OECD says investment in Asia not dented by crisis

OECD says investment in Asia not dented by crisis

PARIS (Reuters): The OECD said on Sunday that foreign direct investment (FDI) into Southeast Asia had not been dented by the financial crisis and the outlook for this kind of investment remained mixed.

"The impact of the recent currency crisis on FDI flows into Southeast Asia will depend on a number of influences which, to some extent, are offsetting," the 29-nation think-tank of industrial countries said in its Financial Markets Trend report published Sunday.

"Slower growth and political turbulence will dampen investor interest, while more competitive exchange rates, further liberalization and a greater willingness of local firms to cede control to foreigners will also encourage FDI," the Paris-based organization added in the thrice-yearly report.

A significant share of foreign direct investment in the region was to supply goods and services to the local and regional markets and slower growth would lead to less direct investment in the short term.

This was particularly the case for the automotive sector, where purchases were usually made on credit and where demand had been hit by a rise in interest rates to defend currencies.

The OECD said investors' decisions would also be influenced by exchange rates, with many Southeast Asian currencies having depreciated by over 30 percent against the dollar since July 1997.

"This will assist national economies as they try to compensate for depressed local demand by exporting. While they will have little advantages over each other because all currencies have fallen, they will have gained some advantage over Chinese exports," the report said.

The OECD said exchange rate movements would also have implications for the profitability of a given investment. While depreciation lowered the potential dividends from the affiliate in dollar terms, the cost of making an investment was considerably reduced on top of the fall in asset prices.

"If the currency is expected to appreciate in the future, then this latter effect will outweigh any short-term decline in dollar-denominated dividends," it said.

The OECD noted that local Southeast Asian companies in search of capital were now more likely to sell shares or even a controlling interest to foreign investors. On top of that, governments were under pressure to liberalize their inward investment schemes.

"Virtually all Southeast Asian countries have liberalized their investment regimes to varying degrees as a result of the crisis. They have also discussed the possibility of accelerating regional integration. Greater privatization could also lead to significantly more FDI flowing into the region, as it has done in Latin America," the OECD said.

The economists said preliminary evidence suggested the crisis had not dampened the enthusiasm of foreign investors for investing in Southeast Asia.

They said estimates by accountants KPMG showed that Indonesia, Malaysia, the Philippines and Thailand sold assets worth $11 billion to foreigners in 1997.

The Institute for International Finance predicts that equity flows will remain high to the four ASEAN countries and Korea at a net $17 billion, which will partially offset a net decline in bank lending estimated at $20 billion.

A survey of investment plans by UNCTAD and the International Chamber of Commerce shows that large multinational companies have unchanged confidence in the region as an investment destination.

The OECD said that while there seemed to be considerable interest in the long-term potential of Asia, some investors might hesitate or retrench in the short term. Political uncertainties also clouded the picture.

"The full implication of the crisis on FDI flows will only be revealed in the long run. It is nevertheless comforting that, as in Mexico, foreign direct investors appear to be discounting the current turmoil in their quest for an expanded presence in Asia," the OECD said.