The world economy may be facing conditions seen during the 1997 Asian Financial Crisis — aggressive U.S. interest rate hikes and a strengthening U.S. dollar.
But history is unlikely to be repeated, analysts said, though they caution that some economies in the region are particularly vulnerable to currency devaluations reminiscent of the time.
On Wednesday, the U.S. Fed Reserve made another interest rate hike of 75 basis points.
The last time the U.S. pushed up interest rates this aggressively in the 1990s, capital fled from emerging Asia into the United States. The Thai baht and other Asian currencies collapsed, triggering the Asian Financial Crisis and leading to slumps in stock markets.
This time, however, the foundations of emerging Asian markets — which have evolved into more mature economies 25 years on — are healthier and better able to withstand pressures on foreign exchange rates, analysts said.
For instance, because there are fewer foreign holdings of local assets in Asia, any capital flights would inflict less financial pain this time around, UBS Global Wealth Management executive director for Asia-Pacific FX and macro strategist, Tan Teck Leng, told CNBC’s “Squawk Box Asia” on Thursday.
“I think this brings back memories of the Asian Financial Crisis but for one, the exchange rate regime has been a lot more flexible in today’s context, compared to back then,” he said.
“So, I don’t think we’re on the cusp of an outright currency collapse.”
“But I think a lot depends on when the Fed had reached an inflection point.”
Asia’s most vulnerable
Tan said, however, that among the riskier currencies, the Filipino peso was one of the most vulnerable, given the Philippines’ weak current account.
“And I think the battle lines in Asian currencies is really drawn along the lines of — against the backdrop of higher U.S. rates — the external financing gaps to the likes of Philippines and India, Thailand. These would actually be the currencies that are most prone to near-term weakness within Asia.”
On Thursday, however, the central bank of the Philippines also raised its main policy rate by a further 50 basis points and signaled it would implement further hikes down the track. Reducing currency disparity with the U.S. dollar reduces the risks of capital flights and foreign exchange rate collapses.
In contrast, economies with more accommodative monetary policies — that is, those that aren’t hiking interest rates in tandem with the U.S. — such as Japan, may also risk further weakening of their currencies, said Louis Kuijs, chief economist for Asia-Pacific at S&P Global Ratings.
He warned that downward pressures on Asian currencies may rise, especially in light of expectations that the Fed will continue to hike rates well into the first half of 2023. Nevertheless, he, too, does not anticipate another Asian Financial Crisis.
A ‘healthier’ Asia
“Fortunately, Asian emerging markets policy regimes are stronger now and policymakers better prepared. Central banks have much more flexible exchange rate regimes now,” he told CNBC.
