Gloom not boom

Interest rates in Asia are rising as currency values fall, sparking fears of an economic crisis like the one that buried the region in the late 1990s. But is this good reason to panic, asks Joshua Kurlantzick

The village of Mae On, a 20-minute drive from the northern Thailand city of Chiang Mai, looks like it could be an advertisement for tourism to the kingdom. Mist-covered hills, cousins of a larger mountain chain that extends north into Myanmar and eventually China and the foothills of the Himalayas, are dotted with small, emerald-green farms of vegetables, rice and coffee, an increasingly popular crop in the north. Winding and narrow roads meander up the mountains, passing an occasional waterfall, limestone cliff and group of western tourists breathlessly pumping their bikes up the steep tarmac. In the village itself, a central market is surrounded by stalls selling thick pork curries, wide sen yai noodles, and slices of pineapple and papaya kept cold on chunks of ice.

But though Mae On looks, on first glance, like it might have 50 years ago, in reality the area has gone through massive property development in just the past decade. More than a decade of Thai government policies, first launched by longtime prime minister Thaksin Shinawatra, who is now in exile, and designed to lower banks’ interest rates and push them to make property, auto and infrastructure loans, have ploughed money into places like Mae On.

Signs along the main road to Mae On advertise new condos in half-built housing estates, though local brokers say few of the new developments are full. Massive new malls on the side of the mountain road sell the latest American and Chinese DVDs and the newest updates for an iPhone, and their parking lots are full of the latest model Toyota 4Runners and VW sedans.

Now, some residents of the area – and many Thais throughout Thailand – worry that the days of easy credit, which have driven years of growth even as the country has witnessed constant political turmoil, may be over. As the Federal Reserve and central banks across Asia, prepare to wind up the period of easy credit, interest rates for all types of loans have begun rising. Many investors have rushed to the safety of dollars, euros and safe-haven investments from the most stable nations. One longtime investor in Thailand and other Southeast Asian nations says, “It’s chaos in the region now, every day the [region’s] stock markets open and as soon as the bell goes, it’s a frenzy of selling, selling, selling.”

Worried Thais are hardly alone: since the middle of this summer, emerging markets, particularly in Asia, have witnessed massive sell-offs of their bonds, enormous slides in their stock markets, and investors dumping their currencies as fast as they can. Many Asian and foreign analysts of Asian nations now worry that the easy credit masked huge problems in the foundations of emerging economies, and that Asia could witness an economic and financial crisis similar to the devastating meltdown that crushed the region in the late 1990s. This time, such a crisis would be even tougher for the world to withstand: emerging markets are far larger than they were 15 years ago, and a crisis in Asia could take down the entire international economy.


Thailand is hardly the only Asian country that has weathered economic and financial shocks in recent months. India’s rupee has fallen to historic lows against the US dollar, and other Asian currencies have plummeted by as much as 20 per cent against the dollar. Meanwhile, investors are furiously selling off their holdings of Thai, Malaysian, Indonesian, Indian, Chinese, and other Asian bonds. In a recent research report, global brokerage firm Goldman Sachs predicted that the Indonesian, Malaysian and Thai currencies will continue dropping for another year. In early September, several Asian countries, and other developing nations, became so worried by the growing global financial panic that they proposed working together to intervene in global markets, using their combined reserves to buy up dollars and stop the plummet of developing nations’ currencies. Meeting in St Petersburg, Russia, the Brics group of five large emerging economies – Brazil, Russia, India, China, and South Africa – proposed a similar idea, a fund created from donations from the big five, and designed to help stabilise emerging economies when they need inflows of cash.

Some aspects of the current emerging markets meltdown do seem eerily reminiscent of the Asian financial crisis of the late 1990s, when money flowed out of developing Asian economies and speculators attacked one overvalued Asian currency after the next, exposing the weak foundations of many Asian economies, which had at that time been booming for two decades.

The speculators won out, and after the Thai baht’s peg to the US dollar crumbled in mid-1997, Thailand’s currency collapsed, the central bank almost ran out of money, and the contagion quickly spread to Indonesia, Malaysia, South Korea, and many other countries in the region. Hundreds of banks around the region collapsed, and millions of Asians fell below the poverty line; in Indonesia alone, by 1999, one year into the financial crisis, 23 per cent of Indonesians were living on less than US$1 (Dh3.6) per day.

