ASIA NEWS NETWORK
WE KNOW ASIA BETTER
Keeping house in order as markets roil
Publication Date : 07-09-2013
Even though Asian stocks and currencies are under pressure, there is no reason to fear that an Asian financial crisis is brewing all over again - or worse, an interminable crisis a la Europe. Policymakers and analysts mostly agree that things are very different now from the 1997-98 debacle. There is considerably lower exposure to foreign debt and the foreign exchange reserves of central banks are in a much healthier state than before. Back then, those who had gorged on debt in foreign currencies were doubly hit when debt-servicing costs ballooned and prices of imports soared because of sliding currencies.
This time, the regional contagion risk is low. India (Asia's third-largest economy) and Indonesia have borne the brunt of the sell-off but Asian powerhouses China and Japan are largely unaffected. Elsewhere, some of the huge losses sustained have been pared down lately as investors return guardedly.
There is cause for optimism as emerging economies in the region have come a long way since the Asian financial crisis. For example, a sustained export-led recovery saw Indonesia, the worst hit, turning things around sharply - its economy was 72 per cent bigger last year than in 1997.
However, it would be facile to simply link roiling Asian markets lately to broad issues like a resurgent US dollar, looming US monetary stimulus tapering, sabre-rattling over Syria, and rising oil prices. Other factors are in play too, like underlying problems dogging certain economies. These must be faced squarely. In India, for example, political gridlock, a yawning current-account deficit, slower growth and rising inflation are all culpable. Little wonder the rupee, which led the pack of losers, has been weakening for over two years.
Economists who ask if nations have drawn sufficient lessons from the crisis 11/2 decades ago may be right on the money. The same overweening optimism that preceded the Asian financial crisis was out in full force when cheap money had flowed in before the current meltdown. Investors piled into property and other assets in Asia, turning one-time laggards, like the Philippines' benchmark index, into star performers.
It should be amply clear by now that capital can take flight at the same speed it alights. Yet Asian nations dragged their feet in checking asset bubbles and undertaking much-needed financial reforms, for example, to encourage adequate risk management and strengthen supervision. Any weaknesses in the economy need to be tackled with resolve as they can assume magnified proportions when investors sense even a whiff of a crisis. Keeping one's house in order and being better prepared should things go badly are sensible ways for economies to weather regional storms.