The tide of liquidity released across the globe as central banks, led by the US Federal Reserve, undertook “quantitative easing” through asset purchasing programmes, is in the process of going out.
Emerging market crises are more often than not the result of volatile financial flows, the turning of the tide has indeed created difficult conditions across many high-performing economies.
Southeast Asia, especially Thailand and Indonesia are being buffeted by bad economic news and worrying conditions. These difficulties are showing up in numerous emerging markets around the world, but it is in India where the situation is most dire.
This week the Indian currency has again been setting disturbing records. These include not only more record lows against the U.S. dollar, but on Wednesday also a dramatic drop which was the worst one day sell off almost twenty years.
Whilst Syria might be geographically far from India, the apparent turn towards a strike on Assad’s regime by a U.S. led coalition, and also the feared regional destabilization such a strike could ferment is not helping the situation in the subcontinent.
Foreign funds continue to leave the country, but now it is not just bond markets that are seeing foreign outflows (USD $4.6billion this year) but also equity markets (which have lost USD $3.6billion in the last three months).
Quarterly growth reports released in recent weeks for the major economies in Southeast Asia have been pretty grim. This week, Thailand surprised investors and analysts by reporting that its economy had contracted in the second quarter of 2013, falling into a technical recession.
In Indonesia, second quarter growth came in below forecasts, while in Taiwan, although the second quarter produced strong growth, the government reduced its forecast for 2013 overall.
Meanwhile, Malaysia’s economy grew at a slower-than-expected rate in the second quarter, and the government slashed its forecast for 2013 as a whole.
In many of these countries, massive current account deficits and the end of cheap credit are to blame for the slowdowns. Some financial analysts worry that the region—including not only Southeast Asia but also China—is repeating some of the mistakes that led to the disastrous 1990s Asian financial crisis. Cheap credit in nearly every major Southeast Asian economy (and in China) has led to booms, often wasteful, in housing construction; many countries in the region now have unprecedentedly high current account deficits and debt/GDP ratios.
Some leaders in Thailand, Malaysia, Indonesia and, one suspects, in China, worry that as easy credit is less available many of these countries are going to face currency crunches similar to that which launched the Asian financial crisis in 1997 as the Thai baht’s peg to the U.S. dollar collapsed.
Such doom-mongering, though, seems to overstated, at least at this point. All of these countries have been through one Asian financial crisis, and have learned some important lessons from it, including building up much larger piles of foreign currency reserves, creating the currency swap initiative as added protection, and launching close informal cooperation among central bankers and finance ministers in the region, so that any currency crunches do not catch other countries unaware.
Southeast Asia’s bond markets have become more mature, with greater long-term borrowing, making it less likely for credit to dry up for any Southeast Asian nation all of a sudden. All this doesn’t mean the region’s leaders are free from worry, but expecting a return of 1997 is, too alarmist.
Is DS Najib ready to manage the repeat of the late 1990's financial crisis?
On the narrowing current account surplus, the prime minister said:
“I will comment on it when it’s appropriate. The government is monitoring the situation very closely.
“It means that the market expects us to manage our deficit and balance of payment in a way to ensure the market will have confidence in the micro and fiscal management of the country.
“The details relating to that matter will be announced when it is appropriate,” he added.
The Finance Ministry is currently monitoring the narrowing current account surplus by considering thoroughly future public sector projects.
Projects with low import content and high multiplier effect will be given priority without compromising on the economic growth.