The crisis sparked massive political unrest as well, with populations furious over the economic turmoil overthrowing longtime Indonesian dictator Suharto and fighting political leaders in many other Asian nations. “No one was really prepared for [the crisis], even though everyone in the region knew that it could happen,” says Bilahari Kausikan, Singapore’s ambassador-at-large, who previously served as the top official in Singapore’s foreign ministry. “It was only a matter of time.”

As in the late 1990s, many Asian nations today are running massive current account deficits and have ridden long booms of cheap credit, both at home and in global markets, to build endless housing and industrial developments. Similar to the present-day easy credit that has fuelled housing and commercial real estate projects all over Thailand, in Bangkok in the mid-1990s, cheap credit fuelled construction of new buildings rising as fast as developers could pour concrete. The frothy investments were built on weak plans, with buildings often empty. After the crisis hit, the city was left with a maze of half-built skyscrapers that resembled an urban wasteland.

Now, domestic credit is becoming tighter in many emerging markets, particularly in Asia. Though the US Federal Reserve has not immediately ended its quantitative easing policy of keeping interest rates low, buying up US bonds, and making credit easy, most economists expect the Fed to do so soon, whether or not emerging markets are dependent on easy credit. Federal Reserve officials won’t give emerging nations’ leaders any guarantees that easy credit will last, even though these leaders have asked for the Fed to be clearer about when its easing will end, argues economist Robert Kahn of the Council on Foreign Relations.

With banks tightening up and investors panicked, some Asian economies are slowing rapidly. Thailand has entered a technical recession, while even China’s growth rate this year will be its lowest in at least two decades. In the hangover, many Asian nations now – as they did in the 1990s – face staggering ratios of debt to gross domestic products. In Japan, the debt/GDP ratio has climbed to 170 per cent, while many economists believe that, if China’s true debt figures were released, it too would have a debt/GDP ratio of over 200 per cent. China could be at “high risk of an economic collapse,” notes prominent China economist Michael Pettis, a professor of finance at Peking University’s Guanghua School of Management.


Despite all the similarities to the 1990s Asian financial crisis, and the worries from investors, analysts, and international institutions, a repeat of the 1990s is very unlikely. For one, countries like Thailand are not as defenceless as they were 15 years ago. Fewer nations today have currency pegs than in the 1990s, meaning that their exchange rates can prove far more flexible in the face of a slowdown. As Singapore’s currency has weakened this year, Singapore’s economic officials, widely considered among the savviest in the world, have allowed it to devalue, making Singapore’s exports cheaper. This policy already seems to be paying off: An early September poll of economists focused on Southeast Asia found that most predicted Singapore’s economy actually will grow faster this year than they had expected at the beginning of the summer – largely because of cheaper exports.

What’s more, nearly every nation in Asia has built up far larger foreign currency reserves than they had in the 1990s, giving themselves greater defences against speculation and sell-offs of their currencies. China alone has over $3.5 trillion in foreign currency reserves, and even many smaller Asian nations now have massive foreign currency hoards. While India in the 1990s only had enough reserves to cover two weeks of severe outflows, today it has about seven months’ worth of foreign currency reserves, which has allowed its leaders, and its people, to remain calm as the rupee has lost value. “We allowed the international banks to take over too much [of the Thai banking sector] the last crisis, in the 1990s … We won’t make the mistake again,” says Noppadon Pattama, the former Thai foreign minister.

In addition, the Chiang Mai currency swap initiative, created by a group of Asian states after the Asian financial crisis, provides extra protection against a region-wide contagion. The currency swaps have built up a pool of reserves worth over $240 billion, which could potentially be used to flood markets in Asia with liquidity. These swaps also would prevent Asian nations from being dependent on bailouts from the IMF, or other outside actors. Compared to the 1990s, most Asian nations also now enjoy close informal cooperation among central bankers and finance ministers, so that the region’s financial leaders are more likely to act in unison.

Other factors also make a deep, region-wide crisis much less likely than many analysts are predicting today. In the 1990s, much of the investment in South East Asia was hot money, poured into the region’s stock markets or into bonds with very short-term yields. Since so much of the investment then was in short-term bonds, as investors began to have doubts about Asia’s economies, they could easily and quickly sell off their bonds. But today investors cannot so easily dump their Asian holdings. Much of the debt Asian countries have run up now is in longer-yielding bonds, which means that even if investors are concerned about these economies’ trajectories, they cannot just sell their bonds.


