Speculation points to Asian reform

Australia has both a role and a strong interest in what is happening on the Asian currency scene. The Reserve Bank of Australia (RBA) is providing technical assistance to the Bank of Thailand on the mechanics of managing the float of the baht. The RBA is also one of the banks which signed repurchase agreements with other banks in 1996 after the Mexican peso crisis. The idea behind these agreements was that the banks would help each other withstand speculative attacks on their currencies. While it is a welcome example of regional cooperation, the banks recognize that the best they can do is stem the tide for a while. Even with the foreign exchange reserves amassed by strong economies such as Hong Kong, Singapore and Taiwan, there is an awareness that Europe and the USA can mount an attack on the weaker Asian currencies that would be almost impossible to withstand. We have seen the baht, the peso, the Indonesian rupiah and the Malaysian ringgit all come under pressure. The problem for some Asian economies is that the general cyclical slowdown in export growth in the past 12 months, combined with growing current account deficits and foreign debt (linked in some cases to excessive property speculation), is exacerbating currency volatility and leaving them vulnerable to attack. If this pressure results in a fundamental revaluation of Asian currencies that better reflects their economic prospects, then we can say that the market is working as it should.

Full financial liberalization inevitably requires economies to expose themselves to the twin forces of competition and highly mobile capital. Those countries sheltering behind a regulatory wall are simply deferring the often painful process that accompanies fiscal reform. They are also cutting themselves off from access to fund-raising opportunities that might spur greater economic growth. To the extent that Australia's experience is relevant to our neighbors, the RBA should extend the maximum possible assistance as it is now doing with Thailand.

-- The Australian