Thursday 1 January 2009
Asia Should Prepare Now for Prospect of New Crises
And now for the next crisis . . . or crises. It might seem that we have already run the full gamut of emergencies with the sub-prime crisis being followed by the collapse of financial institutions, the credit crunch and the crisis of bank lending, leading on to the collapse of economic growth. But that would be wishful thinking and the New Year will bring fresh trials.
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Asia Should Prepare Now for Prospect of New Crises
By ANTHONY ROWLEY
31 December 2008
And now for the next crisis . . . or crises. It might seem that we have already run the full gamut of emergencies with the sub-prime crisis being followed by the collapse of financial institutions, the credit crunch and the crisis of bank lending, leading on to the collapse of economic growth. But that would be wishful thinking and the New Year will bring fresh trials.
In particular, we are likely to see a new currency crisis in Asia and elsewhere, as well as a crisis of rising unemployment and perhaps social unrest. These are not exactly palatable prospects, but they are dangers that have to be faced as a result of past excesses and imbalances.
A currency crisis might already be said to be with us, given the way in which the yen has soared while the dollar has see-sawed and the pound collapsed while the euro has begun to emerge as the only pole of stability. But the crisis of emerging market currencies is yet to come.
Masahiro Kawai, one of Asia’s best monetary economists and currently dean of the Asian Development Bank Institute in Tokyo, acknowledged in a recent interview with Japan’s Asahi Shimbun that a new Asian currency crisis is a very real possibility.
We have been led to believe in recent years that such an eventuality was unlikely given the build-up of foreign exchange reserves, the adoption of floating exchange rates and the reduction in short-term foreign borrowing over the decade since the 1997 Asian crisis occurred.
But as financial and economic turmoil continues to spread, nemesis-like, around the world, the completely unexpected is becoming the entirely possible. The currency crisis, like the sub-prime crisis and its baleful offspring, will not be of Asia’s own making this time but rather the toxic fallout from events elsewhere.
Even as bank lending and capital market financing dry up, under the influence of fear and mistrust among financial institutions, governments in the world’s so-called advanced economies are rushing to raise funds to finance the fiscal stimulus that they are planning on an unprecedented scale. The result is a ‘crowding out’ effect that is increasingly depriving emerging market borrowers in Asia - sovereign and private borrowers alike - of access to capital markets. Whether it is in the interbank lending market or the international bond market, emerging market borrowers are being given the thumbs-down.
South Korea, where a buildup of short-term foreign debt has scared foreign bankers as they sound the retreat from emerging market lending, is the most obvious example. Denied the balance-of-payments financing it needs from capital markets, Seoul is seeing its currency plunge precipitously.
Capital outflows from other Asian economies are bound to put similar downward pressure on their currencies as well as on asset prices in those countries, unless the region’s economies with the most reserves (China and Japan) can quickly activate swap lines with the most vulnerable economies. This seems unlikely, however.
South Korea has activated swaps with the US Federal Reserve (as have Singapore and others), but these cannot compensate fully for the more general drying-up of US dollar liquidity that we are seeing now. Unless certain Asian economies are prepared to swallow their pride and turn to the (formerly reviled) International Monetary Fund, it is difficult to see how a currency crisis can be averted.
As for the jobs crisis, it is very hard also to see how that can be avoided. Industrial output has collapsed in Japan, and China is going to be very hard-pressed to avoid a similar collapse, even if overall economic activity there is cushioned to some extent by massive fiscal stimulus.
Without these two engines of regional trade activity firing properly (because of their ultimate dependence upon final demand in the now recession-mired US economy), other Asian economies are bound to suffer a slump in activity and a corresponding surge in unemployment.
As noted, these are not pleasant prospects, but it is better to face and prepare for them now rather than remain in denial, as so many policymakers have done for so long. Economies are coupled together in a train that is going off the rails and it is too late to apply the brakes.
But at least the emergency services can be fully activated in advance, so that casualties among the unemployed can be minimised and damage to social stability kept within tolerable limits.
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