Posts Tagged ‘1997 Asian financial crisis’

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Asia is in crisis mode. Europe, or so it appears, is in recovery mode. In Asia we are set to see a re-run of 1997, or so they say, when Asia suffered one very nasty crash. In Europe years of pain are set to pay dividends, or once again so they say. Yet, look beneath the surface and things look different. Asia today is nothing like Asia in 1997. Parts of Europe on the other hand do.

Déjà vu. We all get it from time to time, but presumably it is an illusion. It has been theorised that we may get that feeling of that having done or said something before, because our subconscious can perceive something before our conscious. Déjà vu when applied to Asia may be an illusion too.

At the moment many are trying to draw a lesson from the 1990s. In 1994, the US Federal Reserve began a cycle of tightening monetary policy. As US interest rates increased, money flowed from the so-called tiger economies of South East Asia into the US. The 1997 Asian crisis resulted. The IMF stepped in. Some countries, that had previously seemed to be on an unstoppable road to riches, suffered a very nasty recession/depression.

Many fear a repeat of this today. The Fed is set to tighten. The biggest victim to date has been India. Brazil, Turkey and Indonesia have also seen sharp currency losses. Indonesia’s central bank has responded by increasing rates four times in just a few months. Don’t forget, however, that despite the severity of the 1997 crisis, within a short time frame output across South East Asia had passed the pre-1997 peak. It will be like that again. Indeed Indonesia, perhaps along with the Philippines, is one of the most interesting territories in the world right now – from an investor’s point of view that is. This time around savings rates are higher in South East Asia, while external debt – especially in the case of Indonesia, the Philippines and India – is relatively modest.

Contrast this with what is happening in the euro area, where many countries in the region are facing the tyranny of a fixed exchange rate, which is causing the recession/depression to drag on and on.

But the latest Purchasing Managers’ (PMIs) Indices relating to Europe look promising. The PMI for Spain hit a 29 month high, for Italy it was at a 27 month high. Ireland’s PMI was at a 9 month high. For Greece the story is sort of better still; the PMI is now at a 44 month high.

However, the Greek PMI still points to recession. In Spain, Italy and Ireland the growth looks only modest. Just remember that these countries have massive levels of unemployment – especially in Spain and Greece. For them to cut government debt to the levels required, they have to impose austerity for years and years.

And just consider what might happen, if the markets expect an even higher return on the money they lent to troubled Europe as rates rise in the US.

The markets are panicking over Asia. They should perhaps be looking towards Europe.

© Investment & Business News 2013

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It happened in 1997, and some think it is happening again. Back in 1994 the US Federal Reserve upped interest rates, and so begun a cycle of tightening monetary policy. Money flowed from East to West, and in 1997 crisis was the watch word. The so called tiger economies of South East Asia in particular saw their economies look distinctly like a certain fruit – a pear. It was an important episode. Some say that the Asian crisis of 1997 sparked off a chain of events that led to the 2008 finance crisis. And now it seems to be happening all over again. Or is it?

Many economists say that the tragedy of the Asian crisis was that it was not the fault of the countries that were the victims. Cheap interest rates in the US meant money flowed from the US and Europe into South East Asia. Not all governments in the region wanted it. But – or so Nobel Laureate Joseph Stiglitz, who was chief economist at the World Bank at the time alleges – the IMF urged governments to welcome the influx of money. It is just that when money flows fast, not all of it is used wisely. Bubbles are born. Then in 1994 things began to change. Slowly the Fed increased rates. By 1997, the interest rates in the US were attractive to investors, and money flowed back. Bad Asian businesses were exposed. Good businesses were caught out too. The IMF came riding in to the rescue, but not all agreed with how it reacted. Critics say the IMF was more concerned about finding ways to ensure the West got its money back than helping the countries of South East Asia cope with the crisis.

And in so doing seeds were sown. Many countries in South East said never again, and vowed to ensure they were never again reliant on overseas capital. China watched events with alarm, and its policy of keeping a cheap yuan, and pushing for growth off a trade surplus was born. Many economists say this policy helped to contribute to global imbalances, which may have been an underlying cause of the 2008 crisis.

