DBS: Asia headed for another financial crisis

BUCHEON, South Korea - Asia is headed to a crisis similar to the 1997 financial meltdown that crashed economies, but the good news is much can be done to prevent it from happening possibly five years from now when stimulus from the United States is already gone.

“Current account deficits, capital outflow, collapsing currencies— is Asia headed for 1997 all over again? Absolutely,” Singapore-based DBS said in its research titled “Asia-vu 3: Are We There Yet?” released on Thursday.

“How Asia’s march back to 1997 ends remains an open question. A crisis isn’t pre-determined— it depends on policy and on not letting things— leverage mainly— go out of hand,” it added. 

For the past month, the region, once the brightest spot on a fragile global economic recovery, has been hit by trillions in capital flight, owing specifically from the prospect of imminent withdrawal of stimulus from the US. 

The US Federal Reserve is expected by analysts to announce a slow winding down of its $85-billion in bond buying measures two weeks from now as the world’s largest economy showed more signs of recovery. 

For DBS, this means a reversal of large capital inflows that swamped yield-bearing assets in Asia, where investors sought refuge from the floor-hitting interest rates in the developed markets meant to pump prime their economies. 

The US is on the recovery track for the past five years after the subprime mortgage crisis, while Europe is in embroiled on its own deficit and debt crisis.

“We have argued for some time that the 10 years following the global financial crisis would, for Asia, look a lot like the 10 years leading up to the 1997 crisis— that is the regional landscape would once again be characterized by capital inflow…,” DBS explained. 

This, in turn, expectedly resulted into a shift from current account deficits to surpluses, helping boost investments in each country together with ballooning foreign reserves. DBS said that is about to change now.

From 2007 until now, average Asian current account surplus— the broadest gauge of trade— fell from eight percent of economic output to just four percent. In addition, of all Asian crisis, India and Indonesia— two of the region’s largest economies— are both running deficits. 

“But a 4-percent surplus is still a substantial one and from this perspective, Asia over-all remains far away from 1997,” DBS said. 

Foreign debts and investments have also remained in check, the bank said, noting that post-crisis, Asian nations have become more careful on borrowing abroad. 

“Net external debt fell sharply in the decade following the 1997 crisis. By 2009, most Asian countries had become net creditors to the outside world rather than net debtors,” DBS said, citing Malaysia and the Philippines as examples.

On the other hand, while China should be a concern for “over-investing,” the rest of Asia had investments that only “ticked up” following the crisis 16 years ago. The fear is investment is being funded by debts, which in turn may be defaulted. 

DBS said while it looked like that foreign inflows are leaving Asia now, the truth of the matter is “it isn’t.” It argued that most inflows Asia attracted years back are structural in nature, meaning they still believe that Asian growth will prevail over the long-term. 

It however did not discount some “short-term” investments coming from the US’s quantitative easing, but the bank was careful to distinguish them with long-term ones.

“The bigger point to make is that the short-term money that flowed into Asia on the back of low interest rates in the West was always going to be just that: short-term,” it explained.

“The US was always going to recover,” DBS said.