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."