Rob SubbaramanandSi Ying Toh

Eye On Asia | Having learned from the 1997 crisis, Asia’s currency defence is likely to be prudent and eclectic

Asian economies are in a much better state today, more able and willing to tolerate currency depreciation, which can act as a shock absorber

To slow it down, Asia could use an array of instruments, from interest rate increases and opportunistic currency interventions to piecemeal capital-flow management

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Indonesian rupiah are exchanged at a vegetable stall in Jakarta on August 18, 2020. The rupiah was among the currencies worst hit in 1997. Asian currency depreciation this time is more the result of a strong dollar, not a symptom of weak economic fundamentals. Photo: Bloomberg

Rob SubbaramanandSi Ying Toh

Published: 4:30pm, 23 Oct 2022

While the US Federal Reserve’s aggressive monetary tightening and strong dollar look set to add pressure to the balance of payments and currency depreciation in Asia, fears of a full-blown Asian crisis appear overdone.

Indeed, the severity of the 1997 Asian financial crisis, starting with the devaluation of the Thai baht on July 2, was breathtaking: by June 1998, the Indonesian rupiah had lost 85 per cent of its value against the dollar. More astonishing was the volatility that saw the South Korean won fall by 28 per cent in December in 1997, with the sum of the daily percentage changes that month being five times as large, totalling 156 percentage points.

But this time, Asia is not the epicentre of the global economic downturn, nor is its inflation as severe as in the rest of the world. For most Asian countries, nominal trade-weighted exchange rates are not weak, highlighting that the Asian currency depreciation is more the result of an exceptionally strong dollar, and should not be regarded as a symptom of weak economic fundamentals.

Apart from Hong Kong, Asia’s exchange rates are much more flexible today. Fewer countries have large current account deficits, with most running surpluses, and Asian countries’ foreign-exchange reserve buffers, in terms of import cover or as a share of the gross domestic product, are healthier. There is also less room for large-scale capital flight as there has not been a large build-up of “hot money” net capital inflows.

Most importantly, the share of short-term, unhedged foreign currency debt is lower than 25 years ago. This was Asia’s Achilles’ heel in 1997, as massive currency devaluations suddenly inflated external debt. Indonesia’s external debt obligations, for example, skyrocketed to 153 per cent of GDP in 1998 from 56 per cent in 1996. In contrast, a larger share of external debt today is denominated in local currency.

The region, however, still faces challenges, with no easy policy options. Asian inflation might not be as high as elsewhere, but it is still high and policy interest rates have been slow to adjust, evidenced by much lower, and in most countries, still deeply negative real interest rates. Noticeably higher domestic private debt in most economies also makes them more sensitive to higher interest rates than before.