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Structural woes deepen Asia crisis

 

PARIS -- A consensus view of the Organisation for Economic Cooperation and Development (OECD) has been put forward that long-standing structural weaknesses in Asia has amplified the crisis, accentuated recently by a tendency towards overheating, excessive and over-leveraged borrowings, and exchange rate policies that are too oriented to the US dollar.

The Asian countries affected by the financial crisis all carry similar structural weaknesses. These range from a lack in corporate governance arrangements, lack of transparency about businesses' financial situations and their relationship to government authorities, poor regulatory and supervisory arrangements in the financial sector, tendencies to high indebtedness and over-leveraging, and to allowing financial institutions to continue operating with high levels of non-performing loans.

''The crisis reveals the weakness in the system behind the economic miracle,'' says Yutaka Imai, division head of the OECD's Economics Department.

Although these weaknesses have been around for more than 30 years without preventing the Asian countries from achieving an economic miracle or a rise in living standards, they stand to amplify the problems when the crisis is triggered.

Paul E Atkinson, division chief of the OECD's Economics Department, said the sustained high economic growth in Asia in the past gave rise to excessive optimism, without due regard to downside risks. ''When you have the high growth over the past 30-40 years, people could easily got carried away. There was lots of success from good investment, but there was also over-investment. Somewhere along the line, the judgement had become a bit less focused,'' he said.

In particular, the Asia countries had a tendency toward overheating, as reflected in large current account imbalances. Thailand ran one of the world's highest current account deficits of about 8 per cent of gross domestic product in 1995 and 1996. Excessive and leveraged investments were highly concentrated in property and commercial buildings in Thailand and in important industrial sectors in the case of South Korea.

''This led to over-capacity, unsustainable rises in asset prices, and low returns on investment or even operating losses,'' said the OECD Report published in June 1998. ''The result has been severe balance sheet problems which have threatened the viability of both non-financial enterprises and banking systems throughout the region.''

By pegging their currencies to the US dollar than their trade relations with the US would justify, the Asian countries were handcuffed by the rise of the US dollar in mid-1995, which undermined their competitiveness.

The loss of competitiveness was more apparent in the case of South Korea, which competed head-on against Japan in international markets. A weak yen also discouraged Japanese companies from investing overseas or in Southeast Asia, which has mainly depended on their direct investment. The Chinese devaluation by 35 per cent 1994 also eroded the competitiveness of other Asian exports.

When the baht fell through a devaluation in July 1997, it had a contagion effect. The OECD report said there were two effects of the baht crisis, which deteriorated and created pressure elsewhere in the region.

''First, the earlier stabilisation of the baht against the dollar had generally been viewed as credible, leading many borrowers to maintain open foreign exchange positions. Depreciation then prompted local borrowers to rush to hedge or to close these positions, increasing the downward pressure on the currency.

''Second, depreciation of the baht created a domino effect. As international investors reassessed the situation, the pressure on Malaysia and Indonesia increased, and many aspects of the Thai experience were repeated. This amplified the pressure elsewhere, eventually leading to the present situation in which three countries in the region (Korea, Indonesia and Thailand) are receiving policy-conditional financial support from the International Monetary Fund.''

BY THANONG KHANTHONG

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