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Emerging Markets’ Currency Crunch

by Joshua Kurlantzick
August 27, 2013

A money changer (facing camera) helps a customer convert Indonesian rupiah in Jakarta on August 20, 2013. Asian emerging market currencies extended losses on Tuesday, with the rupiah hitting a fresh four year low. (Beawiharta Beawiharta/Courtesy Reuters) A money changer (facing camera) helps a customer convert Indonesian rupiah in Jakarta on August 20, 2013. Asian emerging market currencies extended losses on Tuesday, with the rupiah hitting a fresh four year low. (Beawiharta Beawiharta/Courtesy Reuters)

Over the past few weeks, investors have been bailing out of the major markets in Asia faster than Jimmy Connors’ tenure as a tennis coach. As Thailand released its 2013 second quarter growth figures, which revealed the country had fallen into a technical recession, investors have been selling off Thai bonds and getting out of the Bangkok stock exchange. In India, the rupee has hit new record lows against other currencies as the country has been reporting enormous current account deficits. In Indonesia, Vietnam, and even more stable Asian economies like Singapore and Malaysia, similar outflows of capital are mounting, exacerbated by the U.S. Federal Reserve’s hints that it may slowly end the period of quantitative easing, marking the worldwide end of cheap credit.

For some analysts, and even some Asian leaders and officials, the massive sell-offs, and the reasons behind them, seem eerily reminiscent of 1996 and 1997, when money flowed out of Asian economies and speculators attacked one Asian currency after the next, triggering a region-wide financial panic. As in the mid-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. With domestic credit become tighter, and the Fed’s tapering of quantitative easing, that credit boom will be over. Many Asian nations now face historically bad debt to GDP ratios; in Japan, the debt/GDP ratio has climbed to 170 percent, while many economists believe that, if China’s true debt figures were released, it too would have a debt/GDP ratio of over 200 percent.

In Bangkok in the mid-1990s, cheap credit drove a breakneck development boom. After the crisis hit, the city was left with a maze of half-built skyscrapers, looking like a Mad Max set. But don’t expect a sequel. All of the nations in South and East Asia have been through one Asian financial crisis, and have learned some important lessons from it.

For more on why this summer’s currency crunches do not herald a second Southeast Asian financial crisis, see my new BloombergBusinessweek piece here.

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