IT used to be that Mexico was simply the name of a country. But following the peso crisis last year, it is now possible for Asian nations to be subjected to 'Mexico concerns' and a 'Mexico factor', even though the crisis is long gone. A proper noun has become an economic phenomenon. Economists do not use the word lightly - it conjures up images of a currency crisis, multi-billion dollar rescue packages and economic mayhem - a scenario even the most die-hard pessimist would be hard-pushed to justify for any of Asia's economies. But Robert Rountree, an economist at Nomura Research Institute, has constructed an argument in which the word figures prominently. For example, he said: 'Mexico-related fears are likely to reappear in Asia upon the emergence of any bad news . . . the inherent danger is that Mexico concerns could become self-fulfilling prophecies.' What is the 'bad news' to which he refers and how could this 'inherent danger' manifest itself? It boils down to current account deficits. Last year, following the Mexican peso crisis, economists started fretting over rapidly increasing current account deficits in Malaysia, Thailand, Indonesia and the Philippines. Why is this important? Andrew Freris, chief regional economist at Salomon Brothers, said: 'Current account deficit crises occur when the international investment and lending community is unwilling to extend credit or invest more in the deficit country, either because of uncertainty over the capacity of the economy to generate enough flows to service its debts and investments, or because of concerns that the rate of exchange will depreciate.' This is hardly a new theme - a fact that Mr Rountree acknowledges. Following the peso crisis, global attention focused on emerging markets running significant current account deficits and this naturally drew them to Asia. The region's stock markets suffered as a consequence and some currencies - notably the Thai baht - felt the effects of the Mexican wave. 'The disquiet which emerged in 1995 was undoubtedly compounded not only by continuing current account deficits within the region, but by the speed at which these deficits increased,' Mr Rountree said. 'It was the sharp increase of current account deficits as percentages of gross domestic product [GDP] that undermined confidence in the region and its currencies.' As Mexico attracted less and less coverage and the so-called Tequila Hangover wore off, it appeared that concern over Asia's current account deficits was also diminishing. Mr Freris said: 'During the last 11 years, the region as a whole has been running an overall current account surplus that has been concentrated in three economies: Taiwan, Hong Kong and Singapore. Thus, the widespread notion that Asia has been a net absorber of capital from the developed world is flawed. The story, however, is more complex if examined on a country-by-country basis.' It is this country-by-country analysis that interests Mr Rountree. Rather than damning the entire region, his concerns focus on Thailand, Indonesia, Malaysia and the Philippines, although he reasons there could be a knock-on effect around the region. His problem is this: 'One aspect of current account deficits which has not been adequately addressed is the manner in which they have been, and will continue to be, funded.' He argues that the role of domestic banks in financing the deficit is restricted - a fact that increases reliance upon capital inflows from overseas. 'Most [domestic] banking systems have [advances-to-deposits] ratios which exceed 100, which means the banking systems are constrained in providing capital unless it can be obtained from another source,' he said. 'If the current account is in deficit, the importance of the capital inflows and their implications for monetary policy are magnified. With the banking system and the financial markets increasingly dependent on foreign capital inflows, the sentiment of foreign investors is becoming increasingly important. 'As dependency on foreign capital increases, the inherent danger is that Mexico concerns could become self-fulfilling prophecies. No one minds debt; it is necessary to grow, but the question which will be increasingly asked of Asia is: How much debt?' Mr Rountree also has serious concerns about the nature of the capital inflows into Asia. 'A significant and disturbing trend is emerging. Increasingly, long-term capital inflows are not sufficient to cover the current account deficit,' he said. 'In an increasing number of cases, the balancing capital inflow is of a short-term nature . . . attracted to stock market investments and by high interest rate differentials. 'If foreign sentiment towards regional developing economies were to suffer any setback, the impact would be felt very quickly and could be very severe.' Ranjan Pal, chief economist at Jardine Fleming, said: 'You can run a current account deficit of 14 per cent of GDP if it is through long-term inflows - but not if these inflows are short term.' In other words, short-term money can leave as quickly as it arrived, with dramatic consequences for economic growth in the countries affected. Mr Rountree said: 'The situation should be monitored carefully because the developing regional economies will have to continue relying on an inflow of foreign funds if current rates of economic growth are to be sustained.' Despite these warnings, he ended his analysis by saying: 'Asia's growth will continue.' It is apparent that although he is confident his 'crisis' scenario is unlikely to happen, it worries him that it might. But then, economists get paid to worry.
