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BANGKOK - Inflated asset values, massive global liquidity and speculative pressure on Asian currencies - the same factors that led to Asia's 1997-98 economic crisis - have re-emerged a decade on and could destablise economies in east and southeast Asia again, a UN official said last night.
"The region cannot afford to rest on its laurels," Kim Hak-Su, executive secretary of the Economic and Social Commission for Asia and the Pacific, told a conference in Bangkok.
The two-day meeting of economists, central bankers and government officials aims to review the recovery of crisis-affected countries and highlight new vulnerabilities.
The region achieved robust economic growth of more than 5 per cent in 2006, driven by strong international demand for goods and a similar growth rate was expected this year, Kim said.
Current account surpluses had averaged 5 per cent of Gross Domestic Product (GDP) since 1999, compared to a deficit of 2 per cent before the onset of the crisis, he said.
But huge global liquidity, inflated asset values and tremendous speculative pressures on regional currencies could destabilise regional economies, as happened 10 years ago.
"Globalisation, along with its many benefits, exposes economies to quick and harsh risks from the constantly shifting international environment," Kim said.
The region had seen a sharp rise in hedge fund activity and credit finance capital inflows that involve borrowing in cheap foreign currencies to buy international assets.
Heavy foreign inflows into Asian equity and financial products had raised fears of inflated asset values again. Asian-Pacific equity markets rose 29 per cent in 2006, with the Indonesian bourse jumping 55 per cent last year, he said.
Speculative inflows and a weak US dollar pushed most regional currencies higher last year. That trend is expected to continue in 2007 despite the best efforts of central banks in the region to tame their currencies' rise.
The Bank of Thailand imposed tough capital controls in December to rein in a surging baht, the fastest riser in Asia against the dollar last year, after repeated intervention failed.
The controls shocked foreign investors and triggered a massive share sell-off. It did halt the baht's advance, but also gave birth to an offshore market.
The baht was trading around 35.60 per dollar onshore and 33.8 offshore, compared to a 9- year high of 35.06 baht a day before the controls were imposed.
With hindsight, the bank should have cut interest rates to rein in the baht, said economist Ammar Siamwalla of the Thailand Development Research Institute. "I'm not convinced that lowering rates would not have worked."
Despite Thailand's robust economic recovery from the 1997-98 crash triggered by the devaluation of the baht, Ammar had doubts about the stability of some financial institutions and the effectiveness of the central bank's inflation targeting regime.
Private banks cleared out bad loans and improved risk management after thousands of defaults during the crisis. But state banks have been slow to reform.
"The risk posed by state banks is that despite the lessons learned during the crisis, they still lend to politically-connected individuals," he said in a report.
To ensure Asia can weather future global shocks, countries must ensure solid macroeconomic fundamentals to maintain investor confidence and sustain economic growth, Kim said.
A healthy financial sector needs a well-developed regulatory structure and risk management systems to prevent bad loans, he said.
He also called for clear property rights, overseen by a strong judiciary, a flexible labour market and adequate social safety nets, and urged more regional cooperation to avoid financial market volatility.
- REUTERS
