In 1997, a global market crash was caused by Thailand’s devaluation. History may very well repeat itself.
Pakistan is frantically seeking a bailout as its currency collapses to prevent a debt default. Bangladesh has asked the International Monetary Fund for a preemptive loan. Sri Lanka’s government has disintegrated and it has defaulted on its international obligations. Even in India, where the trade deficit is soaring, the rupee has fallen to record lows.
This summer’s economic and political unrest in South Asia is frighteningly reminiscent of the unrest that overtook neighbors to the east 25 years ago during the Asian Financial Crisis.
When Thailand devalued the baht in July 1997 to deal with currency speculation, it appeared to be an isolated incident, but it quickly spread to Indonesia, Malaysia, and South Korea like a virus. Investors withdrew from stocks and bonds in emerging markets, including Latin America and Russia, which defaulted on some of its debt in August 1998. Panicked lenders demanded early repayments. A month later, the highly leveraged bets on Russian and Asian securities placed by the hedge fund Long-Term Capital Management failed.
Can it happen once more? The nonprofit organization Karandaaz Pakistan, based in Islamabad and dedicated to financial inclusion, concurs. They claim that for the past ten years, South Asian countries “had a big party on low-cost dollar loans, supporting luxury and vanity projects.” South Asia “feels as Southeast Asia did in 1997,”
When the US Federal Reserve escalated interest-rate rises to battle inflation this spring, the fracture lines became apparent. In South Asia, where inflation has also been raging, this caused dominoes to start falling. Foreign exchange reserves disappeared, currencies declined, and the easy money dried up.
Change Since December 31, 2021 in US Dollars
A protracted crisis would dampen activity in a region that is home to India, the world’s fastest-growing major economy, and a quarter of the world’s population, endangering the expansion ambitions of businesses that have placed significant bets there, like Amazon.com Inc. and Walmart Inc.
The spread of infection appears to be stopped so far. One explanation is that the so-called economic miracle of Asian nations in 1997 hid weaknesses that are less pronounced today: excessive public and private debt, weak banks, and highly speculative foreign investment. South Asian nations also owe less to foreigners than their neighbors did in the 1990s because they borrowed more in local currencies than in dollars to finance their economies.
The IMF also appears more tolerant as it enters various levels of credit negotiations with the most devastated economies. During the previous crisis, the global lender imposed severe austerity measures on struggling countries. According to experts, it’s unlikely to use the same strategy this time.
Nevertheless, there are numerous warning indications. Fuel and food shortages, as well as a rise in inflation brought in in part by Russia’s war in Ukraine, have devastated the region. Pakistan and Sri Lanka are both experiencing political upheaval.
Power outages caused by government rationing have lasted up to 12 hours a day in Pakistan and 5 hours in Bangladesh. A college student from Madhukhali in southern Bangladesh, roughly 90 miles from Dhaka, Shawon Mondol, 18, says, “Lights go out occasionally in the evening, sometimes in the middle of the night.” “On top of the daytime power outages, there are now these. I find it difficult to focus on my schoolwork.
Money is running away. According to the Institute of International Finance in Washington, even countries that export commodities and profited from a strong dollar earlier this year are experiencing widespread capital outflows.
The rupee, the currency of Pakistan, has reached a record low and performed the poorest among the nations the IIF monitors. Its sovereign debt rating is quite low, close to junk status. In an effort to secure an IMF bailout, a new administration raised diesel prices by roughly 100% and power costs by approximately 50% within a short period of time. In order to increase money, Pakistan also taxed shops, which sparked nationwide demonstrations. According to Finance Minister Miftah Ismail, when the pandemic started to spread, multilateral organizations and other nations “had a stronger sense of concern for the world economy.” That’s no longer there. He maintains that Pakistan is surviving the storm thanks to self-imposed budget cuts and a decline in import demand.
Fuel shortages in Bangladesh, a country with a stable credit rating and one that many economists regard as a rising star among so-called frontier economies, are causing widespread unease and ballooning import costs. The typically strong garment industry, which accounts for more than 80% of exports, is struggling with a domestic energy shortage and a slowdown in international orders. Officials in Dhaka claim that the aid that Bangladesh has requested from the IMF is preventative and should not be compared to the bailout money that Pakistan and Sri Lanka have asked for.
The most challenging issues are those in Sri Lanka. Widespread protests over fuel shortages and poor government management led to the overthrow of its government. Additionally, it has not yet satisfied the requirements for new IMF assistance, such as creditor agreements to reduce outstanding debt. According to Motor Link Holdings, “everyone is in lines.” A barrel of engine oil that cost between 150,000 and 200,000 Sri Lankan rupees ($414 and $552) two years ago is now worth one million. The cost of paint has increased by nearly 900 percent. We are unable to provide a quote that is good for more than three days because prices are changing so quickly.
Palitha Kohona, Colombo’s ambassador to China, said on July 15 that Sri Lanka is negotiating with China for up to $4 billion in aid, including a restructuring of a $1 billion Chinese loan due this year. He estimates that 10% of Sri Lanka’s foreign debt is owed to China.
It is hoped that India would act as a stabilizing force, much like China did for East Asia 25 years ago. Since the previous crisis, which largely spared the country, India’s foreign exchange reserves have multiplied twenty-fold. Investor bets on its sizable consumer market have caused its stock markets to soar. However, the rupee’s decline versus the dollar and the Fed’s tightening have increased pressure on India’s capacity to finance imports, which have become more expensive as a result of the rupee’s decline.
Investors withdrew over $29 billion from domestic equities this year, forcing the central bank, the Reserve Bank of India, to utilize some of its around $600 billion war chest, though it still has enough to pay imports for about nine months. In order to lower inflation, the RBI has increased interest rates and is anticipated to tighten further. Governor Shaktikanta Das has promised a soft landing. All that can be done is pray for the same in a neighborhood of more than 1.5 billion people.
Richard Meyer Cayne
Richard Meyer Cayne of Asia Wealth Group Holdings, the Meyer Group, Meyer Asset Management and Meyer International Ltd has been involved in wealth management planning for decades. Originally born in Montreal Quebec, Canada, he later relocated to Tokyo, Japan for over 15 years and now resides in Bangkok, Thailand. While he runs the Meyer Group and serves as the high credibility CEO of Asia Wealth Group Holdings Ltd, a London, UK Stock Exchange-listed Financial Holdings Company, as well as the Managing Director of the Meyer Group of Companies www.meyerjapan.com. and has additionally been the managing director of multiple organizations that specialize in helping high net worth individuals with succession planning .
Having worked with clients all over the globe with everything from portfolios to bonds to mutual funds to offshore investing to investing in retirement for your golden years, Richard Cayne of Meyer International can help you invest the right way and protect your cash. Richard has been a financial advisor involved in wealth management planning solutions and asset management in Asia for over 25 years and while living in Tokyo, Japan, he assisted many high net-worth Japanese families create innovative international tax and wealth management planning solutions. The financial holding public company of which he is CEO can be seen at Asia Wealth Group Holdings Ltd or the stock exchange link:
Asia Wealth Group Holdings Ltd – Richard Cayne Thailand. Meyer Asset Management Ltd has been in the wealth management space since March 2000 and uses fundamental analysis along with modern portfolio theory.
His image worldwide as a professional advisor has been sterling and he maintains a firm command and understanding of all things finance-related.