Emerging Asia Better Prepared for Currency Crisis
By Chua Siew Joo
July 28 – The economies of Asia are experiencing soaring inflation rates driven by rising food and fuel prices. Vietnam’s inflation rate has hit an impressive 27.4 percent in July, with the rest of the Asian economies, including Japan, achieving rates of between 7.5 percent and 11 percent. Such hikes, in the context of a looming global economic recession, are read by some to portend a second Asian financial crisis.
The Asian Development Bank (ADB) has warned that rising inflation could hit investment and corporate earnings, besides potentially destabilizing governments in the regions. High inflation rates, considered being the a regressive form of taxation will have the greatest impact on the Asian poor which makes up two-thirds of the world’s poor population.
Despite the alarming figures, Mr. Haruhiko Kuroda, head of ABD, told BBC that he is “[reasonably] confident that nothing like the Asian currency crisis 10 years ago would happen in the region” as many emerging economies in Asia have since reduced their dependence on foreign capital by accumulating their own.
In the wake of the 1997 crisis, many reforms were proposed, including the creation of an international currency and an international regulatory body for the world financial system, many of which, however, did not come to fruition.
Measures already taken to prevent a repeat might yet be adequate or even relevant to manage the problems stemming from economic overheating faced by certain Asian and Eastern European economies.
Despite disagreement about the root causes of the 1997 financial crisis, differentials between US and Asian interest rates are likely to be involved. Investors consider using US dollars to buy currencies with higher interest rates, if inflation is low enough not to wipe out the returns on their deposits.
According to a paper published by the Center for Economic and Policy Research, the financial liberalization policies of the International Monetary Fund played a pivotal role in exacerbating, if not, starting the 1997 crisis.
On a positive note, the governments have been taking concerted steps, though achieving varying efficacy, to alleviate the ills of inflation. India has banned exports of non-basmati rice and raised a short term borrowing rate to 8 percent; Vietnam has unexpectedly raised its petrol prices by more than 30 percent and Malaysia and Indonesia have implemented fuel subsidy schemes.
According to the ADB, emerging East Asian economies would still expect a moderated growth rate of 7.6 percent in 2008 and 2009. The continuing current account surpluses and strong capital inflows have kept the balance of payments in surplus across the region. The ADB has also recommended that emerging East Asia adopt a more aggressive tightening of monetary policies while economies in healthy fiscal positions, avoid artificial price fixing and subsidies.
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