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Asian tigers sick

All is not well in Asia as the tiger economies take a battering from currency traders. BT Funds Management outlines its views on the area.

Friday, September 12th 1997, 12:00AM

by Philip Macalister

The downward pressure on some South East Asian currencies is of concern for New Zealand investors with an exposure to the area.
Since July the Thai baht moved from a pegged currency system to a floating system, causing the baht to depreciate significantly.
Following this, the Philippine peso, the Malaysian ringgit, the Singapore dollar and the Indonesian rupiah have all fallen considerably.
Large overseas currency funds have been partially responsible for initially attacking the Thai baht and breaking the peg to the US dollar.

However, more importantly, high growth rates in these South East Asian economies and the strength in the US dollar (their currencies were tied to the US dollar) has caused structural problems in these countries, such as falling exports.
This has led to sharp falls in these countries’ currencies. BT over the past 12 months has maintained a defensive approach to investment in the sharemarkets of South East Asia, particularly Malaysia, Thailand and the Philippines.
Its defensive position is due to the structural problems it saw in these markets resulting from the strength in the US dollar, as that strength has caused exports to slow down. The economies had also been suffering from excessive credit growth over the past few years, causing problems in the banking sector.
In Indonesia recent moves by the Central Bank to push short term interest rates up to 30% will have a negative impact on the economy and liquidity.
The severity of this will depend on how long interest rates remain at this level.
We need to see some rational policy responses from the Central Bank to restore confidence.
However, our longer term outlook for Indonesia is more positive than most other South East Asian economies.
We believe Indonesia is likely to benefit from domestic growth and a proactive central bank as well as deregulation measures which are expected to be introduced.
While there has been turmoil in some currencies, the Japanese yen, Korean won and Hong Kong dollar have remained relatively stable.
BT has reduced its exposure to the Japanese market, reflecting its more cautious view on the pace of Japan’s domestic recovery.
A move towards floating exchange rates across South East Asia is creating fears that the Hong Kong dollar’s US peg may be under threat. (The Hong Kong dollar is the last pegged currency in the world).
BT believes it is very unlikely that this currency will be floated.
However, higher interest rates to keep this in place will have a deflationary impact on asset prices.
South Korea remains relatively independent of the South East Asian turmoil and BT believe the sharemarket should benefit from an improvement in the current account. Also, weakness in the won should continue to make the country’s products more competitive internationally, and assist a recovery in exports.
BT expects the South East Asian currencies and sharemarkets to experience further volatility.
The net effect of the recent currency difficulties is likely to be slower growth across the South-East Asian region as central banks raise interest rates to defend their currency and restore stability.
Longer term, however, these developments are likely to be positive for the countries. We expect the recent currency devaluations to have a positive impact on exports.
BT expects the South East Asian economies to maintain reasonably solid rates of growth.
owever, the outlook for Thailand remains more difficult. The major casualty will be in the banking system and the resultant increase in non-performing loans. Consequently, we are continuing to limit investment in the Thai sharemarket.
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