The rumblings of a currency crisis are being heard in emerging markets and are only getting louder.
Argentina’s Central Bank raised interest rates to 40 per cent to protect its peso in May 2018. When this did little to help, Argentina took out a US$50 billion credit line from the International Monetary Fund (IMF).
Turkey stated in August 2018 that more than 35 per cent of the value of its lira had vanished against the US dollar since the beginning of the year.
And in India, pressure is also building up against its currency, which has slipped to a record low. Will these trends spark a currency contagion in emerging markets?
ASEAN was spared full-blown impact in the 2007–08 global financial crisis. But can it remain immune next time around?
On the one hand, ASEAN is seen as a region of economic opportunity and attracts substantial capital inflows.
Average GDP growth in ASEAN has been above 5 per cent for the last few years and the IMF and World Bank predict that this growth will continue into 2019 and 2020.
On the other hand, borrowing by governments and corporate entities on Wall Street reached US$6.8 trillion in 2017.
Global total debt hit US$247 trillion in the first quarter of 2018. These are unprecedented numbers and the associated risks are high.
An important financial barometer is the Damocles Index. The Index has called to attention the risk of exchange rate crises for Argentina, Egypt, Pakistan, South Africa, Sri Lanka, Turkey and Ukraine. Apart from South Africa, the other six countries are already in or facing a currency crisis and seeking assistance from the IMF.
ASEAN member states are not facing immediate risk of an exchange rate crisis according to the Index. That being said, the Indonesian rupiah has fallen to its lowest level in more than 20 years and Indonesia’s external debt currently stands at 34 per cent of GDP — one of the highest in Asia. Indonesia is also handling the effects of a number of natural disasters and growing political pressure from different interest groups, particularly on issues relating to concessions for investors in the oil, gas and mining sectors. These factors are contributing to weakening investment sentiment, which may in turn exacerbate unfavourable perceptions of the rupiah.
Malaysia and Singapore are also facing financial challenges. Some of these are associated with funds leaving emerging economies, including ASEAN members, as quantitative easing policies are reversed in developed economies and interest rates are increased. Other issues are emerging due to the worsening US–China trade friction, which is adversely affecting market sentiment in these two highly trade-dependent economies.
In this global economic climate, it is possible that certain ASEAN member states — or ASEAN as a whole — might face the danger of a ‘stroke’ in exchange rates. A stroke cuts off blood flow to the brain and can happen to anyone at any time.
ASEAN economies should watch out for any symptoms and take preventive actions to address a possible ‘currency crisis stroke’. There is a critical time window in which to address ailing economies. Once past, a meltdown is inevitable. A currency crisis stroke is also highly contagious, as seen during the 1997 Asian financial crisis and the 2007–2008 global financial crisis.
Authors: Christopher H Lim and Tan Ming Hui, RSIS