Emerging countries in Asia are under renewed economic pressure. The Indian rupee has tumbled to a fresh all-time low of 68.80 against the U.S. dollar. China is already crushed under heavy debt, though it still appears strong on the surface. As we reported last week, the economic contagion is spreading from India and Indonesia to Malaysia, Thailand and broader Southeast Asian economies. All these indicators lead us to a big and worrisome question: are emerging Asian countries headed toward a 1997-like Asian Financial Crisis (AFC)?
Citi sees five major changes since 1997 Asian Financial Crisis
Over the past three months, emerging market risk assets have seen heavy sell-off due to concerns over the Federal Reserve pulling back its $85 billion a month stimulus program. Johanna Chua, a senior analyst at Citi Research says that Asia is definitely vulnerable to a financial crisis. But Chua sees some differences between the current woes and the 1997 Asian Financial Crisis; there have been several significant changes in the nature of external vulnerabilities over the past 16 years. Citi Research says there are five major changes since 1997 Asian Financial Crisis in external vulnerabilities.
The first chsnge is that forex regimes have become more flexible now. They are helping Asian countries protect their external liquidity positions by acting as a shock absorber to shifting external financial conditions. Assuming everything else is same as 1997 crisis, the countries won’t have to accumulate many precautionary reserves. However, China, Hong Kong and Vietnam haven’t seen more flexible forex regimes.
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Secondly, except Sri Lanka, almost all emerging Asian countries have improved their forex reserve buffers. Citi Research analyzed five metrics to assess the improvement in reserves. They include reserves relative to the number of months of imports a country can cover, forex reserve over short-term debt by remaining maturity, forex reserve over total external financing requirements, reserves over broad money and forex reserve change. All the metrics show a significant improvement compared to 1997 Asian financial crisis.
The third change is the current account position for Asian countries are much stronger in 2013 compared to 1997, except for Indonesia, India and Sri Lanka. Before the 1997 Asian Financial Crisis, current account deficits were much larger in countries like Thailand, Myanmar, the Philippines, South Korea and Vietnam. But all of them have seen significant improvement since then.
The fourth change is the reliance of Asian countries on non-capital commercial flows in funding current account and basic balance has seen a drastic decline. That’s because domestic bond markets in Asian countries have seen a sharp increase over the last decade as fundamentals improved.
Finally, the most important structural change that has taken place since the 1997 financial crisis is that the “foreign currency component” in external debt of emerging Asian countries has declined sharply. Hence, they are less vulnerable to forex mismatches in times of volatility. Even more troubled countries like India and Indonesia have shown significant improvement.
Citi Research states that though emerging Asian countries are in trouble, this time it will be less severe compared to the 1997 Asian Financial Crisis.