Asian economies slide but not to 1997-level

Asia experienced a severe financial crisis that rocked its economies severely 25 years ago. The ghost of 1997 is back in the area now. As a result of the strong US dollar, the US Federal Reserve’s swift hike in interest rates, and a downturn in China, currencies and stock markets in Asia’s largest nations have fallen to levels not seen in decades.

In a recent report, a UN agency cautioned that the Fed’s policies and those of other central banks run the risk of bringing about a global economic downturn. The yuan, the currency of China, the second-largest economy in the world, dropped to a historic low of roughly 7.27 against the dollar last week in international trading.

The yuan, or renminbi, is close to record lows in the offshore market despite interventions by China’s central bank. According to recently released data, it has lost 11% of its value against the dollar so far this year, putting it on pace to have its worst year since 1994.

Japan, the third-largest economy in the world, has performed much worse. The Japanese yen has dropped a staggering 26 percent this year, more than any other Asian currency. The Indian rupee has also fallen to a historic low in South Asia, losing 9 percent of its value against the dollar for the year.

“The Fed’s rapid monetary tightening is sending ripples far and wide,” said Frederic Neumann, chief Asia economist at HSBC. “Even Asia, despite its robust macroeconomic fundamentals, is now facing heightened financial market volatility,” he added. Some financial specialists are concerned that if the situation is not handled, it may result in a financial crisis in the area as the tremendous pressure on key Asian currencies persists.

“The strong dollar environment has raised questions about how Asia will be impacted and whether this will precipitate another financial crisis,” wrote Morgan Stanley’s chief Asia economist Chetan Ahya in a research report on Monday.

The devaluation of Thailand’s currency, the baht, in the summer of 1997 led to a severe crisis in the area. It caused significant capital flight and stock market volatility and sent shockwaves through Asia. As a result of the upheaval, the area experienced a severe recession that bankrupted businesses and toppled governments.

Investors aren’t in a full-fledged panic, despite their concerns about a potential replay, mostly because Asian economies are considerably better equipped to defend their currencies today than they were back then.