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."