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Expect another 6-9 months of volati
- Subject: Expect another 6-9 months of volati
- From: nyeinchan@xxxxxxxx
- Date: Sat, 22 Nov 1997 20:55:00
Singapore Business Time (22 November 1997)
Expect another 6-9 months of volatility in Asia: experts
But region's future remains good if it acts fast and shows political will
By Larry Wee
xpect another six to nine months of volatility in Asian financial
markets, now that South Korea has joined the list of battered economies,
And what the markets will look like two years from now will depend on how
quickly sentiment takes a turn for the better. But be prepared for a
two-year period of painful but necessary economic adjustment, they warned
at a forum which ended here this week.
Pacific Asset Management partner and chief strategist Dave Carbon said:
"The contagion effects could now widen. Before Korea, it was restricted
to capital markets, but now there's a competitiveness issue which will
have a much larger multiplier effect."
In Mr Carbon's view, this would suggest that crisis conditions could be
only 40 per cent over. Instead of the three to six months period of
volatility he had earlier projected, it could now be as long as nine
months. "There's now the question of how the Korean won's devaluation of
more than 20 per cent (since January) will impact on higher-end export
competitors like Taiwan, Hongkong, Japan and Singapore," he said.
Rating agency IBC Asia's director Sam Chin said: "It's all about
confidence now." But he argued that the region is not over-rated as some
Western analysts are saying.
However, for confidence to return, forum participants emphasised that it
must start with a demonstrated political will by Asian leaders to "bite
the bullet" quickly and take painful decisions.
The IMF's David Nellor said the sources of Asian strength are still
there, and strong growth will resume, but implementation of strong
economic medicine is crucial.
"There must be a willingness to adjust," stressed Dr Nellor, the deputy
to the director of the IMF's office for Asia and the Pacific, based in
Tokyo. Sharply lower capital inflows must be expected for now, he said,
which will lower current account deficits but at the same time slow
The three analysts were among speakers at a two-day forum on Asian
financial markets in an era of change and adjustment, organised by IBC
Asia, which ended yesterday.
Dr Nellor, as well as Mr Chin and Mr Carbon, provided a snapshot of the
critical ingredients needed for a return to stability: More flexibility
in exchange rate regimes: this will reduce opportunities for day-to-day
interest rate arbitrage between Asian currencies and the US dollar.
Fluctuation bands, where imposed, must be structured so that they can be
changed when needed. Banking sector reforms: these will be crucial too,
and must install clear and transparent rules for existing and troubled
institutions. Political influence based on vested interests and what has
come to be termed as "cronyism" must also be eliminated. Selective
"market-based" capital controls: these may be desirable, especially where
these are market-based, via the imposition of reserve requirements and
prudential controls. Better and more timely provision of financial
information must also be introduced. Sound monetary policies: these,
while responsive, must not be used to defend exchange rates. And fiscal
policies must help play a part in boosting savings, and in curbing
Mr Carbon, however, warned that there's no iron-clad guarantee that
benefits will always outweigh costs in a new Asian era of freely-floating
exchange rates -- which allows greater control over interest rates.
"Don't be surprised if, in one or two years, we see a move back towards
some form of pegged exchange rates," he said.