Crisis | In Asia, the events of 1997, 26 years later, are still firmly embedded in the memory of political decision makers, businessmen and investors.
It is clear that the chaos caused by Covid-19 and the bankruptcy of Lehman Brothers in 2008 are themselves sources of post-traumatic stress. However, the 1997 Asian financial crisis is still deeply ingrained in memories from Jakarta to Tokyo. This is largely due to the existential character of the economic situation.
However, if the current economic situation reflects the crisis of 1997, it is also because of one of the root causes of this crisis, which is the strict tightening of the Federal Reserve.
So the economy is certainly not about to collapse in Asia. Since the late 1990s, Asian governments have generally strengthened banks and economic institutions, accumulated large foreign exchange reserves and increased transparency.
However, the World Bank report on global economic prospects It will not fail to arouse tension among Asian decision makers. It paints the global outlook in a far more precarious light than most observers might have predicted just a few months ago, and presents a bleak picture of the future.
“Global growth is expected to slow significantly in the second half of this year, and this situation will continue in 2024,” the World Bank said. “The prospect of widespread banking turmoil and tightening of monetary policy could translate into weaker global growth.”
The World Bank cut its forecast for 2024 from 2.7% to 2.4%. Furthermore, the foundation warns that the risks are very much on the downside.
This problem is explained by the fact that 2023 and 2024 were supposed to be the years of catching up for Asia. It was seen as an opportunity for the region to make up for lost gains in gross domestic product and living standards and reduce the public debt soaring due to the pandemic.
Today, this is no longer the case. On the other hand, the surge in post-coronavirus reopenings in China is not going as well as hoped. Import activity on the mainland is not as thriving as expected by neighboring countries that were hoping to ship fleets of tankers to China.
On the other hand, it is not certain that the Fed Chairman’s team, Jerome Powell, finished activating the cash brake. The 339,000 additional non-farm payrolls the US created in May, against all expectations, means that even if the Fed takes a break from rising interest rates, it probably hasn’t happened yet.
Reading the World Bank and other reports, one realizes that the collateral damage of the fastest global tightening since the 1990s is intensifying in unpredictable ways.
At the same time, a strong appreciation of the dollar, as happened in the 1990s, makes it difficult for trade-dependent markets to attract and retain global capital to stabilize growth and development. In Asia, the Chinese yuan is scaring off global investors.
Fear of devaluation of the Chinese currency was a major concern in 1997 and 1998. Thailand’s devaluation of the baht on July 2, 1997 created a regional domino effect. Indonesia devalued its currency soon after, and Korea followed suit. The shock wave shook the economies of Malaysia and the Philippines.
At the end of 1997, it was Japan’s turn to shudder. The dramatic collapse of Yamaichi Securities, after 100 years in business, one of Japan’s Big Four brokerages, has sent officials in Washington into a panic. The idea that what was then the largest economy in Asia would also collapse was as existential as a market crisis.
The risk of Beijing devaluing the yuan added to the paranoia at the time. There were fears that China, then the second largest economy in Asia, could trigger a new wave of competitive devaluations, unleashing the momentum of the Asian Crisis 2.0.
Fortunately, that did not happen. However, this is the epic Fed tightening cycle forAlan Greenspan 1994-1995 set the stage for 1997. First, a federal rate hike helped cripple the Mexican economy and drive Orange County, California, into bankruptcy. After that, the appreciation of the dollar for several years made it impossible to defend currency parity in Bangkok, Jakarta and Seoul.
Now it is the Fed’s Jerome Powell policies that have contributed to the collapse of institutions like Silicon Valley Bank, and possibly Asia 2023.
And, as recent World Bank advice attests, the development trajectory of Asia and beyond is particularly “worrying”. Rising returns are pushing highly indebted economies to the brink. Already, the World Bank notes that the first half of the 2020s will certainly be the weakest in the first five years of a 30-year decade.
Added to this are concerns from the World Bank that the economic outlook in 2024 “remains weak” at a time when the financial situation of low-income countries is “increasingly unstable”. At that time, the burden of higher borrowing costs will become increasingly apparent and will catch up with the region, which has yet to recover from previous crises.
Translated article from Forbes US – Author: William Pesek
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