The global economy may face conditions we saw during the 1997 Asian financial crisis – a sharp rise in interest rates in the US and an appreciation in the value of the US dollar.
But analysts said history is unlikely to repeat, although they cautioned that some economies in the region are particularly vulnerable to time-reminiscent currency devaluations.
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On Wednesday, the US Federal Reserve raised interest rates again by 75 basis points.
The last time the US raised interest rates so aggressively in the 1990s, capital fled emerging Asia to the US. The Thai baht and other Asian currencies collapsed, triggering the Asian financial crisis and causing a slowdown in stock markets.
This time, however, the fundamentals of emerging Asian markets — which have evolved into more mature economies after 25 years — are healthier and better able to withstand pressures on foreign exchange rates, analysts said.
For example, since there are fewer foreign holdings of domestic assets in Asia, any capital flights will result in less financial pain this time around, according to Tan Tic Ling, executive director of wealth management at UBS Global Wealth Management for Asia. Pacific FX and Macro Strategist, told CNBC’s “Squawk Books Asia” on Thursday.
“I think this brings back memories of the Asian financial crisis, but on the one hand, the exchange rate regime was much more flexible in today’s context, than it was at the time,” he said.
“And in terms of foreign holdings of domestic assets, I think there is also a sense that holdings are not high.”
“So, I don’t think we’re on the cusp of a total currency collapse.”
“But I think a lot depends on when the Fed reached an inflection point.”
The most vulnerable in Asia
Tan said, however, that among the more risky currencies, the Philippine peso was one of the most vulnerable, given the Philippines’ weak current account.
“And I think the battle lines in Asian currencies are really drawn along the lines of – on the back of higher US interest rates – the external financing gaps of the likes of the Philippines, India and Thailand. These will in fact be the currencies most vulnerable to weakness in the near term within Asia.”
However, the Philippine central bank on Thursday also raised its key interest rate by another 50 basis points, and indicated that it will apply further increases along the way. Reducing the disparity between currencies and the US dollar reduces the risks of capital flight and foreign exchange collapse.
By contrast, economies with accommodative monetary policies – that is, those that do not raise interest rates along with the US – such as Japan, may also risk weakening their currencies, said Louis Koig, chief economist for the Asia-Pacific region. In S&P Global Ratings.
He warned that downward pressures on Asian currencies may rise, especially in light of expectations that the Fed will continue to raise interest rates in the first half of 2023. However, he also does not anticipate another Asian financial crisis.
Asia is ‘healthier’
“Fortunately, Asian emerging market policy regimes are now stronger and policy makers are more prepared. Central banks have more flexible exchange rate regimes now,” he told CNBC.
“They have largely allowed exchange rates to absorb external pressure, rather than prop up the currency by selling foreign currency reserves.”
“Also, Asia [emerging market] Governments have pursued more cautious macroeconomic policies in recent years than they did before the 1997 crisis.”
“The current episode cannot compare to the carnage they faced during the Asian crisis” mainly due to healthier balance sheets and larger foreign exchange reserves, said Manishi Raichodhury, Asian equity strategist at BNP Paribas.
The depletion of foreign exchange reserves led to the flotation of the Thai baht and the subsequent collapse in the 1997 crisis.
Some Asian economies are also running balance of payments surpluses and improving healthy foreign reserves through efforts such as the Chiang Mai Multilateral Initiative in 2010, a multilateral currency-swap arrangement among ASEAN+3 members, said Bert Hoffman, director of the European Union’s East Asia Institute. National University of Singapore.
However, Vishnu Varathan, head of economics and strategy at Mizuho Bank, said foreign exchange turmoil in emerging Asia will remain significant and will likely lead to similar crises as the one that occurred in the gradual tantrum in 2013 – when the market reacted strongly to the bank’s bid. The Fed is slowing down the quantity. Dilution through the sale of bonds and shares.
He said, “The panic over an impending financial crisis, and the accompanying crash in Asian emerging markets, can be said to be exaggerated…But nevertheless, the risk of ongoing turmoil in currency markets has not been averted either.”
“So, more foreign exchange declining risks cannot be carelessly ignored” this time, it is a different “crisis.”
Despite the concern, there are positives for the markets.
The Chinese yuan, for example, is showing resilience, said Dwyfur Evans, State Street Global Markets’ head of macro strategy for the Asia Pacific region.
“There has been a lot of talk about Chinese yuan weakness, but in actual fact, when you look at the Chinese yuan relative to other regional currencies, in fact, China has held up relatively well,” Evans told CNBC’s Capital Connection on Thursday. “. .
“So, it is a very stable currency relative to the basket.”
He added that the slowdown in China may, however, lead to increased capital flows in and out of the country, and this could have a greater impact on the Chinese yuan being on track.
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