Analysts Discuss US Interest Rates, Dollar, Asian Financial Crisis

UBS says Taiwan's currency remains dominated by weakness in major North Asian countries

The world economy may be facing the conditions seen during the Asian Financial Crisis of 1997 – strong US interest rate hikes and a stronger US dollar.

But history is unlikely to repeat itself, analysts said, although they warn that some economies in the region are particularly vulnerable to currency devaluations reminiscent of that time.

On Wednesday, the US Fed Reserve made another rate hike to 75 basis points.

The last time the US raised interest rates like that in the 1990s, capital flowed out of emerging Asia into the US. The Thai baht and other Asian currencies collapsed, triggering the Asian Financial Crisis and leading to a stock market crash.

This time, however, the underpinnings of emerging Asian markets – which have evolved into more mature economies in 25 years – are healthier and better able to withstand pressures on exchange rates, analysts said.

For example, because there are fewer foreign assets holding local assets than in Asia, any capital flight will cause less financial pain this time around, said the UBS Global Wealth executive. Asia-Pacific FX Management and macro strategist, Tan Teck Leng, told CNBC.Squawk Box Asia” on Thursday.

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“I think this brings back memories of the Asian Financial Crisis, but overall, the exchange rate regime is a lot more flexible in today’s context than it was then,” he said.

“And just in terms of foreign holdings of domestic assets, I think there’s also a sense that holdings aren’t improving.”

“So I don’t think we’re on the cusp of a total currency collapse.”

“But I think a lot depends on when the Fed reaches the inflection point.”

Asia’s Most Vulnerable

However, Tan said that of the riskier currencies, the Philippine peso is one of the most vulnerable, given the Philippines’ weak current account.

“And I think the front lines for Asian currencies are really drawn along the line – in the context of higher US rates – the external financial gap to countries like the Philippines and India, Thailand. Lan. These will indeed be the currencies most vulnerable to near-term weakness in Asia.”

The current episode cannot compare with the carnage they faced during the Asian crisis

Manishi Raychaudhuri

Strategist BNP Paribas

However, on Thursday, the Philippine central bank also raised its main policy rate by 50 basis points and signaled that it would make further hikes. Reducing the currency spread with the US dollar reduces the risk of capital flights and exchange rate collapse.

In contrast, economies with more accommodative monetary policy – i.e. those that do not raise interest rates in tandem with the US – such as Japan, could also risk further weakening their currencyLouis Kuijs, chief economist for Asia-Pacific at S&P Global Ratings, said.

He warned that bearish pressure on Asian currencies could increase, especially due to expectations that the Fed will continue to raise interest rates in the first half of 2023. However, he also does not predict a meeting. Another Asian Financial Crisis.

A ‘healthier’ Asia

“Fortunately, the policy regimes of emerging Asian markets are stronger now and policymakers are better prepared. Central banks now have a flexible exchange rate regime. much more,” he told CNBC.

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“They mostly let the exchange rate absorb external pressure, rather than support the currency by selling foreign reserves.”

“Also, Asians [emerging market] governments have pursued more cautious macroeconomic policies in recent years than they did before the 1997 crisis.”

Manishi Raychaudhuri, an Asia equity strategist at BNP Paribas, said the “current situation cannot be compared with the devastation they faced during the Asian crisis” mainly due to the balance sheet. healthier balance sheet and larger foreign exchange reserves.

Depleting foreign exchange reserves was the cause of the collapse of the Thai baht during the 1997 crisis.

Some Asian economies are also maintaining balance of payments surpluses and healthier foreign exchange reserves improved by efforts such as the 2010 Chiang Mai Multilateralization Initiative, a swap agreement. multilateral currency among ASEAN+3 members, says Bert Hofman, Director of the East Asia Institute at the National University of Singapore.

However, Vishnu Varathan, Mizuho Bank’s head of economics and strategy, said foreign exchange turmoil for emerging Asia will remain significant and will likely cause similar difficulties. similar to the fury of 2013 – when the market reacted strongly to the Fed’s quantitative reduction efforts. easing through a sell-off of bonds and stocks.

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“Feared by an impending financial crisis, and the collapse of emerging markets in Asia, foreign exchange is said to be overblown…but that said, the relationship,” he said. The threat of persistent foreign exchange chaos cannot abate either,” he said.

“Therefore, the risk of a further decline in the exchange rate cannot be carelessly eliminated about” this time, it is “contained”.

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