Pacific Money

Is Southeast Asia Headed for a Repeat of the Late 1990s Financial Crisis?

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Pacific Money

Is Southeast Asia Headed for a Repeat of the Late 1990s Financial Crisis?

Recent GDP figures and the fallout from cheap credit are a concern.

Quarterly growth reports released in recent weeks for the major economies in Southeast Asia have been pretty grim. This week, Thailand surprised investors and analysts by reporting that its economy had contracted in the second quarter of 2013, falling into a technical recession. In Indonesia, second quarter growth came in below forecasts, while in Taiwan, although the second quarter produced strong growth, the government reduced its forecast for 2013 overall. Meanwhile, Malaysia’s economy grew at a slower-than-expected rate in the second quarter, and the government slashed its forecast for 2013 as a whole.

In many of these countries, massive current account deficits and the end of cheap credit are to blame for the slowdowns. Some financial analysts worry that the region—including not only Southeast Asia but also China—is repeating some of the mistakes that led to the disastrous 1990s Asian financial crisis. Cheap credit in nearly every major Southeast Asian economy (and in China) has led to booms, often wasteful, in housing construction; many countries in the region now have unprecedentedly high current account deficits and debt/GDP ratios. A recent article in the Financial Times suggested that, if all the books were opened, China would have total debts worth more than 200 percent of gross domestic product. Some leaders in Thailand, Malaysia, Indonesia and, one suspects, in China, worry that as easy credit is less available many of these countries are going to face currency crunches similar to that which launched the Asian financial crisis in 1997 as the Thai baht’s peg to the U.S. dollar collapsed.

Such doom-mongering, though, seems to me overstated, at least at this point. All of these countries have been through one Asian financial crisis, and have learned some important lessons from it, including building up much larger piles of foreign currency reserves, creating the Chiang Mai currency swap initiative as added protection, and launching close informal cooperation among central bankers and finance ministers in the region, so that any currency crunches do not catch other countries unaware. And as the FT notes, Southeast Asia’s bond markets have become more mature, with greater long-term borrowing, making it less likely for credit to dry up for any Southeast Asian nation all of a sudden. All this doesn’t mean the region’s leaders are free from worry, but expecting a return of 1997 is, I think, too alarmist.

Joshua Kurlantzick is a fellow for Southeast Asia at the Council on Foreign Relations. He blogs at Asia Unbound, where this piece originally appeared. You can follow him on Twitter: @JoshKurlantzick