Repeat of 1997 Asian financial crisis ruled out
Southeast Asian currencies are tumbling, and that may be a good thing.
Indonesia’s rupiah and Malaysia’s ringgit have fallen to levels hit during the Asian financial crisis of 1997-98, leading a decline in the region’s currencies. The drop won’t spark the same economic meltdown this time around, according to analysts who watched the disaster unfold almost two decades ago. In fact, it could be a healthy realignment that helps boost exports.
The slide in currencies, exacerbated by China’s surprise devaluation of the yuan by the most in two decades last month and a strengthening US dollar, is occurring amid lower external debt burdens, more flexible exchange rates and higher foreign-currency reserves than before. Most Southeast Asian economies now run current-account surpluses instead of the deficits they had before the late 1990s crisis.
“Things are fundamentally different now compared with 1997,” said Tomo Kinoshita, chief economist at Nomura Securities Co., who studied Asian economies over the past 18 years. “Authorities have introduced quite rigid prudential measures to avoid a currency crisis. The depreciation in the currency is a positive factor for the exports and general competitiveness of those Asian nations.”
Malaysia and South Korea have run current-account surpluses every year since 1998. And the region has accumulated foreign exchange reserves. Indonesia’s stockpile is five times as large as it was 18 years ago, and Thailand’s six times. The four countries’ external debt – excluding reserves – has fallen from 60 percent of gross domestic product in 1997 to 11 percent of GDP, according to DBS Group Holdings Ltd.
“The region still has many buffers, so we are not in a repeat of the Asian crisis context,” said Anoop Singh, former director of the Asia and Pacific Department at the International Monetary Fund, who led missions to Thailand, Indonesia and Malaysia during the Asian crisis. “The US is clearly recovering strongly and this is good news for the region and the global economy.”
That’s starting to show: Indonesia’s shipments to the US, the country’s largest destination, rose 14 percent in August from July. A US recovery also has Southeast Asian policy makers bracing for an increase in interest rates by the Federal Reserve, which meets from Sept. 16 to Sept. 17, a move that may draw capital out of the region. However, outflows from Asia shouldn’t be significant, David Carbon, chief economist at DBS in Singapore, wrote in a Sept. 10 note.
“The amount of capital that does or doesn’t flow out of Asia in the weeks ahead will depend on three things: the strength of the US, the weakness of China and how much Asia today resembles the Asia of 1997,” said Carbon, who began covering Asian markets and economies in 1994, when the Fed began a monetary tightening cycle. “Fear not. The US is not as strong as many believe. China is not as weak. And Asia today looks nothing like 1997.”
To be sure, some Southeast Asian economies are in a better position than others. The IMF in July warned about the “sizable” share of corporate debt in foreign currency as a share of GDP in Malaysia and Thailand.