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.