Macroeconomic scenario in 1997
In 1997, speculative attacks against the Thai baht forced the country to float and devalue its currency in a move that was followed by the Philippines, Malaysia, Singapore, and Indonesia. Then, Hong Kong stock market experienced a massive decline, which consequently led to losses in markets around the globe.
The crisis started in Thailand with the financial collapse of the Thai baht, after the Thai government was forced to float the baht due to lack of foreign currency to support its fixed exchange rate. Indonesia, South Korea and Thailand were the countries most affected by the crisis.
At the time of the mid-1990s, Thailand, Indonesia and South Korea had large private current account deficits, and the maintenance of fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.
The resulting large quantities of credit that became available generated a highly leveraged economic climate, and pushed up asset prices to an unsustainable level. These asset prices began to collapse eventually, causing individuals and companies to default on debt obligations.
The “Asian flu” had also put pressure on the United States and Japan. Their markets did not collapse, but they were severely hit. On October 27th, 1997, the Dow Jones Industrial plunged 554 points or 7.2%, amid ongoing worries about the Asian economies. The New York Stock Exchange briefly suspended trading.
What has changed?
Indonesia’s rupiah and Malaysia’s ringgit have fallen to levels hit during the Asian financial crisis of 1997-98, leading a decline in the region’s currencies.
However, the slide in currencies, intensified by China’s surprising devaluation of the yuan by the most in two decades last month and a strengthening U.S. dollar, is occurring amid lower external debt burdens, more flexible exchange rates and higher foreign-currency reserves than before. Most Southeast Asian economies now run current-account surpluses instead of the deficits they had before the late 1990s crisis.
Malaysia and South Korea have run current-account surpluses every year since 1998 and the region has accumulated foreign-exchange reserves.
Buffers for the region include banking regulations that were tightened in the wake of the Asian financial crisis itself and the 2007-09 global credit crisis.
On the government side, Malaysia and Indonesia’s local sovereign-debt markets are susceptible to shocks, given they have the highest proportion of offshore ownership in Southeast Asia: 38% in Indonesia and 32% in Malaysia. Foreign funds have sold a net US$9.7 billion of stocks in Malaysia, Thailand and Indonesia this year. Malaysia’s economy is stronger now, such as by having a current account surplus.
Major stock markets in Southeast Asia had been underperforming year-to-date compared to the same period last year, mainly due to the prospect of rising U.S. interest rates, waning investor appetite for risk, falling commodity prices, and slowing economies.
Corporations from Indonesia, Malaysia and Singapore have scrapped initial public offerings and have been cautious in launching deals in stock markets that are down between 4.7% and nearly 20% so far this year, with Vietnam as the exception (as its market has posted a 3.1% growth ytd).
In conclusion, there are many evidences that we are not in a repeat of the Asian crisis context, but we need to take into consideration the effect on the long slump in commodity prices. In addition, geopolitical risk persists: Indonesia President Joko Widodo is struggling to deliver on promises to reform the economy, while Malaysia Prime Minister Najib Razak is battling allegations he received billions of ringgit linked to a state investment company in his private bank accounts.
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