Southeast Asian free trade project 'in danger'

Southeast Asian free trade project 'in danger'

TOKYO (AFP): Southeast Asia's currency crisis may force the region to reconsider an ambitious free trade project as gaps between its economies widen over the next few years, analysts said.

The crisis, triggered by Thailand's de-facto devaluation of the baht on July 2, will be scrutinized during the annual meetings of the World Bank and the International Monetary Fund (IMF) in Hong Kong.

Members of the Association of Southeast Asian Nations (ASEAN) are expected to play down the crisis during the Hong Kong meetings and their annual economic ministers' meeting next month in Malaysia.

Analysts warn that Asia and the rest of the world should not underestimate the crisis, saying an overall review of economic projections including a free trade zone plan may be necessary.

"Following the currency crisis, the possibility that AFTA (ASEAN Free Trade Area) will end in failure is getting bigger," said Shunta Yamato, a senior analyst in charge of Asian economies at Daiwa Institute of Research.

The group plans to set up a free trade zone, with Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand scheduled to cut tariffs by 2003, Vietnam by 2006, with Burma and Laos following two years later.

Analysts said the currency crisis would widen differences in economic development in Asia by the turn of the century and may force ASEAN to revise the deadlines and start with a clean slate.

"Thailand will suffer a serious slump in the short term, but may finally join the side of the advanced team together with Singapore and Malaysia because it has fairly developed production bases and personnel resources," Yamato said.

"On the other hand, Indonesia and the Philippines and the remaining ASEAN members will have a hard time catching up with the front runners as their economic weakness will be exposed," he said.

According to the World Bank, East Asian economies' gross domestic product (GDP) would slow to an average 7.6 percent between 1997 and 2006 from 9.2 percent in 1987-96, while South Asia's would ease to 5.9 percent from 5.4 percent.

Analysts said the inflow of investment in the region would continue in the long run with demand for infrastructure -- roads, electricity and telecommunications -- expected to remain stronger than any other region.

But they warn that investors would be more cautious about their money flows into Asia and discriminate between countries in terms of investment destinations.

"A lot of money flowed into the region without proper assessment of investment risk," said Taiki Saito, an analyst at Yamaichi Research Institute.

"From now on, investors will be looking not at the region in general but countries seen as appropriate recipients of funds," Saito said.

The Institute of International Finance said last week money flows to developing countries were expected to fall in 1997 for the first time in three years due to a sluggish capital flows to Asia.

The Washington-based research group, set up by U.S., Japanese and European financial institutes, said net fund inflows to emerging markets were forecast to fall 7.1 percent from last year to 261.4 billion dollars this year.

The decline would be mainly due to a 24.5 percent drop in money flows to Asia to 107.1 billion yen this year because of the currency crisis, the institute said.

Analysts said Asian economies should recover because the plunges in the value of their currencies against the dollar would boost exports, but the timing of such export-driven growth was unknown.

"Theoretically, exports should pick up thanks to the decreased value of their currencies against the dollar and the yen," said Nobuyuki Saji, a senior economist at Nikko Research Center Ltd. "But it is still uncertain when strong exports will visibly contribute to their economic growth," Saji said.

Yamato said: "When Mexico faced its crisis three years ago, the United States fully committed itself to solving the problem under the framework of NAFTA (North American Free Trade Agreement), and as a result, Mexico showed clear recovery boosted by brisk exports to the United States and Canada.

"But in this case, there is no America," Yamato continued. "Japan may be urged to play a similar role, but it cannot play like Washington did because Tokyo is a pure investor, which does not have a flexible and large enough market to accept production inflow from the region."