[Kabar-indonesia] BT Panel of Experts: Another Asian Crisis Unlikely

[Joyo at aol.com]

Business Times Singapore 
Saturday, July 1, 2006

ECONOMIC ROUNDTABLE / PANAL OF EXPERTS

Another Asian crisis unlikely

OVERVIEW

THE bloodshed across global financial markets last
month kindled fears of a deeper crisis in regional
economies. Though the market slump has since eased,
the force and extent of the earlier bloodletting has
left niggling worries among some that a fundamental
weakness still dogs the markets.

Such fears were articulated recently by the
International Monetary Fund's chief economist who said
that, while world markets were not in a crisis
situation 'right now', things might become 'a little
more serious' if it went on for much longer.

Raghuram Rajan was touching on what many analysts fear
the most: that an emerging market economy may
experience a severe financial crisis that will spread
from one market to another, like the Asian crisis that
began in Thailand in 1997 and spread across Asia,
Eastern Europe and Latin America.

Have such fears been overplayed, especially with fresh
strength having returned to the markets? Or does there
remain an undercurrent of weakness that could threaten
to unhinge the current financial stability in Asia?

Our panel of experts tells us more. Michelle Quah:
What, in your view, caused the recent market scourge?
Are we looking at an inherent weakness in financial
markets that could prompt a further sell-off globally?
Or has the selling been due to more 'innocuous'
factors, such as the seasonal drought of buying
interest every May and the unwinding of funds'
positions?

Kevin Scully: There were probably three or four
different factors that caused the meltdown in emerging
markets and commodities - but because they happened
around the same time, the effect was severe. There was
the US Federal Reserve which signalled in mid-May that
interest rates had not peaked and more rate increases
were to come. Crude oil prices were also continuing to
rise, supporting the Fed's hawkish view. China was
signalling that it was introducing curbs to prevent a
further over-heating of the economy. There was a
tightening of liquidity in Japan which could see
inter-bank rates moving higher. And markets were
moving into a seasonal quiet period, so there was an
absence of buying from investors winding down for the
holiday break.

I believe the strong rally in emerging markets and
commodities in the first quarter of 2006 was probably
driven by a rush of liquidity from hedge funds. These
funds, which can gear up to more than 100 per cent,
were borrowing in Japan at less than 1 per cent and
investing in emerging markets and commodities where,
because the borrowing costs were so low, an absolute
return of 12 to 15 per cent was good. These funds had
to quickly unwind, however, when the Bank of Japan
started to soak up the surplus liquidity.

Jimmy Koh: Among other things, we've identified three
main factors for the recent market sell-down: 1)
Increasing concerns over the second-round inflationary
effect of crude oil and commodities prices surge.
There were even concerns that the next thing China
will be exporting is 'inflation'; 2) Uncertainty over
the extent of the Fed monetary tightening cycle.
Earlier in the year, the consensus was that the Fed
would pause around 5 per cent, which now seems more
likely to be 5.5 per cent or higher. There's also the
issue of the market grappling with Fed chairman Ben
Bernanke's communication mode, where his clearer
approach - compared with his predecessor, Alan
Greenspan's - has back-fired in the current
environment where clarity is lacking; 3) Of course,
there were reasons related to the 'square in May and
go away' phenomenon, as well as liquidity drying up as
the market heads into the World Cup season.

In terms of the magnitude of correction, it is largely
the result of flush liquidity conditions and
investors' unquenchable thirst for risky assets over
the last few years. While the 15 to 20 per cent
correction over four weeks appeared worrying, it is
important to note that there is yet no erosion of
global fundamentals, neither is the correction an
indication of a more fragile global environment. What
this means is that once the coast is clear,
risk-taking activities will be back.

Song Seng Wun: I also believe that it's really a
combination of factors. Many markets across the world
have done really well over the 15 months to April
2006. For instance, the benchmark Straits Times Index
(STI) rose nearly 14 per cent in 2005 and a further 11
per cent in the first four months of 2006. So the
markets were ripe for correction. And that came
against a backdrop of near-term uncertainties from
rising interest rates amid increased inflation risk,
and signs of froth or stress in the commodity markets.

You can also throw in the fear and speculation of a
global recession, triggered by a cooling of the US
economy. Indeed looking back to the 1980s, we can see
that many global economic downturns were preceded by a
slowdown in the US economy. It is thus not surprising
that the anticipated slowdown in the US economy has
stirred fears of a sharp regional economic slowdown
triggered by lower exports, a situation akin to the
bursting of the tech bubble in 2000. Another important
ingredient thrown into the pot is, of course, the
football World Cup matches in June/July. With most
European funds managers and investors paying more
attention to football bets, interest in equities has
dried up further, especially so against the backdrop
of heightened uncertainty in the markets.

