Weak currencies may not spur Asia, says BIS

Weak currencies may not spur Asia, says BIS

ZURICH (Reuters): The sharp depreciation of the currencies of some troubled Asian countries may do little to spur their exports or economies, the Bank for International Settlements said.

In a quarterly report to be published on Tuesday, the BIS said the countries which had suffered most -- Indonesia, Korea and Thailand -- still had painful adjustments ahead.

"More generally, these three countries still need to face the actual economic, financial and social costs of adjustment," it said.

"While international rating agencies have incorporated the related uncertainty into their ratings, most recent forecasts suggest that, despite their heavy export orientation, the ability of these countries to reap the benefits of currency depreciation might be limited," said the report, released in advance to the press.

One reason was that the "response of exports to the sizable competitive gains" was partly neutralized by the importance of intra-regional trade, including with Japan.

The BIS also cited the countries' dependence on imported items for production, as well as "difficulty in obtaining trade financing and, in view of exchange rate uncertainty and inflationary prospects, the lack of willing counterparties for the hedging of liabilities".

It also said weakness in the financial and corporate sectors was subduing economic activity, forcing "a sharp downward adjustment in borrowing and spending" alongside tighter monetary policies.

The report said Korea and Thailand had made progress in taking the necessary steps to restructure financial systems and foreign debt.

"At the end of March, the currencies of the two countries showed signs of stabilizing at higher levels, official reserves had been partly replenished, domestic interest rates had fallen back and the spreads on their foreign currency debt had narrowed to around three percentage points."

But Indonesia's exchange rate at the end of the first quarter still reflected a high degree of uncertainty and turbulence. The BIS said a further recovery of the currency would depend on progress in implementing a reform package signed with the International Monetary Fund in April.