seen in January last year do not look likely, forces are building to push currencies back to levels seen before the rally at the end of 1998," said Kate O'Donoghue, analyst with Barclays Capital in Singapore.

Most Asian currencies fell to record lows in January 1998.

Donoghue said while Asia's asset market rally late last year attracted overseas funds and supported the regional balance of payments, there could be a portfolio outflow if growth disappointed and the recent rally faltered.

"This will mark a reversal of recent currency stability," she said.