U.S. interest rates may be rising, but that won’t trigger another Asian Financial Crisis, analysts say

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Taiwan's currency is still dominated by the weakness in major North Asian ones, says UBS

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.

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“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.

“And just in terms of the foreign holdings of the local assets, I think that there is also the sense that the holdings are not elevated.”

“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.”

The present episode is not comparable with the carnage that they faced during the Asian crisis

Manishi Raychaudhuri

BNP Paribas strategist

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.

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“They largely let exchange rates absorb the external pressure, rather than supporting the currency by selling FX reserves.”

“Also, Asian [emerging market] governments have pursued more cautious macroeconomic policies in recent years than before the 1997 crisis.”

Manishi Raychaudhuri, an Asian equity strategist at BNP Paribas, said the “present episode is not comparable with the carnage that they faced during the Asian crisis” mainly due to healthier balance sheets and larger foreign exchange reserves.

Depleted foreign reserves triggered the floating and subsequent crash of the Thai baht in the 1997 crisis.

Some Asian economies are also running balance of payment surpluses and healthier foreign reserves improved by efforts such as the Chiang Mai Initiative Multilateralization in 2010, a multilateral currency swap arrangement between ASEAN+3 members, said Bert Hofman, director of the East Asian Institute at the National University of Singapore.

Nevertheless, Vishnu Varathan, Mizuho Bank’s head of economics and strategy, said the foreign exchange turbulence for emerging Asia will remain significant and will likely cause similar distresses like those of the 2013 quantitative easing taper tantrums — when markets react strongly to attempts by central banks to slow monetary easing through bond and stock sell-offs.

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“Panic about an impending financial crisis, and attendant collapse in Asian emerging markets foreign exchange is arguably overblown … but that said, the threat of persistent FX turbulence is not obviated either,” he said.

“So, further downside foreign exchange risks cannot be carelessly dismissed on “this time, it is different” refrain.”

Chinese yuan



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