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Asia to ‘fare better’ in financial storm

Publication Date : 03-02-2014


The beating that Asian markets took last week has raised fears that the region’s economies may be ensnared in another financial storm.

Last month, Asian stocks posted their biggest monthly drop since May last year, after worries about China’s growth and the United States’ dwindling monetary stimulus compounded a brewing crisis in emerging market currencies.

The eye of this current storm is in Argentina, where massive selling of the peso led the authorities to devalue the currency by almost 15 per cent last week.

The selling spread to the currencies of other emerging economies – such as Turkey, Brazil and South Africa – and has started to hit Asia.

As the currency carnage continues, investors wonder which Asian markets might be most susceptible to contagion if the bloodbath turns into a real crisis.

Credit Suisse economists tried to answer that question last week with a new report, which assesses the relative resilience of Asian and emerging market economies based on a range of macroeconomic and valuation indicators.

The measures they examined included improvements in trade balances, foreign exchange reserves and foreign bond holdings, as well as the difference between each economy’s local 10-year interest rate and that of the US.

Their analysis put China, Hong Kong, South Korea, Singapore and Taiwan as the best-positioned to weather a financial storm. These economies “escaped the last shock largely unscathed and continue to pose few risks in our view”, said economists Michael Wan, Robert Prior-Wandesforde and Santitarn Sathirathai.

Malaysia, the Philippines and Thailand were also deemed “better placed” in most categories, though not totally without risks.

“We still worry about the high level of foreign bond holdings in Malaysia, the political situation in Thailand and low real interest rates in both Thailand and the Philippines,” the economists said.

Within Asia, India and Indonesia are likely the most vulnerable, they added. While these economies have made some progress in improving their economic fundamentals in recent months, they still encompass some fragilities.

“Still, the extent of the damage (in) a given shock is likely to be less” than the drubbing these two economies took in the markets last summer, the economists said.

The Credit Suisse report concluded that emerging economies outside Asia, such as Argentina, Turkey and South Africa, were “generally worst placed” to deal with a currency crisis.

Argentina’s foreign exchange reserves are “comparatively low” at 4.8 months of merchandise imports – Singapore has nearly double that while China has almost five times the number, the report said.

Turkey and South Africa, meanwhile, have current account deficits amounting to about 7 per cent of their economies.

The upshot is that this time, Asia is better placed to weather a financial storm compared with last year, and compared with other emerging markets.

But policymakers should not be complacent and ease up on strengthening their economic fundamentals further.

During the panic of a crisis, even the smallest perceived weakness in an economy can spiral into a potential death sentence.


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