West braces for Asia fallout

UK companies may be hit as troubled tigers seek to renegotiate or cancel big capital projects

Businesses across a range of UK industrial sectors will this week count the cost of the currency and market turmoil that has affected the economies of South-East Asia in recent weeks and which observers believe is set to continue.

At stake for British business are a number of lucrative capital projects involving engineering companies, utilities and heavy industrial companies in Malaysia, Indonesia and the Philippines. Analysts fear some will have to be renegotiated or even cancelled.

While some strategic contracts such as British Aerospace's existing deal to supply 16 Hawk military aircraft to Indonesia are believed to be safe, infrastructure projects to modernise the region's water, power and communications networks may be scaled back to reflect the reduction in those countries' ability to pay in hard currency.

In the Mexican peso crisis of 1994 the currency devalued by 40 per cent against the US dollar. A number of infrastructure projects involving British companies fell apart as a result.

The Hong Kong Monetary Authority, the Chinese province's de facto central bank, is seeking to calm the turbulent currency markets by talking up the stability of the Hong Kong dollar in the hope of discouraging speculators from trying to dislodge it from its peg to the US dollar.

The move follows Friday's reported intervention by the Sultan of Brunei, the world's richest man, to buy Malaysian and Singapore dollars which allowed both currencies to bounce slightly off three-year lows against the US dollar.

Malaysian prime minister Dr Mahathir Mohamad dismissed suggestions from the IMF that the country should slow down its economic expansion to prevent the economy overheating.

"The country will have eight per cent growth, but that will be in ringgit terms. In foreign currency terms, in per capita terms, it will go down," he told a news conference yesterday.

A spokesman for Thames Water, which recently signed a pounds 250m contract to install a modern water and sewage system in Jakarta, the capital of Indonesia, said that the company was monitoring the situation and cited a clause in the agreement that allows it to renegotiate if necessary. "Of course we are concerned, but we aim to build enough financial leeway into contracts to avoid nasty surprises," he said.

A spokesman for Airbus said orders for 19 planes worth approximately $1.2bn from Thai Airways, Cathay Pacific, China Southern and Sichuan Airlines would be unaffected by the currency crisis. Transport analysts in London were more cautious. "I do not think the Asian carriers are going to stop buying new planes, but the terms and delivery times may have to change to reflect ability to pay," said one.

Among heavy industrial companies, Blue Circle Industries faces diminished profits from its building materials businesses in the region. The company is building a cement plant in Malaysia which will increase capacity at a time when the construction industry in these countries faces a severe downturn.

Operating profits from Malaysia-based Malay Cement in the first half of the financial year are expected fall by about 4 per cent in sterling terms from pounds 18m when Blue Circle reports interim results on 8 September.

"The shock to growth in the region will have important implications for industrial commodities like chemicals, paper and steel. Asia has been a very important source of demand, and if that changes the pain will be felt throughout these industries," said Richard Kersley, equity strategist at BZW.