Does Asia’s market turbulence herald a 1997 financial crisis repeat?

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The risk of recession in Asia is real, but some experts say fears of another 1997-style financial crisis are overblown, not least because the region overall is economically in a much different place than it was 25 years ago.

High inflation has been plaguing many of Asia’s economies as of late, eating into consumers’ purchasing power and stifling economic growth. On Wednesday this week, Asia saw most of its equity markets fall as the euro plunged to a 20-year low.

In response, Bloomberg released a survey forecasting chances of recession for several Asian economies. Sri Lanka is at the top of the list with an 85% chance of recession next year, followed by New Zealand, Japan, South Korea, China, Taiwan, Australia, and the Philippines.

In general, Asia’s risk of recession is around 20-25%, according to the survey. But the question on many people’s minds is: will this lead to another 1997-style financial crisis?

Nicholas Spiro, partner at Lauressa Advisory and columnist for the South China Morning Post, doesn’t think so. According to him, Asian economies are now in a stronger position than they were in 1997. They have healthier currency and current account balances, and are facing vastly different conditions.

Spiro explained that Asian economies now no longer have the same vulnerabilities they did in 1997. Fixed or semi-fixed exchange rate regimes have been abandoned in favor of letting currencies adjust and prevent speculative attacks. Most Asian nations also now borrow largely in their own currencies, preventing their debts from growing when exchange rates fluctuate.

Furthermore, emerging Asia (which excludes China and India) is not in explosive growth mode as it was in 1997. Spiro pointed to JPMorgan data that shows that the region grew by just 4.7% last year, less than the average rate for advanced economies.

And while there is a sharp deterioration in sentiment towards Asia, Spiro said it is important to note that other markets are even under greater pressure, reflecting wider concerns about acute tensions in the global economy.

“The market turmoil in Asia is brutal and has yet to run its course. But comparisons with 1997 are wide of the mark. Today, the crisis, if there is one, is of collapsing confidence in global policymakers’ ability to quell inflation without snuffing out the recovery,” Spiro added.

Sri Lanka, which is now in the throes of an economic and humanitarian crisis, is a stark reminder of what can happen if things go wrong in the region. On Thursday, the Sri Lankan government increased interest rates to a 21-year high as inflation reached 54.6% and food inflation shot up to 80.1%.

However, the aforementioned Bloomberg survey reveals that Europe’s 50-55% probability of going into recession is higher than the entire Asian region’s, while the US’ chance of recession stands at 40%.

HSBC’s co-head of Asian economic research Frederic Neumann is even more optimistic, saying that even a recession will not happen in the US. “It’s going to be a bumpy ride, but we’re not really sold on this recession idea,” he said to Bloomberg.

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