WALL STREET FALLOUT

Supachai: The worst is yet to come
Strong Asian growth slowed by US crash

``If regulators allow banks like Lehman Brothers to leverage debt 35 to 40 times, then there must be something wrong,'' says Dr Supachai.

Asian economies should brace for more impact from the global credit crisis and also prepare for a prolonged global economic recession, warns Supachai Panitchpakdi, secretary-general of the United Nations Conference on Trade and Development (Unctad). The insolvency of Lehman Brothers and the bailout of the insurer AIG have shed new light on the depth of the meltdown of financial institutions in the United States, the former Thai deputy prime minister said yesterday.



The breakdown of the US financial system could result in a decline in world economic growth this year and next, and complicate efforts to forge a new global trade agreement under the World Trade Organisation, which Dr Supachai headed from 2002-05.


''We had predicted a global economic slowdown by 1% this year. But watching the situation in the financial market as it has unfolded over the last few days, my fear was that it would be higher than that,'' he said at the Thailand Focus investors' conference yesterday in Bangkok.


''People mostly think of the word recession in a technical aspect, which means two quarters of economic contraction. It is a recession nevertheless. We must prepare for a longer period of recession.''


The anticipated decline in US financial market asset prices, recognition of losses, deleveraging of the private sector and the need to recapitalise the financial system would be a prolonged process, Dr Supachai said.


Asia economies are expected to post strong 6% growth this year due to growing incomes in China and India which will be buoyed by agricultural product prices.


But Asian economic policymakers should avoid repeating stagflation which occurred in the 1970s when global economies were hit with high inflation pushed by fuel prices against a backdrop of weaker international trade than today.


Asian countries should continue to improve labour productivity and strengthen trade liberalisation to cushion the impact of the world slowdown, he said.


Meanwhile, central banks must avoid adopting overly restrictive monetary policy that could depress economic growth, he added.


With the threat of stagflation, the trend in policy is to keep interest rate increases on hold.


Dr Supachai said financial institutions' unwinding of futures contracts in the wake of the credit crisis could contribute to a further decline in oil prices. But Asian economies should avoid subsidies which increase dependence on fossil fuel and thus pressure their current accounts.


He said the global credit crisis highlighted loopholes in regulations of world financial systems.


''The combination of the financial system awash with liquidity and the unfettered market mechanism is the cause of the problem. When there is an upturn in the economy, people become more complacent and are willing to take more risks,'' he said.


''If regulators allow banks like Lehman Brothers to leverage debt 35 to 40 times, then there must be something wrong.''