Emerging markets better equipped to ride out financial storm than in 1997
What began as a correction in June has turned into a rout in most major emerging markets. While developed countries, especially in the US, have mostly recovered, financial markets in developing nations from India and Indonesia to Turkey and Thailand have been hit hard. Some of these countries' currencies are plunging to alarming levels against the US dollar, a safe haven currency.
The Thai baht, Brazilian real and Malaysian ringgit among others are weakening. The Indian rupee has had the worst sell-off since the mid-1990s. The Mumbai stock market has fallen by close to 10 per cent since the end of July. And Indonesia, so loved by foreign investors even at the start of this year, has seen the rupiah drop by 10 per cent and its equity market by 20 per cent over the past three months.
Is this the beginning of a new phase of the global financial crisis? If so, the crisis has gone full circle as emerging markets, much favoured until recently, take a plunge while the US - where the crisis first started in 2007 - is recovering, albeit slowly. The danger is that a full-blown crisis in the emerging markets would also threaten the nascent recovery in the US and Europe, and the global economy at large. Central bankers and the International Monetary Fund have expressed alarm. Talk of another Asian crisis may be overblown, but investors and policymakers are justifiably concerned.
While each country has its own set of problems, they are all caught in the unfavourable headwinds from China and the US. Developing countries, especially those in Asia with the most export reliance on China, have been adversely affected by its slowdown. And while they benefited in the last few years from the liquidity flood created by ultra-loose monetary policy in the US, the expected policy reversal by the Federal Reserve and the economic recovery are pulling money back there.
Fortunately, countries in Asia are in much better shape than they were in 1997. Their large reserves allow them a margin of safety; their banks are better capitalised; and most debts are no longer denominated in foreign currencies such as the US dollar. Hopefully, in the short term, they will muddle through, if - and this is a big if - policymakers of the key emerging markets don't panic and make serious mistakes. But in the longer term, many still face structural reforms.
Meanwhile, everyone is keeping their fingers crossed.