The final ingredient is that even after the football
is over, many Asian markets - especially those with a
large Chinese population - might find that things will
still be relatively quiet because the Hungry Ghost
month is just around the corner. But this year,
according to the Chinese calendar, the Hungry Ghost
festivities will stretch over two months - from the
last week of July to the last week of September! With
many Chinese not expected to commit themselves to any
business decisions during the period, punting on
football now might be the most exciting activity for
many in 3Q06! Michelle: So, if that's the case, what
do you make of fears that we could see a repeat of the
Asian financial crisis of 1997, where a prolonged
sell-off could lead to the collapse of an emerging
market, creating a domino effect throughout the
region? Are those fears unjustified, given what you
believe is an absence of fundamental weakness in the
markets?

Seng Wun: At this juncture, I would say such fears are
unjustified.

Asian countries are now better placed to manage
domestic and external risks as their economies have
generally become more flexible in their policies and
financial institutions are more resilient to shocks.

Since 1998, the economic structures of Asian countries
have become increasingly diversified and the
macroeconomic fundamentals have strengthened
considerably. This places the region in a stronger
position to counter any cyclical shocks stemming from
the external sector.

Most of the emerging markets in Asia have been
gradually moving from an accommodative to a more
restrictive policy stance. The authorities in the
region are keeping a tight rein on their budget
deficits by reducing petrol subsidies. A number of
central banks - Thailand, Korea and Indonesia - have
been raising domestic interest rates in response to
the upturn in US rates, as well as to combat
inflation.

Furthermore, since the 1997 financial crisis, regional
economies have taken painstaking efforts to fortify
their economic fundamentals, making them more
resilient to economic shocks. Due to the consistently
strong trade balances, the countries that were hard
hit by the crisis now have much higher international
reserves, putting their economies on a better footing
to resist speculative forces.

Also, as the currencies have become more flexible,
there is more room for the economies to adjust to
economic shocks. Given the economies' increased
resilience to economic shocks, we do not think the
price correction for equities, commodities, metals and
minerals in recent weeks is likely to have a
'contagion' effect on the regional economies as was
the case during the 1997 financial crisis.

Jimmy: We also believe that, over the last few years,
the global environment has become increasingly
resilient - partly the result of a liquid global
system and technology advancement enhancing the pace
of real sectors' adjustment process. As for another
Asian financial crisis, we doubt so, as most Asian
economies are now sitting on stronger fundamentals.
Besides the respectable current account and fiscal
surpluses, most economies are working with very
manageable foreign debt. Also, Asian economies are now
operating with more flexible foreign exchange regimes,
which allow risk premiums to be readily priced into
forex levels - and enable the burden of risk premium
not to be undertaken by the domestic economy alone. In
all, stronger fundamentals, more flexible FX and
interest rate regimes should help cushion Asian
economies against another financial crisis.

Kevin: I don't see this as being like the Asian
financial crisis of 1997, when the financial systems
of certain countries were at risk.

This is more a withdrawal of liquidity which saw the
gains of stock markets in three to four months wiped
out in one to two weeks. In fact, by the end of May,
most markets were back to December 2005 levels. It was
probably the speed of the decline which surprised
investors. But there is no perceived problem with any
financial system - instead, it was a tightening of
liquidity. Michelle: So, what could possibly be the
worst-case scenario, in your view?

Seng Wun: Many global economic downturns were preceded
by a slowdown in the US economy. It is thus not
surprising that the anticipated slowdown in the US
economy has stirred fears of a sharp regional economic
slowdown triggered by lower exports, a situation akin
to the bursting of the tech bubble in 2000. So one of
the major fears now is that the US may experience
several quarters of sub-par growth and that is
accompanied by a synchronised global slowdown.

Kevin: That question can only be answered by the Fed.
If we see US rates peaking after the 25-basis-point
June 2006 increase by another 50 basis points, then
markets can find some ground once valuations have
taken into account the higher risk-free rates. The US
markets are forecasting earnings growth of 30 to 40
per cent, on the basis that the markets are fairly
valued with the additional 50-basis-points increase.
So, a further correction of 10 to 15 per cent is
needed to bring buyers back. Secondly, and more
importantly, the 30 to 40 per cent earnings growth -
which is quite robust - must hold. Any sign of
earnings downgrades will probably send the markets
lower.

Jimmy: It is important to note that financial markets
are now deeper and more integrated. The worst-case
scenario is an extended irrational unwinding of global
risk-taking activities, resulting in a collapse in
global assets markets, and erosion of consumer and
investment confidence. However, we are still far from
that. Also, any indication of such an outcome will
result in the Fed immediately pausing in its monetary
tightening cycle - eg. a possible cut in interest
rates - which will give global assets a much needed
boost. Michelle: Looking specifically at the
implications for Singapore, is there any threat that a
prolonged sell-off will create a systemic risk here?

