Remote chance of crisis hitting Asia again: PERC

Remote chance of crisis hitting Asia again: PERC

SINGAPORE (AFP): Asian countries remain dogged by problems arising from the 1997 financial crisis but these are not likely to trigger another collapse in the region's economies, a report said Monday.

There is still volatility in Asian currency markets but attempts to contain such fluctuations through the basket approach are not necessarily the solution for Asia, according to the Political and Economic Risk Consultancy (PERC).

It warned against including the euro in the currency basket comprising the U.S. dollar and yen.

"Adding the euro to this basket would not help promote the goal of greater exchange rate stability," PERC said in its latest Asian Intelligence report entitled "Asian Exchange Rate Volatility."

"To the contrary, with the euro moving one way against the dollar and the yen the other way, putting the euro in the basket would work against the interests of countries like Taiwan and Korea, which are mainly concerned with finding a proper balance between the dollar and the yen in order to maintain their export competitiveness," it said.

Asian economies are now fundamentally stronger than when the crisis erupted in 1997, it said.

"Today, virtually every Asian country still has major systemic problems, but they are different from the ones that existed four years ago and are not so far out of line with market forces that they are likely to spark another region-wide exchange rate crisis," PERC said.

"The sharp corrections that occurred in most Asian economies in 1997 and 1998 caused most governments to institute important policy reforms," it said.

"Local banking systems, while still weak, have not been piling on new debts," it added.

The profile of the region's capital market has changed markedly since Japanese corporations started repatriating their capital, leaving most Asian countries -- major recipients of Japanese capital investments -- less vulnerable, PERC said.

"No country in Asia has the exposure to short-term foreign debt that it did four years ago," it said.

"Foreign reserves have, in most cases, been rebuilt to fairly hefty levels.

"That capital inflow that is taking place is mainly in the form of direct investment capital, not indirect investment capital into local equity markets, which was the case back in 1997."

At the Asia-Europe Meeting held last month, Asia was urged by Japan and France to include the euro and the yen in a new post- crisis currency regime to reduce reliance on the greenback.

But an exchange rate regime is only successful when the economy is supported by appropriate macroeconomic and structural policies, PERC said.

A basket regime would not be effective in parts of Asia such as Indonesia and the Philippines when it was governed by former president Joseph Estrada, it said.

"There is too much political uncertainty," PERC said, referring to Indonesia.

"Nor could such as system be effective in a place like the Philippines when confidence was being sapped by a leadership crisis such as the type that happened under Mr. Estrada," it said.

But Asian politicians are likely to favor the basket approach to manage the exchange rates as it gives "the impression of greater currency stability in the near-term," PERC said.

This approach in the long-term would only encourage governments "to revert to policies that result in greater economic imbalances and systemic shortcomings that ultimately lead to more radical exchange rate corrections," it added.