Salient to Investors:

William Pesek writes:

Another 1997-like Asian crisis is highly unlikely because exchange rates are now more flexible, foreign-currency debt is lower, banks are healthier, countries are sitting on trillions of dollars of reserves, and economies are far more transparent.

The same can’t be said of 1994, when the Fed last reminded the world that its monetary policy is decided in Washington, not Asia. Then, Greenspan doubled benchmark interest rates over 12 months, causing hundreds of billions of dollars in bond-market losses and helping set the Asian financial crisis in motion. The dollar’s post-1994 rally made currency pegs impossible to maintain, leading to devastating devaluations across the region.

Asia’s real problem then was hubris, but now it suffers from a different kind of smugness. After the 2008 global crash, regional governments started believing their own press. They were convinced they had decoupled from the West. Bankers were abandoning New York and London for Hong Kong and Singapore. Asian debt had become a safe haven from turmoil in Europe. And, as China’s 1.3 billion people grew richer, the good times would keep rolling on.

Asia has come a long way since 1997 but rapid growth and unquestioned success in surviving the global meltdown has revived hubris. Currencies in Indonesia, Thailand and elsewhere suddenly seem toxic to investors, while India is in chaos at a time when China’s growth trajectory is more uncertain than it has been in 15 years.

Asia may be able to live without American and European consumers for 4 or 5 years, but thriving beyond that requires more buoyant and self-supporting domestic economies.

Complacency is too easy to find in Indonesia, Thailand, Philippines, and Malaysia.

Simon Grose-Hodge at LGT Group said the US has been given a free pass on the twin deficit issue, but emerging-market countries will not be so lucky.

In India, reforms have stalled and unaffordable government handouts have proliferated. With an election due in nine months, no one expects the hard decisions needed to get the economy back on track will be taken.

Unlike in 1997, Japan Inc. is healthier, the government is shoring up the economy, and the central bank stands ready to add new liquidity as the Fed’s tapering process begins. China will pull out all the stops to keep growth above 7 percent.

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