Jimmy: Singapore's economic fundamentals have been
stable, given the country's large current account and
fiscal surplus. In fact, during the Asian crisis, it
was more of a contagion effect from across the region,
instead of an erosion of Singapore's fundamentals.
Thus, the risk of a systemic risk very much depends on
its neighbours' ability to weather the current
sell-off, and we believe Southeast Asian economies are
now more resilient. Further, funds unwinding risky
equities were actually shifting into more defensive
Singapore government related papers - which means
funds are still well within the nation's border. This
is also reflected in the stable forex reserves figures
over the last two months.

Seng Wun: As various reports from the IMF and even the
IMF have said, and I also agree, Singapore's financial
sector has proven very resilient in the face of the
series of external shocks and asset price declines in
the past few years. The local banks and insurance
companies are very profitable and very
well-capitalised. Stress test results indicate that
Singapore's systemically important banks and insurance
companies could withstand significant shocks.
Michelle: So what's needed for a real recovery in
global markets? Would the answer lie merely in further
strength for the US economy and the greenback? What
part can the emerging markets play?

Jimmy: As indicated by the factors that contributed to
the sell-off, we would have to witness a return of
risk-taking activities and a clear indication of a
pause in global monetary tightening cycle. As for the
former, the consensus is that, after the recent
sell-off, it would take a while for fund managers to
gear up their leverage ratio.

Further, global liquidity usually dries up as Europe
heads into the summer holiday season. On the latter,
there are still yet signs of an end in the current
monetary tightening cycle. The consensus is that the
Fed's intention will be a little clearer at the August
2006 meeting. Thus, if anything, risk aversion will
scale back, at the earliest in late-July 2006.

Seng Wun: Whether it is emerging markets or the
developed markets, equity investors got out of the
market in the last two months because of likely profit
disappointments in the coming quarters, given the
uncertain macroenvironment globally. For equity
investors to return again, it must be because there is
greater profit visibility. However, it might be
towards the tail-end of this year that we find out how
resilient the household sector is in the face of many
central banks' effort to cap inflationary expectations
by tweaking interest rates.

My view is that the interest rate cycle is peaking now
- and going forward, if we continue to see income and
job creations, we should see global growth conditions
stabilising and that would be when we have a better
handle on the issue of profitability.

We do not see a crash coming but we agree that global
growth is moderating. In particular, rather than a
sharp economic downturn, the No 1 economy, the US, is
expect to see growth of around 3 per cent this and
next year (4.4 per cent in 2004 and 3.5 per cent in
2005).

However, the No 2 economy, Japan, is firmly on the
road to growth - with deflation on the back burner and
the labour market improving. We are witnessing a
gradual consumption and investment recovery there.

The IMF and OECD (Organisation for Economic
Co-operation and Development) have upgraded their
assessment of the nation's economic outlook, upping
this year's GDP growth to 2.8 per cent (2.3 per cent
in 2004 and 2.7 per cent in 2005).

Meanwhile, the outlook for the Singapore economy
remains favourable even in the face of higher crude
oil prices. We are confident that the Singapore
economy can record growth of 7.3 per cent this year
and 6 to 6.5 per cent in 2007. But only time will tell
if we are being over-bullish!

Kevin: I think the euphoria of the first quarter is
gone and investors have now sobered up. Investors can
find protection in value, that is, if you buy stocks
on mid- to high-single-digit PERs (price-earnings
ratios) with modest earnings growth of at least 10 to
20 per cent, you have protection in the valuation.

The more important question is whether the further
increase in US and global interest rates to check
inflation will slow global growth and impact cyclical
stocks. This probably explains the weakness in the
tech sector, amid expected price cuts and more intense
competition in the PC (personal computer) market.
Banks and property plays might lose their lustre.

PARTICIPANTSin the roundtable

Moderator: Michelle Quah, BT Senior correspondent

Panelists:Kevin Scully, managing director of
NetResearch Asia Jimmy Koh, head of economics-treasury
research at UOB Song Seng Wun, senior vice president &
economist at CIMB-GK Research

KEY POINTS:

Economists and stock analysts believe a host of
factors caused the market meltdown in June,ranging
from uncertainty over US interest rates to the ''World
Cup'' factor. Encouragingly, they don't believe the
recent market negatives have weakened the fundamentals
of Asian financial systems and say another Asian
financial crisis does not threaten. They believe
regional economies have grown more resilient since
then, and are better placed to withstand such shocks.

Singapore's economic fundamentals, in particular,
remain very resilient. Still, there are worries over
the anticipated slowdown in the US economy - which
will be felt worldwide - and weaker earnings numbers
from companies, given the uncertain macro-economic
environment globally. The US Federal Reserve's move in
August will give markets a good indication of whether
risk-taking activities can resume. Until then, the
double Ghost Month this year could give Singapore
investors pause.

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