Pressure of contagion likely has less bite

Pressure of contagion likely has less bite

By James T. Areddy

SINGAPORE (Dow Jones): Southeast Asian financial markets
appear to have started 2000 better insulated from regional
contagion than at any time since the 1997-1998 crisis, which
analysts attribute to real financial system improvements made in
the past two years.

There has already been a lot of political tumult this year in
Southeast Asia to test the theory: Coup rumors and renewed
rioting in Indonesia, a squashing of opposition figures by the
government in Malaysia and turmoil in the Philippine
administration.

All have had some impact on domestic financial markets, but
none of these events appears to have made more than a few-days'
ripple elsewhere. It's a change from 1997 and 1998 when similar
agitation fueled forceful selling in financial markets across
Asia, leaving investors in one Asian market duty bound to
understand the details of what was happening elsewhere.

The key difference now, according to analysts, is that
Southeast Asian economies are stronger and more able to withstand
pressures of contagion.

"The policy makers have learned their lessons that the best
way to avoid volatility is to get your (economic) fundamentals
right," according to Neil Saker, a regional economist at SG
Securities Research Ltd. "Asia's growth cycle is so strong, there
will be a high degree of resilience," he said.

The so-called contagion that began in 1997 in Asia, and then
spread to other emerging markets, was widely cited as proof of
increased international market integration. Some called it the
flip-side, or downside, of "globalization."

Chaos in Indonesia in 1998, for example, was felt in markets
worldwide, as investors calculated the disparate risks of a
possible cutoff in oil supplies or loan losses for international
banks.

That this could happen at all was one of the main lessons
about how economies work that emerged in the Asian financial
crisis, according to the International Monetary Fund (IMF). The
Washington-based Fund, rattled by the forced rescue of several
emerging market economies, now offers contagion insurance -- in
the form of contingency credit lines -- to healthy economies that
might be threatened by the problems of riskier ones.

But as the economies recover in Asia, the idea of linking the
political and economic developments between neighboring countries
looks somewhat less advisable to some.

"Contagion is an intellectually lazy theory," according to
Anand Aithal, regional strategist at Goldman Sachs & Co. in
Singapore. "We don't believe in contagion anymore."

Most analysts aren't going that far, noting, for example, that
Singapore stocks were hit hard last week when new sectarian
violence flared across Indonesia, including places that attract
lots of Singapore tourists and investment.

But analysts also agree that since Singapore's market was
already worried about higher U.S. interest rates, it is difficult
to isolate one bearish factor as being more influential in the
selling. Plus, they note that Indonesia's problems didn't much
factor into analysts views about other Asian stock markets.

Southeast Asian currencies are more intertwined than stocks
because of the arbitrage opportunities that still exist between
them, according to analysts. But even here, analysts said traders
have become more discriminating -- some use the word
sophisticated -- in the past two years about what constitutes a
regional call to buy or sell.

"In the crisis, one problem fed off another," Aithal said. But
the chain reaction is no longer happening so clearly, he added.

"I don't think these linkages are as great as they are
commonly held (in the markets) to be," according to Adrian
Foster, an economist at Nomura International in Singapore, also
dismissing the contagion view.

"When (Asian performance) was a 'miracle,' we got slapped in
the face" when any blemish appeared, said Foster. "All those
things were surprising. All these things aren't surprising," he
said, noting that investors now better understand the forces at
play in the region's markets.

He said that international investors now understand that one
country can even benefit from another's trouble. Turmoil on the
Indonesian resort islands of Lombok and Bintan last week probably
means more travelers will consider Thailand's Phuket as a
vacation spot, Foster said.

SG's Saker said he remains a big believer in the forces of
contagion. However, amid economic recovery and government-led
restructuring, he describes it as a "virtuous circle."

Problems exposed by the regional financial crisis are being
corrected with a vigor that is offsetting the impact of fresh
turmoil, so contagion appears weaker and less sinister, according
to Foster. Southeast Asian countries are rebounding at different
speeds and investors need to give a second thought to whether a
problem in one country should impact the upward spin of another's
economy, he said.

Analysts said the change in sentiment amounts to more than
fund managers doing their homework about what makes individual
Asian economies tick. Nor is it only that there is less "hot"
money sloshing around, that investors ignore politics when
economies improve or that today's political problems are minor
compared with those of two years ago, according to analysts.

Fundamental improvements have been made since the financial
crisis struck in 1997, analysts say. The market meltdown forced
governments to tackle problems such as current account deficits,
outmoded currency regimes, bad bank lending practices, poor
corporate governance, corruption and a whole host of Achilles
heels that were exposed by, and caused, political and social
turmoil.

"In 1997, the markets were assuming that there was nothing an
individual country could do to avoid (what seemed like)
Armageddon," said Aithal. "I think you've got to give credit
where credit is due. Indonesia's problems are in a different
league from what you've seen in Malaysia and the Philippines," he
said.

And financial markets are clearly reflecting differences in
outlook around Southeast Asia. Kuala Lumpur stocks are up about
17 percent this year, while Jakarta's key index has fallen about
2.0 percent, Manila is down about 4.0 percent, Bangkok is about
flat and the Singapore market is off about 8.0 percent.

Meanwhile, the IMF has continued playing up the threat of
contagion. "Whether a county is large or small, any crisis can
become systemic through contagion on globalized markets,"
outgoing IMF Managing Director Michel Camdessus said in a speech
last month.

Hong Kong's Political and Economic Risk Consultancy Ltd.
thinks it knows why. "The fact that the upturn has occurred
almost simultaneously in all economies in the region is a good
indication that external forces are still at work," Perc said in
a report distributed last week. "If these forces were to change
suddenly (such as a U.S. recession), Asia would not be able to
escape the fallout."