'Asia may face new collapse'
Goldman Sachs warns of more trouble unless big debt write-downs are taken
July 13, 1998: 7:53 a.m. ET
SINGAPORE (Reuters) - Asia's economies face fresh collapse if sizable debt write-downs are not taken "up front and expeditiously," a report from Goldman Sachs said on Monday.
"To avert further dramatic collapse in the real economy ... sizable debt write-downs must be taken up front and expeditiously, with the government moving quickly to help finance the shortfall in the system," the report said.
Goldman said it had lowered key macroeconomic forecasts for the region and expects gross domestic product contraction to be deeper this year, going into negative or near-zero growth extending into 1999.
The most significant downward revisions apply to the most heavily indebted countries, the report said.
It said with Asian economies deep in crisis, upward pressure on interest rates and the risk of falling asset prices heightening, governments were more likely to allow for easier exchange rates.
"While we do not yet anticipate a quantum leap to floating exchange rate regimes, it is more likely policy-makers will begin tolerating greater slippages of their currencies," the report said.
Goldman Sachs said rising unemployment and falling GDP in crisis-hit countries -- such as Indonesia, South Korea, Malaysia and Thailand -- would see their staunch defense of interest rates slipping further in the next three to six months.
It said the equity markets of countries hit by the currency crisis -- Hong Kong, Singapore, Taiwan and the Philippines -- will not look attractive for another six months.
"For those with banking crises, history shows that another 12 to 18 months are needed before returns pick up."
Goldman Sachs said it did not foresee a devaluation in the yuan or a removal of the Hong Kong dollar peg.
The investment house also forecast further fiscal stimulus for Japan for the latter half of 1998, which it said would keep GDP growth positive in 1998, but not in 1999.
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