In a recent report – Asia: Sound fundamentals suggest no repeat of 1997-1998 crisis – AB (AllianceBernstein) said that although Asian currencies have been unstable in recent months, comparisons with the Asian Financial Crisis are “over the top”.
The report argued that the prospect of monetary tightening by the US Federal Reserve has sparked concerns among investors, most notably in terms of a reversal of capital flows into Asia.
“From a fundamental standpoint, however, external positions of most Asian economies today are much more robust than they were in the 1990s, and the underlying external debt dynamics are quite different as well,” the report said.
“Back then, overheating domestic economic activity kept current account balances persistently in the red.
“In recent years, by contrast, moderate domestic demand and a prudent monetary and fiscal policy mix have allowed most Asian economies to maintain current account surpluses – no overheating despite favourable funding conditions.”
The region has also significantly reduced its reliance on external debt over the past decade, with the corporate sector noticeably deleveraging.
However, the report pointed out that the real concern for Asian economies is the risk of a protracted period of economic slowdown.
“Exports from many Asian countries experienced a further drop in August, while increases in public debt over the past few years imply that there is not much room for fiscal support, and interest rates are already at historical lows,” the report said.
Moreover, an additional risk for Asian economies stems from the opening up of capital accounts across the region in recent years.
“Swings in foreign investors’ money in Asian onshore markets could cause greater volatility in external balances,” the report said.
“Overall we don’t see a risk of a 1990s-style systematic crisis, but currency and asset markets could see a sizeable correction if risk aversion escalates.”
