Malaysia should work with ASEAN and APEC to convene a Global Summit on the Asian economic crisis before it becomes full-fledged global crisis

Media Statement
by Lim Kit Siang

(Petaling Jaya, Wednesdat): There have been no silver lining in the recent bleak and gloomy economic and financial developments and news in Asia, highlighting the failure and inability whether of four recent international conferences - the Manila meeting of APEC Deputy Finance Ministers in early November, the APEC Summit in Vancouver on Nov. 24-25, the ASEAN Finance Ministers meeting in Kuala Lumpur and dialogues with their counterparts from United States, Japan, Australia, China and South Korea and the ASEAN Summit and ASEAN Plus Three in Kuala Lumpur on Dec. 14-16 - or even International Monetary Fund bail-outs to check the downslide of the regional currencies and stock markets.

In the past week, adverse economic and financial news have come thick and fast for the Asian economies, with the IMF releasing Interim World Economic Outlook In Washington last Saturday warning that the financial crisis in Asia could deepen and spread in the months ahead and urged developing countries to brace against the economic fallout.

In its Interim World Economic Outlook, the IMF slashed its combined growth forecast for Thailand, Indonesia, Malaysia and the Philippines by a whopping 3.7 percentage points to 1.7 per cent for 1998, and said turmoil in Asia would dampen global growth.

The most striking change is in the forecast for Japan, which the IMF now predicts will grow at only 1.1 per cent next year. This casts more doubt on the Japanese government's forecast, finalised only last week, of 1.9 per cent growth in 1998.

Michael Mussa, the IMF's chief economist, dealt a further blow to that assumption when he said the IMF forecast could be revised downward again if problems with business confidence and with the financial system persisted.

The growth forecast for South Korea in 1998 is now 2.5 per cent, down from 6 per cent in the previous forecast, though Mussa admitted that even this lower figure was "on the optimistic side".

Thailand is expected to experience zero growth next year, Indonesia 2 per cent, Malaysia 2.5 per cent and the Philippines 4.3 per cent.

Based partly on the Mexican experience, there are economists who believe that investor confidence in the emerging market countries will recover fairly quickly, with a turnaround in sentiment beginning during 1998 and they expect the affected countries to return to average growth levels "in a year or so".

The IMF report warns, however, that the cut in capital flows could be considerably prolonged if policy responses to the crisis are inadequate. It sets up two alternative scenarios to capture this possibility.

In the "worst-case" scenario, capital flows to emerging markets decline by an extra $100bn, and confidence is not fully restored for five years.

In South Korea, markets fell into an abyss yesterday over renewed alarm about a possible debt default in the country and on President-elect Kim Dae-jung's reported remarks about "national bankruptcy" in South Korea, when he was quoted by a newspaper as telling party members on Monday:

As a result, South Korean stocks yesterday plunged a record 7.5 percent, while the won tumbled against the dollar and interest rates soared.

Stocks closed at 366.36 points, off 7.50 percent -- a record one-day plunge in percentage terms. The won plunged to an historic low of 1,995.0 to the dollar, before recovering to close at 1,962.0, against Monday's close of 1,715.0 on Monday. South Korea's currency has lost 57 percent of its value against the dollar this year.

A slew of ratings downgrades on Monday by Moody's Investors Service and Standard & Poor's (S&P) also dealt a blow to the Asian markets. The long-term sovereign debt ratings of South Korea, Indonesia and Thailand were all reduced to junk bond status by Moody's Investor Services, one of the two big international credit rating agencies. Malaysia was also downgraded.

Bankers said Asia's sovereign benchmark bonds had probably not yet seen the worst of the fall-out from the credit downgrades. Many large US holders of Korean, Thai and Indonesian paper would now be forced to liquidate their holdings under regulations.

Japan's stock market has also fallen to a two-year low, further threatening a banking system whose financial well-being is closely tied to share prices accompanied by the continuing weakening of the yen against the US dollar despite recent heavy intervention by the Bank of Japan.

Meanwhile, Malaysia's sovereign risk rating has been further downgraded by Standard & Poor which lowered its long-term foreign currency rating of Malaysia to A from A+ and the short-term rating to A-1 from A-1+ and Thomson Bankwatch which downgraded Malaysia's sovereign risk rating to A- from A+.

Thomson Bankwatch said Malaysia is likely to face difficult times throughout 1998 as the full effects of the ringgit's sharp depreciation and the severe downturn in the stock market are felt throughout the domestic economy.

It said these difficulties are likely to arise from sharply slower economic growth, higher interest rates, tightened liquidity in the banking sector, rising corporate bankruptcies, reduced business confidence and slowed foreign capital inflows.

Further difficulties could stem from recent rapid rise in credit growth and the relatively high levels of bank exposure to the property sector and the finance, insurance and business service sectors.

With these gathering storm crowds in the fifth month of the economic and financial crisis in Asia, international co-operation and solution is urgently needed before the Asian crisis becomes a full-blown global crisis.

The Malaysian Government should work closely with ASEAN and APEC to convene a Global Summit of APEC+EU+IMF and World Bank to prevent the Asian economic crisis from becoming a threat to the global economy.


*Lim Kit Siang - Malaysian Parliamentary Opposition Leader, Democratic Action Party Secretary-General & Member of Parliament for Tanjong