Malaysia, neighbours likely to ride out new Asian storm, says FT: KUALA LUMPUR, Sept 3 — Clouds of a new Asian Financial Crisis may be forming but Malaysia and its Asian neighbours are in a stronger position to weather another bout of the economic squall that battered the region in 1997, according to the Financial Times. The British newspaper noted that emerging markets have evolved significantly since, and no longer showed the same vulnerabilities to a repeat of the crisis that economists predict may result from US Federal Reserve’s planned tapering of its US$85 billion (RM280 billion) monthly stimulus programme. “In some ways, today’s Asian economies have little in common with their 1997 incarnations. Back then, many countries had fixed exchange rates and their companies were heavily exposed to foreign debt,” according to its report entitled “Asia: Storm defences tested” published last week. “As currencies came under pressure, central banks desperately spent reserves to defend them. When the peg finally broke, currencies collapsed and companies’ foreign-denominated debts soared.” In 1997, the hardest hit nations were Indonesia, Thailand and South Korea — all of which were forced to go to the International Monetary Fund (IMF) with hat in hand — but Malaysia and other neighbours were not spared the ravaging that ensued. During the crisis, Malaysia’s Kuala Lumpur Stock Exchange (now Bursa Malaysia) crashed from 1,200 points to below 270; the ringgit shed over half its value against the US dollar, forcing the introduction of a currency peg; and Bank Negara’s overnight policy rate shot up from 8 per cent to over 40, leading to a rash of delinquent loans. Already the global signals of a renewed crisis are beginning to show, according to a report, “A surprising reversal for emerging stock markets”, in the New York Times last week. Since the start of the year, the world’s top 10 developed nations have steadily outperformed emerging markets — once the darling of investors — with the former group expanding even as the latter economies regress. A record of the MSCI world index starting from New Year’s Eve shows that, cumulatively, the 10 largest developed nations have gained 12 per cent in market value for the year to date. And while developed nations are heading up, developing countries including Malaysia have gone in the opposite direction; MSCI’s Emerging Market Index showed a loss of 13 per cent in equity since the start of the year. This is the biggest gap between developed and emerging markets since the 1997 Asian financial crisis. The symptoms may appear familiar, but the FT believes the outcome will likely not be the same. “Today the picture is very different. Asian economies have flexible exchange rates, much higher reserves and sounder banking systems. India, for example, has reserves to cover seven months of imports compared with only about three weeks when it had its own ‘come-to-IMF’ moment in 1991,” the FT said in its report. But it also noted that while the same weaknesses were no longer there, a new Achilles’ heel — a credit bubble — may still expose the countries to possible economic calamity. “One concern is that much Asian growth since 2008 has been bought on credit,” the newspaper said. “The danger of a bubble could be exacerbated in some economies by the fact that, until recently, currencies were exceptionally strong. That was the result of big inflows of money from the US that are now reversing.” Those are concerns that will hit home particularly in Malaysia. The ringgit hit a three-year low against the US dollar last week, having shed over 7 per cent in value versus the greenback since the start of the year. Its national debt is also pushing against the legal ceiling of 55 per cent of GDP, after years of chronic budget deficits, while household debt is at 80 per cent of GDP. Yesterday, Prime Minister Datuk Seri Najib Razak announced a cut to RON95 and diesel subsidies in a bid to address the nation’s aid bill and trim the deficit. Bank Negara Malaysia last month moved to tighten loan regulations in a bid to reduce household debt and there are concerns that it may raise the interest rate in a bid to further regulate loans. “History tells us that when policy normalises, a certain amount of this debt will not be serviceable,” the FT quoted Deutsche Bank economist Michael Spencer in its report. “There are people who have never had a loan before and may not fully understand what happens when interest rates go up.” dlvr.it/3vKdLv
Posted on: Tue, 03 Sep 2013 02:41:52 +0000
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