"It ain't
1997," is a popular refrain making the rounds in Asian markets at the
moment: emerging Asia is at risk of sliding into a 1997-style currency crisis.
Think again. Challenges abound, to be sure.
But the region is a lot more resilient today than it was
nearly 20 years ago.
Foreign exchange reserves, for the most part, are a lot higher.
Most borrowing has occurred in local, rather than in "hard"
currencies. And current account balances are either in surplus or, if in
deficit, manageable. Not a picture that suggests imminent calamity.
Why, then, the worries? Debt -- plain and simple. Just like in the
mid-1990s, credit has expanded much faster than gross domestic product in
recent years. Rapidly increasing leverage often portends trouble. Not just in
emerging markets, mind you. Developed economies learned the lesson all over
again in 2008.
A number of Asian economies, such as China, Malaysia, Thailand,
Hong Kong and Singapore, have seen credit expand at an uncomfortably rapid pace
in recent years. With growth now slowing, hard questions arise.
But the dissimilarities to 1997 outweigh the similarities. Back
then, many Asian economies tightly managed their currencies. With the seeming
absence of exchange-rate risk, this encouraged offshore borrowing, generally in
U.S. dollars. As current account positions were mostly in deficit, central
banks had acquired too few reserves to defend their pegs. When these came
unstuck, and currencies plunged, borrowers where left with soaring
debt-servicing burdens. Bankruptcies ensued, and investment collapsed.
Unpleasant memories. By Frederic Neumann for the Nikkei Asian Review
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