CHENNAI: "According to current expectations of Asian dynamism, the equity market decline could be viewed as a healthy, necessary and relatively moderate correction. Asian markets had become overvalued as compared to the emerging market average. The recent correction seems to be moving share prices back closer to more sustainable levels." That is the assessment of the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) on the recent volatility in the Asia-Pacific financial markets.

In a policy brief on what it describes as `The calm before the storm?', ESCAP says, "Though the markets have been quiet in the last few days, there are new risks emerging, which may lead to more stormy weather ahead." The review of the economies and markets not only recommends a four-track approach to manage risks, but also says that the Asian economies are now much better prepared to handle a crisis than they were in 1997.

ESCAP's brief notes, "The region saw $39 billion in inflows — or 63 per cent of developing country's net portfolio equity investment — in 2005. The most popular equity markets were China, India and Thailand. Investors also brought a wide range of other assets — both developed and emerging market bonds and commodities."

This buying was fuelled by both external and internal factors — low interest rates in developed economies such as the U.S. and Japan, and the attractiveness of Asian equity prices, with booming portfolios. Investors have also preferred particular sectors depending on country conditions. For instance, consumption-related equities such as banks and real estate were the choices in India and China, whereas commodity stocks were important in commodity producing economies such as Indonesia.

With the Asian economies integrating fast into the global economy, ESCAP cautions: "They also face a higher risk from the constantly shifting global environment. It is increasingly important to build strong and flexible economies that can weather global shocks and adapt to new realities. Establishing solid macroeconomic and microeconomic fundamentals, healthy financial sectors, and region cooperation in financial markets are crucial in this endeavour."

In its prescription to weather any storm, the U.N. agency had identified `key elements' — moderate and stable inflation, sound fiscal policies that ensure low budget deficits and sustainable debt burdens, and flexible exchange rates regimes that can absorb external shock and reduce currency mismatches in borrowing. Key areas to address are unemployment, insurance and pensions.

But the ESCAP also finds the countries in the region "in a stronger position to handle turbulence". It says, "Countries now have more flexible exchange rate regimes and high foreign exchange reserves. The region also has the world's best growth prospects".

On the downside, some risks have also been identified. High and rising oil prices may be the main threat to net oil importing economies, whose inflation and current account balances may be affected because of it. Further rises in developed country interest rates — especially in the U.S., Euro zone and Japan — may be possible if inflation shows signs of momentum in these economies. The result may be a global economic slowdown.

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