Overall, too, nearly every major economy in South and East Asia is in better shape, for the long term, than in the mid-1990s. This does not mean that Asian nations have no problems: China and many other Asian states do need to shift more quickly from dependence on state credit and export manufacturing. Not only China but also Vietnam, India and several other Asian nations still need to force their banks and informal lenders to clear bad loans, a particularly severe problem in India and China, where “back alley” lenders often step in when large banks refuse to provide mortgages or loans.

But emerging economies’ fundamentals are far stronger than they were in the mid-1990s. The banking reforms undertaken in most Asian countries in the late 1990s actually weeded out the most indebted financial institutions, making many Asian banks as transparent as any in the rest of the world. In addition, while many of the nations in Asia faced political turmoil in the mid-1990s, most have achieved a high degree of political stability since then. Even poorer Asian nations like Myanmar and the Philippines have become more stable since the late 1990s, with Myanmar making a transition from army to civilian government since 2010. “2013 continues to be a banner year for Manila,” says Asia financial analyst James Parker, noting that the Philippines’ growth this year actually has outperformed even China’s.

In Indonesia, the other Asian giant, cheap credit has to some extent fuelled some of its five-to-six per cent growth for over a decade. But the country’s record of growth has been powered much more by the country’s booming consumer market, demographic dividend, and increasingly stable politics. While in the late 1990s Indonesia appeared to be on the verge of collapsing, with the economy tanking and violence spreading across the archipelago, today the country has become one of the most successful examples of democratisation in the world. The country has become stable enough that, even though it has actually made investing harder for foreign companies, passing new laws to ensure more natural resources remain in Indonesian hands, it has attracted record amounts of foreign investment over the past two years.

In Beijing, Chinese president Xi Jinping and premier Li Keqiang have openly recognised that China’s economy needs a slow cool-down, and they clearly understand that the era of easy credit, massive property development, and rising economic inequality must end. Despite China’s overbuilt cities, its real economy remains surprisingly strong, with many of its largest companies remaining highly profitable, even in industries unrelated to property. Indeed, China’s manufacturing sector expanded in August, suggesting that China’s real economy actually is getting stronger at the end of this year, compared to the first six months of 2013. Even China’s state-owned companies, derided by some analysts as unwieldy parasites sucking in capital, actually have been profitable this year. In the first half of 2013, China’s state companies actually increased their profits by nearly 20 per cent over the previous year, hardly a sign of economic weakness.

And although the Chinese government still faces protests across the country nearly every day, these demonstrations are almost always limited to rural areas. Urban, middle-class Chinese, the core of China’s economy and key to its political stability, remain content with the government, which has allowed the country to execute a peaceful transition from its previous president, Hu Jintao, to new president Xi. Overall, a Pew Research study showed that Chinese citizens reported among the highest rates of satisfaction with their “national conditions” of people from any country in the world. “Sure, China has become more unequal, everyone knows that, that’s why there’s so much focus on [microblogs] on the sons and daughters of officials and their wealth,” says Li Datong, the former editor of Freezing Point, considered one of the most independent publications in Beijing. “But it doesn’t mean that people are not happy with the economy … People are still very happy with the economy.”


A repeat of the 1990s Asian financial crisis would be a disaster not only for Asia but for the rest of the world. China now is the world’s second-largest economy, while Indonesia is the biggest in South East Asia, and these countries are far larger consumers of commodities than they were in the 1990s. Back then, when Asian economies fell, global commodity prices plummeted as well, with oil hitting lows of $17 per barrel in 1999. (Oil today stands at $103 per barrel of West Texas crude.) A similar downturn today would hit oil and other commodities even harder, devastating economies in the Middle East and other regions. But commodity exporters and states dependent on trade understand that the panic about Asia is just that – panic – are not so worried. “China has a lot of problems, Vietnam has a lot of problems, Indonesia has a lot of problems,” says Kausikan. “But investors aren’t going to leave these countries, they’re too big, they have too much potential. No one is really going away.”

Joshua Kurlantzick is senior fellow for South East Asia at the Council on Foreign Relations and the author of Democracy in Retreat: The Revolt of the Middle Class and the Worldwide Decline of Representative Government.