Caution prevails over Asia in the fourth quarter, according to ABN Amro, and much of the blame lies with financial systems. Group chief economist Eddie Wong said in a newly released report that the market would shift its focus to economic problems uncovered or caused by the Asian financial crisis in the next six to 12 months. This was because growth was returning to normal after the 'phenomenal' cyclical rebound. 'One notable problem is that financial systems continue to be weak,' Mr Wong said in the report, 'Asian Anchor: It's Time to be Cautious'. 'Regionally, only Hong Kong and Singapore still have healthy financial systems. All other [Asian] countries suffer different degrees of financial intermediation problems. 'This may start to restrain growth in most of the region's economies over the next six to 12 months.' Mr Wong said due to the exciting rebound in regional economies, governments and corporates had less incentive to tackle structural problems. He believes it is now time for countries to re-focus on the problems they may have preferred to avoid when the economy was making a comeback. The first rounds of the economic recovery and earlier stock-market rally were driven by liquidity, Mr Wong said. This was powered by the sharp turnaround in the region's balance of payments and government borrowings to fund financial deficits. But the next round would be different. Economic acceleration and sustained equity-market performance must come from credit creation making use of the 'massive' surplus liquidity. 'Progress in resolving the financial intermediation problem is absolutely critical,' he said. Caution is also the word against a background of higher oil prices, a possible bear market in the United States as growth slows and a possible continuing weak euro. The combination paints a less-than-rosy picture for the region. However, a reversal of fortune is not on the cards, according to US investment bank Merrill Lynch. While the bank also said in an outlook report that Asia's macro picture looked likely to deteriorate beyond the autumn, it believes the downsides may be exaggerated. Merrill's Asian economist Bill Belchere said the peaking of the global cycle had brought the easy part of the Asian recovery to an end. 'As a consequence, growth in earnings and profits is expected to become increasingly scarce,' Mr Belchere said. 'The external risks to Asia's recovery appear considerable, with asset markets appearing to be pricing in a hard landing.' Still, Merrill Lynch is relying on a soft landing scenario for the US economy. This suggests that worries about oil prices, the euro, weakness in the Japanese economy and an abrupt slowdown are 'probably overplayed'. It expects Asian growth may slow only modestly to 6 per cent in 2001 from 7 per cent this year. While the external cycle is turning against Asia, it does not expect it to tip the region into substantially slower growth.