In 1997, one Asian currency after another tumbled, along with the countries’ stock markets. A major tightening in credit ensued and some countries fell into recession.
Deyi Tan, executive director of research at Morgan Stanley, says “over the last few days, we had several questions from investors asking if this is going to be like another Asian crisis.”
In short, the answer is no. For a bundle of good reasons, this isn’t 1997 all over again.
Asia has far more shock absorption power than was the case in 1997. As Bespoke Investment’s George Pearkes named “flexible exchange regimes, local financial systems, reserves, current accounts” as just a few of the positive differences. To add to that, the debt structure of these countries is better in some ways — less of it is denominated in someone else’s currency (usually dollars) and more of it is owned domestically.
But that doesn’t mean it’s all good news for Asia — far from it, as Morgan Stanley’s economists explain.
After the depths of the financial crisis, it seemed for some time like export growth was returning to its previous strength. But since 2012, it’s been clear that isn’t happening at all. Trade growth has been meager at best, and actually turned negative again recently:
And debt has been surging, particularly in China and particularly in the corporate sector. Investment has surged to prop up economies following the 2008 financial crisis, but some reports suggest that a huge proportion of that has been wasted, leaving a mountain of debt:
Asia’s debt problem is made significantly worse by fact that nominal GDP growth has been growing more slowly than at any time in decades.
9 of 10 countries defined as Asia ex-Japan by Morgan Stanley are seeing producer price deflation. Indonesia is the only one still recording inflation, while the Philippines, Taiwan, South Korea, China, Singapore, India, Malaysia, Thailand and Hong Kong are all recording falling industry prices:
According to the analysts, it’s primarily a story of mis-allocation. The investment boom Asia (and particularly China) has been seeing was based on the pre-2008 crash growth rates being more or less achievable again. It’s now becoming clear that those growth rates aren’t coming back.
But though the crisis may not be as sharp as in 1997, some things are worse today — the growth potential of the region is considerably lower and demographics are particularly worrying in China.
The region’s macro outlook today is less like a car driving headfirst into a wall, as it was in 1997, and more like one trying to accelerate through a swamp.