Asia crisis risks regional depression-fund adviser
Reuters Story - November 13, 1997 17:13
%EMRG %FUND %CN %JP %US %ECI %GVD %DBT %FRX %BNK %FIN EK GLW V%REUTER P%RTR
By James Saft
LONDON, Nov 13 (Reuters) - Asia's currency and deflation
crisis could cast the region into a 1930s-style depression, an
analyst told an emerging markets fund managers conference on
Thursday.
"My fear and belief is that a 1930s environment will
develop in Asia -- a great depression environment," said Michael
Howell, managing director of London-based Crossborder Capital
which advises 70 of the world's largest institutional investors.
"Domestic demand is weak, production is strong, competitive
devaluation is the order of the day and capital flows are
whizzing around and creating havoc," he said.
Howell said he is advising clients to seek shelter in
developed market bonds and cash over the next three-to-six
months.
Asia is in a solvency crisis, he said. Falls in global
liquidity in 1997 had left weak Southeast Asian economies unable
to finance their current account deficits.
But, he said the most serious threat to the region may be
overcapacity in China and Japan.
"China is not 1.2 billion consumers, it is 1.2 billion
producers. Asia has put in significant new capacity in the last
five years.
"You have the world's second and third largest economies as
export economies and only America to soak it up. That is an
unsustainable situation."
The U.S., faced with a flood of cheap imports from Asia,
could turn protectionist, throwing Asian exporters back onto
home markets and a deflationary spiral, Howell said.
IMF policies in the region will only worsen things, he said.
Howell draws a distinction between Asia's solvency and weak
demand problems and Mexico's overconsumption and resulting
finance crisis in 1994.
"The IMF...is really barking up the wrong tree," he said.
"(It) is trying to supply a Mexico-type solution with Asia,
saying let's get tough with budget deficits, let's give
short-term financing."
Asia needs profits, he said and unless the U.S. can soak up
enough exports to fund them, tough economic measures will only
compound problems.
Howell believes Asia's currency problems are not nearly at
an end -- "There are at least another two shoes to drop in Asia.
"It is my belief that we will see in 1998 the removal of the
Hong Kong dollar peg and we will see the yuan renmimbi devalued
and over the next few weeks we will see further evidence of
weakness in the Japanese yen."
South Korea, which is labouring under substantial debt,
could worsen the crises.
The sum of these factors is a gloomy outlook for emerging
markets worldwide and a likely hit to U.S. corporate
profitability, Howell said.
"The Asian solvency crisis is turning into a world liquidity
crisis. It is causing liquidity to be crimped globally and that
is causing a bad environment for all emerging markets. That is
not going to go away quickly."
U.S. companies like Kodak and Corning have
already seen profitability hit by the Japanese yen's 15 percent
slump since June, he said.
"The competitive environment for America is likely to be
seriously affected in 1998 with a slowdown in economic actively
likely," Howell said.
"For the next few months emerging markets will be volatile,
perhaps in mid-1998 we may see some solid returns, especially in
Europe."
--London newsroom +44 171 542 5887 |
