AWSJ: Asia Begins To Feel Effects Of Troubles In Argentina
July 12, 2001
Dow Jones Newswires
By staff reporters Gren Manuel in Hong Kong and Phillip
Day in Singapore
Tremors from Argentina's dramatic economic crisis are being felt in Asia, but few expect a replay of the 1997 regional meltdown, when governments teetered and Hong Kong spent $15 billion supporting its stock market.
In Argentina, stocks and bonds have plunged as investors continue to worry that the nation could be headed toward a default on its roughly $130 billion in government debt. Trouble in the country's economy has been brewing for months, as markets increasingly seem to abandon hope for a near-term recovery of the heavily indebted and recession-plagued economy. In the latest sign of trouble, three-month treasury bills auctioned Tuesday to raise money to service Argentina's short-term debt yielded on average 14.01%, almost twice that of a month before.
Since last month, when Argentina effectively abandoned its currency peg to the U.S. dollar, some pressure has already come to bear on the Hong Kong dollar, which is also pegged to the American currency. Fears that Argentina could default on its debt have hit the Asian bond market, where lenders are asking for higher rates. The Argentina factor is also being cited as a reason behind this week's postponement of a $600 million bond issue by the largest telecommunications company in the Philippines.
Still, market-watchers around the region cite a list of reasons why this time will be different. For one thing, Hong Kong's currency and other units across the region are more tightly guarded now against speculative attacks thanks to controls put in place after the 1997 turmoil. Hong Kong has tweaked its currency system to make speculation more difficult, while Malaysia has introduced a form of currency control as well. Cross-border emerging-market hedge funds aren't as well-funded now as four years ago after many were scorched in the Russian debt default of 1998, giving them less ammunition to mount an attack on a nation's currency.
And some say investors are more aware of differences between emerging markets than they used to be, so problems in one nation won't cause jitters so quickly in others facing very different economic prospects. "After 1997 people began to look at things differently," says Andrew Fung, treasurer for the Commonwealth Bank of Australia in Hong Kong.
Even so, some in the region have already noted a contagion effect, and companies and countries planning to issue bonds soon are particularly worried. Asian sovereign bonds, when compared with their U.S. Treasury counterparts, are now offering investors up to half a percentage point more in yields than they were last week, although traders warn that many factors are at work, such as a large supply of Asian corporate issues hitting the market.
In another sign of contagion, prices of one-year forward contracts for the Hong Kong dollar have risen by the equivalent of about one Hong Kong cent above the pegged rate of HK$7.80 to the U.S. dollar. Mr. Fung characterized this movement as "some pressure," but not serious. Spot rates for the local currency haven't moved.
Hedge funds mounted an attack on the city's equity market and currency peg in 1998, forcing then-Financial Secretary Donald Tsang to spend $15 billion in reserves in a massive share-buying spree. The act damaged Hong Kong's reputation as a free-market center but halted the collapse and left hedge funds with big losses. This time around, Hong Kong has the cash reserves to mount another such operation, although most don't expect it to come to that.
Instead, the contagion effect may prove strongest in economies most similar to Argentina, most notably the Philippines, which like Argentina has struggled with a large budget deficit. "The Philippines historically, good or bad, has always been linked to Latin America," said Fan Jiang, head of Asia credit research at Goldman Sachs in Hong Kong.
Philippine Long Distance Telephone Co. said Wednesday it was putting on hold its plans for a bond issue expected to be valued at about $600 million. The government's planned sale of $500 million in 10-year bonds may also be jeopardized as investor sentiment sours because of Argentina. "A lot will depend on Argentina," said Philippine Central Bank Gov. Rafael Buenaventura. By midafternoon Thursday, the premium demanded by investors buying the benchmark Philippine 2010 bond had grown to 5.6 percentage points over the comparable U.S. Treasury issue. That compared with a 5.45 point spread at the close Wednesday.
Also at risk if sentiment further turns against emerging-market bonds is a massive bond issue planned by Hong Kong's Pacific Century CyberWorks Ltd. Bond-market analysts had earlier speculated that PCCW would need to pay investors 2.6 percentage points to three percentage points over comparable U.S. Treasurys to interest them in the $2.5 billion to $3 billion offering, expected to be priced next Thursday. But analysts are now saying PCCW could be forced to pay even more or cut back on the issue size in light of the news from Argentina.
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