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To: ms.smartest.person who wrote (1756)	7/31/2001 4:45:13 PM
From: ms.smartest.person	Read Replies (1) \| Respond to of 2248

Asia develops resistance to strains of economic turmoil By John Thornhill, Rahul Jacob and Arkady Ostrovsky Published: July 30 2001 18:32GMT \| Last Updated: July 30 2001 22:00GMT One of the shocking features of the Asian financial crisis of 1997-98 was how quickly turmoil in one country affected other markets around the world. The initial market crash in Thailand quickly spread to the rest of south-east Asia, South Korea, Russia and beyond, highlighting the degree of financial interdependence in the modern world. But one of the most striking aspects of the latest round of emerging-market turbulence is how resistant Asia has been to the financial epidemics that have struck Argentina and Turkey. Indeed, Asian bond markets, if not currency and stock markets, have been performing remarkably strongly as cash-rich local banks and nerveless foreign investors search out more secure investments. Manu Bhaskaran, head of research at SG Securities in Singapore, argues that investors have become more diligent in doing their homework and assessing risks since the Asian financial crisis. "The markets are now a lot more sophisticated at distinguishing between different types of country risks," he says. "So Argentinian-type risk has not spilled over into inflationary risk premia in Asia apart from the Philippines, which some would argue is more of a Latin American than an Asian risk anyway." Investors have been ready to draw distinctions within the region, which explains why the impact has varied across countries and asset classes. High-grade sectors of the bond market have been more resilient than sub-investment grade bonds. Largely as a result of the earlier financial crisis, Asian countries have been restructuring their economies, moving to floating exchange rate regimes, paying down external debts, and making somewhat fitful attempts to improve corporate governance. That has left most countries in a far stronger position to weather the current market turbulence. Charles Brock, director of the Asia fund at F&C (formerly Foreign & Colonial), says: "Asian countries have large current account surpluses and are less dependent on international money than they were five years ago. Structurally, Asia is in much better shape." The biggest difference between now and 1997 is that debt levels have come down substantially across the region. Ajay Kapur, Morgan Stanley's Asia-Pacific equity strategist, points to the ratio of short-term external debt to a country's international reserves ratio. In 1997, investors read these ratios in horror as financial markets fell but these numbers now offer a good snapshot of how much the region's fundamentals have improved. For South Korea, that ratio has come down from 341 per cent at the end of 1997 to 45 per cent today. Thailand has gone from 157 per cent to 42 per cent and even Indonesia has gone from 228 per cent at the end of 1997 to 97 per cent today. This big deleveraging exercise prompts Mr Kapur to argue that the time is ripe for a fundamental re-rating of Asia. He says that leverage for corporate Asia (including Australia but excluding Japan) has gone from 100 per cent to 30 per cent. Asian corporations, he says, are now using capital more efficiently: the region's capital expenditure to sales ratio is down to 1990 levels since the crisis. He predicts that corporate Asia's return on equity will also climb to 12 per cent to 13 per cent this year. This compares with a projected 14 per cent ROE for US companies in 2001 and 6 per cent to 7 per cent for Asia in 1997. "Our fundamentals have caught up but our valuations have not," he says. Other analysts believe that worsening news from other emerging markets could eventually take its toll on Asian debt markets. Last week, PCCW, the Hong Kong-based telecoms group, was forced to pull a planned $2.5bn bond issue because of weak market demand. Moreover, ING Barings forecasts that a record $11bn of US dollar-denominated Asian debt will hit the market in the second half causing some indigestion among investors. "An Argentina-style problem does not seem to be an issue. The links are fairly tenuous. But when global emerging markets get nervous, investors can lump Asia in with Latin America," says Jason Carley, head of Asia-Pacific credit research at Merrill Lynch in Hong Kong.