Worrying signs of Asian relapse revive crisis

Worrying signs of Asian relapse revive crisis

PRAGUE (Dow Jones): Asia is looking sick, again. Many thought it couldn't happen again, but stock markets are down more than 20 percent from peak levels, currencies are sliding, and parts of the region are facing political turmoil.

These symptoms - unnervingly similar to those Asia suffered during the crisis three years ago - confront policy makers at the annual International Monetary Fund and World Bank meeting in Prague.

Some of the problems are global, like the nefarious effects of surging oil prices on Asian markets.

But of greater concern is the failure of many governments to make sufficient progress on reforms since the crisis of 1997-1999 that pushed most of the region into deep recession.

Recently it has become clear that a cyclical economic recovery over the past 18 months has masked backsliding on restructuring crucial to fighting future infection.

For now, the IMF remains sanguine about Asia's prospects, and in its World Economic Outlook issued this week was upbeat about its likely growth path. It forecasted a pickup in real gross domestic product growth to 6.7 percent in calendar 2000 from 5.9 percent in 1999.

And the Fund expects the region will expand a healthy 6.6 percent in 2001.

Market observers, however, are more wary. "It may be a bit premature to suggest another Asian currency crisis is looming in the wings, but there is no doubt the recent and pervasive weakness in this region against the dollar is a cause of concern," Morgan Stanley Dean Witter said in a research report.

MSDW said weakness in the currencies of Southeast Asian nations in particular would, if it continues, compromise their ability to service foreign debts that are still mostly denominated in U.S. dollars.

"In addition, the sharp downturn in many units raises significant obstacles to the growth outlook for this area, a situation that is rendered even more worrisome given the sharp runup in energy costs over the past few months," the report said.

This along with volatility in U.S. asset markets and massive gyrations in the currencies of industrialized nations makes Asia's position potentially even more precarious.

But the changing health of region is best illustrated by South Korea's almost overnight transformation from poster child of the Asian recovery to an emergency-room economy.

South Korea, whose economy shrank 6.7 percent in 1998 before expanding 11 percent in 1999, had attracted massive foreign direct and portfolio investment over the past year.

But as the 15 percent crash of the benchmark index of local stocks over the past six sessions and coincident 1.7 percent slide in the Korean won has shown, investors' love affair with Korea may be over.

Indeed, Korean Finance Minister Jin Nyum Friday described the economy as "not good." He said the government needs another 50 trillion won to prop up banks still suffering from the near collapse of the Daewoo Group.

Jin said the government wants to use public money - subject to approval from the National Assembly - to increase the size of an industry bailout fund to 149.3 trillion won.

"I am very sorry," Jin told a press conference. "I apologize to the public and the National Assembly for the need to raise additional public funds."

Foreign investors were already rattled after Ford Motor Co. last week withdrew its bid for debt-laden Korean car maker Daewoo Motor Co. when a deal seemed imminent.

Authorities selected Ford as the preferred buyer ahead of proposals from General Motors Corp. (GM) and a joint bid from DaimlerChrysler AG (DCX) and Hyundai Motor Co. Ltd. (Q.HMC).

Ford pulled out after months of due diligence that industry analysts say uncovered widespread accounting discrepancies. Rather than revise its bid to less than $3 billion from the $7 billion Daewoo creditors wanted, they say Ford dropped out.

Add to this the political uncertainty in Thailand ahead of November elections, the hostage crisis in the Philippines, and a spate of bombings in Jakarta, and there are at least some of the ingredients of the crisis.

Even with these warning signs, the IMF and World Bank are unlikely to deliver anything more than a ritual reminder for Asia to maintain the pace of reforms.

That means the potential for another crisis remains.