A man walks past two among the hundreds of unfinished buildings which were abandoned mid-construction during the Asian financial crisis, in Bangkok in August 2004. The devaluation of the Thai baht in July 1997 sparked a drop in currencies around the region. Photo AFP
The View
by Nicholas Spiro
The View
by Nicholas Spiro

Why comparisons of Asian market turmoil today with the 1997 financial crisis are wide of the mark

  • The 25th anniversary of the devaluation of the Thai baht that sparked turmoil across Southeast Asia has thrown today’s Asian market turbulence into sharp relief
  • However, many Asian markets are now in a stronger position on the currency and current account fronts, and are facing conditions vastly different from those in 1997
In Asian financial markets, the start of the second half of this year is rich with commemorations. Saturday marked the 25th anniversary of the devaluation of the Thai baht, the spark that set off financial, economic and political turmoil across Southeast Asia, exposing the region’s acute vulnerability to cross-border capital flows and severely damaging the reputation of its “tiger economies”.

A quarter of a century on, Asia’s markets are again under intense pressure. In the second quarter of this year, the Bloomberg JPMorgan Asia Dollar Index – which tracks the performance of the region’s 10 most actively traded currencies against the US dollar, with the exception of the Japanese yen – fell 4.4 per cent, one of its steepest quarterly declines since the 1997 crisis.

Having spent years rebuilding their foreign exchange reserves, the region’s central banks are now being forced to spend billions of dollars to prevent local currencies from suffering sharper falls, with the Indian rupee having already plummeted to a record low against the greenback.

Equity and bond markets have also come under severe strain. Foreign investors sold a net US$40 billion of stocks in seven major markets across the region last quarter, the largest quarterly outflows during a period of intense selling pressure since the 2008 financial crash, data from Bloomberg shows.

In May, global funds sold a further US$16.6 billion of Asian local currency debt, one of only four months in the past decade in which monthly outflows surpassed the US$15 billion mark, three of which occurred this year, data from JPMorgan shows.

More worryingly, the whiff of a policy mistake is in the air. Unlike their peers in Latin America and Eastern Europe, central banks in Asia have raised interest rates at a much slower pace. Yet, inflationary pressures, which have been less acute than in advanced economies, have continued to build, driving real bond yields in many Asian markets deeper into negative territory, contributing to the surge in capital outflows.

This is forcing central banks to hike rates more aggressively, threatening to dampen growth just when markets are increasingly concerned about the risk of a global recession brought about by excessive tightening.
Shaktikanta Das, Reserve Bank of India governor, gestures during a news conference in Mumbai on December 12, 2018. India began raising interest rates in May. Photo: Reuters
However, while Asian markets are suffering one of the most severe bouts of turmoil since the 1997 crisis, the ructions are a far cry from the shocks of 25 years ago. Back then, Southeast Asia’s economies were mostly to blame. This time, they have been caught up in a global sell-off that has its roots in the US Federal Reserve’s dramatic pivot towards tighter policy, instigated in part by surging commodity prices.

Comparisons between 1997 and today are not apt, for three reasons. First, the tiger economies learned their lessons some time ago. They no longer operate fixed or semi-fixed exchange rate regimes, allowing their currencies to adjust and making them less prone to speculative attack. What’s more, they borrow mainly in their own currencies, ensuring their debts no longer balloon when their exchange rates drop sharply.

Furthermore, most Asian economies strengthened their defences following the crisis. Current-account balances are in surplus for the most part, while stockpiles of foreign reserves are still substantial. Banking sectors are much more stable, thanks to regulatory reforms.

A currency trader ponders a news report on the US Federal Reserve’s decision to raise key interest rates by half a percentage point, in the dealing room of Hana Bank in Seoul on May 6. Photo: EPA-EFE

Second, economic and financial conditions today are vastly different from those in the run-up to the 1997 crisis, which were characterised by explosive growth and surging capital inflows. Last year, the emerging Asia region as a whole excluding China and India grew by just 4.7 per cent, less than the average rate for advanced economies, data from JPMorgan shows.

Moreover, the share of foreign ownership of Asian domestic bonds had already fallen significantly over the past three years with the exception of China and South Korea.

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Third, and most importantly, the sharp deterioration in sentiment towards Asia is even more severe in other markets, and reflects wider concerns about acute tensions in the global economy.

At the heart of the selling pressure in Asia lies the rapid rise in the US dollar. Demand for the greenback has been relentless, fuelled by the combination of faster rate hikes in the US than in other major developed economies and the dollar’s safe-haven appeal amid escalating geopolitical tensions.

The collateral damage extends far beyond Asia’s currencies. The most dramatic moves this year have been in the yen, down 18 per cent to a 24-year low, and the euro, whose 10.8 per cent decline leaves it on the brink of parity with the dollar.

Asia’s markets are also getting clobbered by fears that inflation-fixated central banks will tip the global economy into recession. Tech-heavy stock markets in South Korea and Taiwan were among the worst performers in Asia last quarter, hit by worries over slowing demand for semiconductors.

The market turmoil in Asia is brutal and has yet to run its course. But comparisons with 1997 are wide of the mark. Today, the crisis, if there is one, is of collapsing confidence in global policymakers’ ability to quell inflation without snuffing out the recovery.

Nicholas Spiro is a partner at Lauressa Advisory