Why emerging-market weakness is not a replay of the 1997 financial crisis
LAST Tuesday Malaysia’s currency, the ringgit, did something unusual: it rose against the dollar. Granted, it was a modest one-day rise (.13%), but after a summer of steady declines it was welcome all the same. Asian currencies have taken a beating this year. The week ending August 14th they suffered the steepest drop since 2011. The Singapore dollar has fallen more than 5% against the dollar, the South Korean won and Thai baht more than 7%. But the ringgit and rupiah lead the race to the bottom, having fallen by 10.5% and 14% to their lowest levels since in 1997, when Asia’s economies were in a full-blown crisis. So is that about to happen all over again?
The short answer is no. To start, look not just at the overall decline but at the speed of the fall. The ringgit and rupiah have fallen steadily over the past eight months. Between July 11th 1997 and January 22nd 1998, by contrast, the baht, won and rupiah fell harder and faster: by 38%, 51% and 80%. When Thailand let the baht float against the dollar, it fell by 15-20% in a single day. Currencies came under speculative attack, weakening them further. High domestic interest rates had encouraged companies to seek financing abroad, often as short-term debt for risky investments; when local currencies plunged they faced massive debt-service payments. Foreign capital streamed out of these countries, depressing equity markets. It was, as we wrote ten years after the crisis, a “perfect storm” of financial and economic turbulence.
Today the story is much different. Governments learned from the last crisis, and have more macroeconomic and policy tools at their disposal. Their currencies already float, and none are running current-account deficits with fixed exchange rates. Their foreign-exchange reserves are larger (though Malaysia’s have just fallen below $100 billion for the first time in five years), and their banking systems stronger, with larger domestic-deposit bases. Their currencies have not come under attack—low oil prices are dragging down the ringgit, while concerns over long-term competitiveness are hampering Indonesia—and their economies better able to handle foreign-investment inflows. Big emerging-market firms look slightly less healthy; many have taken on large and growing piles of dollar-denominated debt, which have become less affordable as the dollar has risen in value. But these debts do not yet look a plausible source of widespread systemic financial risk.
The worry, though, is that governments have equipped themselves well to fight the last war. A panic-driven crisis may not loom, but emerging-market currencies the world over have taken hits from low commodity prices, China’s slowdown and an impending American interest-rate hike. Yet in fact, Asia’s currencies are faring relatively well: the Russian rouble, Colombian peso and Brazilian real have all fallen more than twice as much as the rupiah and ringgit. Low global demand has kept export growth low this year; a weakening yuan will make things worse. Last month Indonesian exports were down almost 30% year-on-year, a sluggishness mirrored across the region. Indeed, some now reckon that emerging markets will try to stimulate external demand through devaluation, as Vietnam did last week. That, in turn, suggests a different risk: that much of the world economy will try to cope with economic weakness by selling to the American consumer. Yet the sorts of global imbalances that result from competitive depreciation are dangerous, as the 2000s demonstrated. Americans might borrow too much as they attempt to play the role of engine of economic demand. Or they may simply tire, leaving the world without a source of economic locomotion.