December 14, 2001	Friday	Ramazan 28, 1422

MANILA, Dec 13: Asia is piling up excessive foreign reserves to cushion itself from another financial crisis instead of using the funds to fuel capital markets and spur much-needed economic growth, analysts warn.

Foreign exchange reserves held by East Asian economies now total as much as $900 billion, more than seven times the amount of foreign private capital that flowed out during the 1997-1998 financial turmoil in the region, according to studies.

“Enough is enough, the Asian governments and central banks should not keep building anymore reserves,” Gregory Fager, Asia-Pacific director of US-based Institute of International Finance, Inc told AFP on the sidelines of a regional meeting in Manila where the rising level of Asian reserves was hotly debated.

The reserves, instead of being locked up as savings in banks, “could be put to better use,” like investing in long-term bonds or stock markets and reducing debt, he said.

Asia, Fager said, also enjoyed a “fairly strong” balance of payments position which required less reserves back-up. Balance of payments captures the trade balance and investment flows of a country.

“The Asian central banks and governments believe the reserves demonstrate confidence but the problem is this is only a one-way thing,” he said, suggesting that it was futile building up a war chest against vibrant markets.

“Now that the Asian crisis is over, there is no need to continually prepare for another crisis — and I think that’s what many governments and central governments are doing,” said Fager, whose institute groups the world’s financial organizations.

Asian countries started beefing up their reserves after the 1997-1998 financial crisis sparked by a meltdown of currencies. The crisis was largely blamed by governments on excessive foreign exchange speculation.

Japan, China, Hong Kong, Taiwan and South Korea are among the top five Asian nations in terms of foreign exchange reserves.

Cindy Houser, an ADB economist, told the conference this week that accumulation of reserves was a “very cheap way — in terms of politics” to send positive signals of an economy.

It is also believed that some countries incur very high costs in building their reserves.

“One does have to think about the cost of holding these reserves — the cost measured by the differences between the the borrowing costs and the returns on those reserves — more fundamentally in terms of opportunity costs,” Charles Adams, the International Monetary Fund’s assistant director for the Asia-Pacific region, told AFP.

“I guess it does become an issue when (the cost gets to be) very, very high levels,” he said.

Adams said Asian countries were moving towards more flexible exchange rates, which means “in the event of adverse shocks, they will allow exchange rates to adjust.”

What was important was for Asian nations to “get their domestic fundamentals correct — in terms of policies, institutions, infrastructure and governance,” he stressed.

But Asian officials argue that credit ratings agencies and foreign private sector creditors give much weight to foreign reserves levels when assessing investment risks in emerging economies than in the industrial nations.

“If we were to reduce our reserves, then Standard and Poor’s will come and reduce our ratings,” lamented Ashok Lahiri, director of the India’s National Institute of Public Finance and Policy.

He said after the 1997 Asian crisis, the Indian central bank intervened to defend the rupee currency and lost $2.5 billion in just two-to-three weeks but the markets in his country did not collapse.

“So it is not true that it is a one way thing,” Lahiri shot back.

Takahira Ogawa, director of Standard and Poor’s Asia-Pacific sovereign ratings, said the larger a country’s reserves the better it was in terms of credit rating, but stressed that the reserves should not be “excessive.” “There should be a certain kind of balance between safety and efficiency,” he said.

Senior ADB economist Kim Yun-Hwan defended the Asian reserves’ accumulation, saying this was vital to prevent another financial crisis.

“Some countries need to hold large amounts of reserves to prevent a panic situation during crises. One of the main factors that led to the (1997) Asian crisis was panic among foreign investors or lenders,” he said.—AFP