Tuesday May 18 1999 SCMP Camdessus urges caution DAVID SAUNDERS Recent rallies on Asia's financial markets are premature and smack of "irrational euphoria", according to the International Monetary Fund's managing director Michel Camdessus. Speaking in Hong Kong, Mr Camdessus warned that while the new-found optimism across the region was understandable as economies started the process of recovery, much work needed to be done in terms of financial restructuring. The recovery on stock markets, while appropriate after almost two years of turmoil, was happening a little too rapidly, he said. "People were talking about a deep recession in the making for Asia . . . Now we are possibly at a turning point, or even possibly after the turning point," Mr Camdessus said. "But I am a little bit concerned that after instances of excessive pessimism, we are now in a phase . . . of a degree of irrational euphoria. So we must be careful in our judgment." However, during a speech beforehand, at the Pacific Basin Economic Council's international general meeting, Mr Camdessus noted considerable progress had been made towards improving the international financial system. "We are at the point now where - let me be a little impertinent - central banks no longer compete for a reputation for secrecy but for one of transparency," he said. He called for full liberalisation of capital movements in a "prudent and well sequenced fashion". He said that while the ultimate goal of financial institutions and all governments should be for trade liberalisation and greater regulatory transparency, he acknowledged there was sometimes a case to argue for capital controls to be imposed on a temporary basis. "Generally, consensus is emerging that capital controls do not deal effectively with fundamental economic imbalances, but may only be useful in certain circumstances," he said, adding they were in fact accounted for within the IMF's own articles of agreement. "[But] controls may have a place when there is the risk of a crisis, but only to allow a breathing space for other fundamental measures to take effect." Such controls were generally more effective when imposed on capital inflows rather than outflows, such as those erected by the Malaysian Government in September. Any future work on financial reforms needed to include social consideration, he said. The financial crisis had exposed the inadequacy of social welfare systems across Asia, where people had traditionally relied on family-based support. Mr Camdessus also said stronger nations had to do more to integrate developing states, which were not benefiting from the global economy. "Too little is being done by industrial countries to facilitate this integration, for instance by opening their markets or by extending official development assistance," he said. Mr Camdessus said all financial institutions, including the IMF itself, had to ensure that they evolved in line with the changing global economy and that all countries were given an opportunity to participate in the decision-making process. Asked for his observations on the Hong Kong economy, Mr Camdessus said the IMF believed it had reached a turning point, although unemployment remained high. He said the SAR Government was right to defend the peg and retain it even though it had undergone immense pressure.