But by trying so hard to save the West, the IMF and –what Stligtz calls the Washington Consensus – western banks got off lightly, It happened again in 1998 with the Russian crisis and the collapse of LTCM, for which Fed Chairman Alan Greenspan managed to orchestrate a rescue which avoided a western banking crisis. But the rescue meant moral hazard because western banks did not learn their lesson. They repeated their errors until they became too big for even the Fed to sort them out in 2008.

Now let’s come up to date. We appear to be entering a new period of rising interest rates. The Fed and Bank of England have tried to persuade us that rates will not rise for some time, but the markets are not buying it. Every piece of good news, every

piece of okay news on jobs in the UK and the US, makes the markets more certain that rates will be rising sooner rather than later. On the back of this, yields on US government bonds have hit two year highs. It is not so much that money is flowing from Asia back into the US, but that the markets fear this will happen. And the fear is having an effect. The Indian Rupee fell to all-time low against the dollar yesterday (19 August). But emerging market currencies saw sharp falls across the board.

So far this year has been disastrous for the South African Rand, the Brazilian Real, and now the Indian Rupee. Last week data revealed that Russia is in recession. Yesterday data emerged indicating that Thailand is in recession. The Indonesian stock market saw sharp falls as markets took fright over the size of its current account deficit. Indonesian government debt is rising too. Yet there are reasons to think that some of these countries are being wrongly punished by the markets, and the ultimate loser will be the markets themselves.

This time around many of the larger countries of South East Asia are far less reliant on overseas money. Savings ratios are high.

In Indonesia the ratio of credit to GDP is 30 per cent, against an average of nearer 100 per cent for the region. More interestingly, in Indonesia a smaller proportion of credit has funded projects in the property sector, relative to Hong Kong and Vietnam, for example. As a result there is little hint of a property bubble in the making. Instead, much of the credit has funded infrastructure and manufacturing. In 1997 around 50 per cent of Indonesia’s credit was funded by foreign currencies. Today that level is nearer 15 per cent.

Indonesian domestic credit to the private sector is just 33 per cent, compared to 203 per cent in the US. The ratio is just 33 per cent in the Philippines too. It is even lower in Mexico, which may, by the way, benefit from re-shoring as manufacturers move closer to the US market.

As far as emerging markets are concerned, the markets are in panic mode. In such times they are lousy at picking the wheat from the chaff. When they become more rational, certain emerging market countries will see equities boom.

© Investment & Business News 2013

In 1994, the US Federal Reserve increased interest rates. The eventual effect of this was the Asian crisis of 1997, then the Russian crisis of 1998 and the collapse of LTCM.

History does not repeat itself, once said Mark Twain, but it does rhyme.

Did you hear that? It is the markets rhyming again.

This week the OECD said: “In East Asia…combined nonfinancial corporate and household debt has increased in several countries, reaching 130 per cent of GDP in China and Malaysia in 2012. For the East Asia region as a whole, private debt has increased by 19 percentage points of GDP since 2007, while in Latin America it has increased by 9 percentage points.

Household debt (only by deposit-taking corporations) in Thailand has risen 15 percentage points since 2007 and now stands at 63.4 per cent of GDP. Total household debt is estimated to be about 77 per cent of GDP in Thailand and almost 80 per cent of GDP in Malaysia.”

Countries across the emerging world where private debt is either around 100 per cent of GDP or even greater than this amount – and listed in order of size of debt to GDP – include: Thailand, Panama, St Lucia, Vietnam, Malaysia, South Africa and China.

Three countries stand out with excessive level of foreign debt. They are Papua New Guinea, Latvia and the Seychelles.

The World Bank said: “Public debt levels are high and proving difficult to manage in countries such as Cape Verde, Egypt, Eritrea, Jamaica, Jordan, Lebanon, Pakistan, and Sudan.”

But as markets panic, and emerging market debt becomes the thing they fear most, expect fundamentally strong economies to be punished too. The markets are like that. In times of either euphoria or panic they don’t tend to discriminate between sectors or regions.

That means opportunities may emerge. Watch out for the countries that make up the Pacific Alliance Trade Bloc, some countries within South East Asia, and the so-called TIMPs – Turkey, Indonesia, Mexico, and the Philippines – in particular.

© Investment & Business News 2013