Analysts discuss US interest rates, the dollar and the Asian financial crisis
The global economy could face the conditions seen in the 1997 Asian financial crisis, namely aggressive increases in US interest rates and a strengthening US dollar.
But history is unlikely to repeat itself, analysts said, although they warn that some economies in the region are particularly vulnerable to currency devaluations reminiscent of the era.
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The last time the United States raised interest rates so aggressively in the 1990s, capital fled emerging Asia to the United States. The Thai baht and other Asian currencies crashed, triggering the Asian financial crisis and causing stock markets to plummet.
This time, however, the foundations of emerging Asian markets — which have transformed into more mature economies 25 years later — are sounder and better able to withstand exchange rate pressures, analysts said.
For example, since there are fewer foreign holdings of local assets in Asia, any capital flight would inflict less financial hardship this time around, said Tan Teck Leng, executive director of UBS Global Wealth Management for Asia-Pacific. FX and macro strategist on CNBC’s “Squawk.” Box Asia” Thursday.
“I think it brings back memories of the Asian financial crisis, but on the one hand, the exchange rate regime has been much more flexible in the current environment, compared to then,” he said. .
“And just in terms of foreign ownership in local assets, I think there’s also a feeling that ownership isn’t high.”
“So I don’t think we’re on the verge of an outright currency collapse.”
“But I think a lot depends on when the Fed hits an inflection point.”
Asia’s Most Vulnerable
Tan, however, said that among the riskiest currencies, the Philippine peso was one of the most vulnerable, given the weak Philippine current account.
“And I think the battle lines in Asian currencies are really being drawn in the direction – in the context of higher US rates – of external funding gaps like the Philippines and India, Thailand. Those would actually be the currencies most prone to near-term weakness in Asia.”
On Thursday, however, the central bank of the Philippines also raised its key interest rate by another 50 basis points and signaled that it would implement further hikes in the process. Reducing the currency mismatch with the US dollar reduces the risks of capital flight and collapsing exchange rates.
In contrast, economies with more accommodative monetary policies—that is, those that do not raise interest rates in tandem with the United States— like Japan, could also risk further weakening of their currencies, said Louis Kuijs, chief economist for Asia-Pacific at S&P Global Ratings.
He warned that downward pressure on Asian currencies could increase, especially in light of expectations that the Fed will continue to raise rates until the first half of 2023. Nevertheless, he too does not anticipate further Asian financial crisis.
A “healthier” Asia
“Fortunately, policy regimes in emerging Asian markets are stronger now and policymakers are better prepared. Central banks now have much more flexible exchange rate regimes,” he told CNBC.
“They are largely letting exchange rates absorb external pressure, rather than supporting the currency by selling foreign exchange reserves.”
“Also, Asian [emerging market] governments have pursued more prudent macroeconomic policies in recent years than before the 1997 crisis.”
Manishi Raychaudhuri, Asian equity strategist at BNP Paribas, said “the current episode is not comparable to the carnage they faced during the Asian crisis”, mainly due to healthier balance sheets and larger foreign exchange reserves. .
The depletion of foreign exchange reserves triggered the floating and crashing of the Thai baht during the 1997 crisis.
Some Asian economies are also registering balance of payments surpluses and healthier foreign exchange reserves, improved by efforts such as the multilateralization of the Chiang Mai Initiative in 2010, a multilateral currency swap agreement among members of the ‘ASEAN+3,’ said Bert Hofman, director of the East Asian Institute at the National University of Singapore.
Nonetheless, Vishnu Varathan, head of economics and strategy at Mizuho Bank, said currency turmoil for emerging Asia will remain significant and likely cause distress similar to that of the 2013 crisis – when the market reacted strongly to the Fed’s attempt to slow down quantitative measures. easing through the sale of bonds and stocks.
“The panic over an impending financial crisis and the concomitant collapse of emerging Asian currency markets is arguably overblown…but that said, the threat of continued currency turbulence is not averted either,” he said. -he declares.
“Thus, new downside exchange rate risks cannot be dismissed recklessly on the refrain ‘this time is different’.”
Despite the jitters, there are positives for the markets.
The Chinese yuan, for example, is showing resilience, said Dwyfor Evans, head of Asia-Pacific macro strategy at State Street Global Markets.
“There’s been a lot of talk about the weakness of the Chinese yuan, but actually when you look at the Chinese yuan against other regional currencies, actually China has held up relatively well,” Evans told CNBC.Capital Connection” on Thursday.
“So it’s a very stable currency against the basket.”
He added that the slowdown in China could, however, increase capital flows in and out of the country, which could have a bigger impact on the Chinese yuan going forward.