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Twenty years since the Asian financial crisis

LiveMint logoLiveMint 04-07-2017 Ami Shah

20 years ago Thailand triggered the Asian financial crisis by delinking the baht from the US dollar. The Bank of Thailand cut the baht loose on 2 July 1997 after the currency had been under sustained attack by speculators. The central bank had almost exhausted its foreign currency reserves in a futile defence of the currency, which went into a free fall after the US dollar peg was removed.

A rapid domino effect followed, with currencies elsewhere in East Asia coming under attack. Thailand, Indonesia and South Korea were the worst hit and required multi-billion-dollar rescue packages from the International Monetary Fund (IMF) in exchange for putting financial reforms in place and restructuring their economies. Malaysia and the Philippines weren’t spared either from the economic crisis that followed, ending a decade-plus run of remarkable growth in East Asia.

India was spared the horror of the crisis, thanks to controls on free movement of capital.

The crisis had been in the making for some time. Businesses in the region had borrowed heavily to invest at home, especially in property, confident that their dollar pegs would fend off any foreign exchange risk.

“Most Asian economies before 1997 had borrowed heavily in US dollars without corresponding dollar income. The asset-liability mismatch was at the root of the 1997 crisis,” Sanjay Guglani, chief investment officer of Silverdale Funds, said in a phone interview.

To be sure, Asian economies and the markets are much more resilient today.

“Today, these economies have become more prudent, further bolstered by foreign exchange reserves at multiple times of that in 1997 (for India, it is over 1,500%). Also, instead of being a single-engine world economy led by the US, we see a very significant increase in inter-se trade between Asian economies,” said Guglani.

Graphics: Ahmed Raza Khan/Mint

The Asian crisis underscored the vulnerability of regional economies to hot money outflows and the importance of adequate foreign exchange reserves, which they squandered on an unsustainable defence of their currencies. Nations that experienced the crisis, which are also among the favourite destinations of yield-hungry overseas investors, have built up a war chest of reserves to shield their economies against the flight of hot money. That should also cushion them against the impact of rising interest rates in the US.

Since the financial crisis on 1997, Indian equity markets have posted the second highest annualized returns after Indonesia. Investors have primarily placed their bets on an expansion of Asia’s third-largest economy, its consumption story and in more recent times structural reforms being implemented by the government. Investors are optimistic about the long-term growth of India, which has overtaken China as the fastest growing major economy in Asia, in light of the continuing reforms process.

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