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Caution flag on regional economies

By JONATHAN FUERBRINGER
THE NEW YORK TIMES

NEW YORK -- Although the fallout has been limited from Brazil's sharp currency plunge last month, several countries could face problems later this year either in raising money or in defending their currencies.

While there is no uniform measure of weakness, the Philippines, Indonesia and Thailand rate a yellow caution flag along with Brazil.

These four countries are not teetering on the brink of financial disaster now, say financial analysts and economists who rank countries worldwide.

The Thai economy shows signs of stabilising. The nation has improved its balance of trade, and its currency, the baht, has rebounded 50 per cent from the low in January 1998.

The Philippines has been upgraded from a negative credit outlook by Standard & Poor's Corp.

It sold US$1 billion (S$1.69 billion) of bonds to global investors in January, albeit at interest rates nearly twice the yield on the 10-year Treasury note. It plans another sale in Europe in March.

Indonesia is not as well off. Its currency has slumped more sharply than Thailand's and the Philippines' in the wake of Brazil's devaluation.

But financial analysts say these countries and Brazil are vulnerable should world financial markets tighten up.

If there is another flight from risk by investors, credit could dry up for them.

Or if China devalues its currency, the yuan, there could be a fresh run on their currencies.

Each of these countries has a significant amount of debt and interest to pay this year, including loans to banks and bonds sold globally to investors.

Based on government, corporate and private debt figures compiled by ING Barings, Brazil owes US$53 billion in the next 12 months, Thailand US$27.8 billion, Indonesia US$27.7 billion and the Philippines US$10.2 billion.

They could find it very expensive, or impossible, to raise money to meet those obligations if investors lose confidence in emerging-market debt.

In Brazil, much of the downward pressure on its currency has stemmed from the fear that the country will default on its local and foreign borrowings, or will be forced to restructure the debt in a way that will hurt investors.

Short-term interest rates in Brazil have shot up to about 40 per cent, and its long-term debt carries a rate of 15.7 per cent. Concerns about Brazil have pushed up interest rates elsewhere in Latin America as well.

This week, the Brazilian central government scrambled to prevent a default by its second-biggest state, Minas Gerais, on US$108 billion of Eurobonds by paying the portion the state could not.

Along with needing to raise money in the capital markets, all four countries have currencies that would be very hard to defend without raising interest rates sharply because they lack the foreign reserves needed for a vigorous defence.

Other countries appear vulnerable, but merit less concern because they lack the same combination of debt and currency weakness.

Argentina, for example, is on the danger list prepared by ING Barings that concentrates on borrowing needs. But it is not on a watch list assembled by Lehman Brothers that focuses on the currency outlook.

That is because Argentina has an ample amount of dollar reserves and has linked its currency, the peso, to the dollar.

Other countries that appear high on one of the two lists are the Czech Republic, Hungary, Malaysia, Mexico, Peru, South Africa, South Korea and Turkey.

The ING Barings list, compiled under the direction of Arturo C. Porzecanski, chief economist for the Americas, looks at government and private debt due in the next 12 months to commercial and investment banks around the world.

He compares this total to the liquid assets of these countries, their companies and their citizens in banks and investment banks abroad. This produces a ratio that he uses to rank a country's risk of defaulting.

"If what comes due substantially exceeds what is deposited, there could be trouble," Mr Porzecanski said.

He uses bank loan and deposit data from the Bank of International Settlements.

The data show that Russia's debt is equal to 241 per cent of its deposits abroad. Indonesia is second at 229 per cent, followed by Thailand at 226 per cent and Hungary at 207 per cent.

Brazil, which spent about US$30 billion in reserves defending its currency, will break into the Top 10 when the loan and asset data is updated in May, Mr Porzecanski said.

Venezuela, which has a new president, has been named as a potential casualty of Brazil's currency woes by many investors. But it is 30th on Mr Porzecanski's watch list, formally known as the Sovereign Liquidity Risk Indicator. The Lehman Brothers list, formerly known as the Foreign Exchange Liquidity Vulnerability Ranking, uses a risk barometer based on a country's dollar reserves.

This reserve level is compared with the hypothetical amount needed to make a full defence against capital flight without resorting to unsustainable high interest rates.

By this measure, Brazil, Indonesia, Thailand, South Korea, and Mexico rank number two to number six and are still extremely vulnerable.

China is number one, but it has certain controls on its economy and a currency that is not convertible.

"So it would be tough to put together a run against the central bank," said Mr Jose M. Barrionuevo, Lehman's director of global market strategy.

Mr Barrionuevo said a Chinese devaluation would probably lead to another run on currencies in emerging markets.

Other Asian countries would feel pressured to let their currencies fall so that their exports would be competitive with China's.

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