As emerging Asia struggles with currency free-fall, exiting capital and market sell-downs, is the region on the verge of another financial crisis?
Credit rating agency Standard & Poor’s said in a recent report that the probability of a repeat of the Asian currency crisis may not be high, but India and some other economies with high deficits do face a rocky road ahead.
The report, titled “South And Southeast Asian Economies Grapple With Growth And External Financing Risks,” said the market turbulence is driven largely by uncertainties around the timing of “tapering” (lowering bond purchases) by the US Federal Reserve, and recent cuts in Asian GDP growth forecasts, most notably for China.
“The road may be rocky in the near term, particularly for the largest deficit countries —India and Indonesia— but we don’t think this is the Asian crisis all over again,” said Standard & Poor’s Asia-Pacific chief economist Paul Gruenwald.
Investment banking major Morgan Stanley said that while most countries in the region boast of better macro conditions now than the 1990s, countries with current account deficits or near-balanced current accounts will face greater immediate pressures due to funding risks.
“If the rise in the US dollar were to continue for longer, this will bring Asia to a situation that would be similar to the 1990s,” Morgan Stanley said in a recent report “Asia Pacific Economics Rise in Real Rates – Why It Feels Like the 1990s.”
Unlike 1990s, most Asian countries are less reliant on external funding, and current account balances are in better shape — save for India and Indonesia.
External indebtedness is also lower in most countries. Besides, the higher level of foreign exchange reserves and more flexible exchange rates, mean that most countries in the region are better placed in this cycle.
The financial markets appear to be in the midst of pricing in a different path for US monetary policy. S&P warned about sporadic bouts of volatility in emerging Asian economies, along with weaker currencies, lower asset prices, subdued investment sentiment and dimming growth prospects.
“But, in our view, this is not a repeat of the 1997 Asian financial crisis. The external positions for the emerging Asian economies are much stronger. The central banks are also not defending their exchange rates. In addition, the increase in leverage over the past five years has been moderate in the economies with high external risks,” Gruenwald said.