/ JANUS HENDERSON /
CROUCHING
TIGERS, HIDDEN
DRAGON
China appears not to have learnt from the “tiger economies” whose
excessive borrowing crashed the Asian market in the late 1990s,
writes Janus Henderson’s Mike Kerley
I
N THE FOUR YEARS
BETWEEN 1993 AND
1996, the tiger
economies of Asia led
the world in terms of
gross domestic product (GDP)
growth and stock market
returns as
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foreign and local investors piled in
and embraced the opportunity. But
trouble was brewing and
Thailand was the canary in the coal
mine. Strong growth was being
funded by ever increasing levels of
debt and with offshore interest
rates far more attractive
than those
available at
home,
US dollars became the funding
currency of choice.
While currencies remained pegged
to the US dollar, risks were minimal,
but as a growing trade and current
account deficit and rising inflation
led to increasing overvaluation of
the Thai Baht, speculation grew and
short-term money started to move
out of the Thai currency.
In July 1997, after a futile
attempt to stem the outflow, the
Thai central bank removed
the peg, triggering
an immediate
25% fall in the
currency – by the
end of the year it
had lost half of its
value. The impact
on the economy was
devastating. Interest rates
initially spiked, making dollar
debt significantly more
expensive. Loans started
defaulting, peaking at almost 50%
of total loans in 1999. The figures
reflect the severity of the downturn:
GDP took five years to return to pre-
crisis levels, consumption – the use
of goods and services by households
– took four years, and private sector
loan growth only returned to
positive territory in 2002.
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Although Thailand was the
trigger, the ticking time-bomb of
unhedged foreign currency debt
and a prolonged period of over-
exuberance prevailed across all of
South East Asia. The Philippines
and Malaysia were also significantly
impacted but the most significant
Crisis (GFC) in 2008 was
borne out of exuberance in the
West, but not in the East, and
although Asian economies were
impacted by the slowdown in
global growth, Asian economic
credibility was never called into
question.
“The days of rapid expansion and
growth for the sake of growth have
been replaced by conservatism
and a focus on cash flow and
profitability”
downturn occurred in Indonesia,
which – although running a current
account deficit only half the size
of Thailand – saw its currency go
from 2000 rupiah to the US dollar to
16000, and bank loan books fill up
with defaulting loans.
The recovery, which on average
took more than 5 years, was
supervised by stringent International
Monetary Fund (IMF) requirements
and has put Asian economies on a
much firmer footing. With a few
exceptions, Asian currencies are
free-floating – meaning their value is
determined by the foreign exchange
(forex) markets through supply and
demand – and as a result, they have
much more flexibility to reflect
domestic economic cycles, ensuring
that pressures don’t build. Current
and trade accounts, with the
exception of India and Indonesia,
are now in surplus, with
the practice of unhedged
foreign borrowing all but
ended. Short term foreign
debt in ASEAN (the
Association of South East
Asian Nations) nations
has dramatically dropped
from 160% to now less
than 30%.
The Global Financial
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The only economy that is
showing a worrying trend is China.
A credit boom following the GFC
has seen debt-to-GDP balloon from
160% in 2008 to 260% in 2017.
The nature of this debt however
is different from that accrued by
South East Asian countries in
the late 1990s. Firstly, most of the
debt lies with state owned
enterprises (SOEs) and
is hence backed by
more than $3tn worth
of foreign exchange
reserves, and most of
it is denominated in
renminbi. Secondly,
although China
operates a managed
exchange rate regime
against a basket of
trading currencies,
the capital account
is closed, which
restricts the amount
of speculative flows.
Finally, a lot of the
debt is owned by
domestic institutions
and is long term in
nature, which reduces
the likelihood of enforced
withdrawal leading to a
liquidity crisis.
The impact of the Asian crisis
lives long in the memory of
Asian corporates. The days of
rapid expansion and growth for
the sake of growth have gone and
been replaced by conservatism
and a focus on cash flow and
profitability. Corporate debt
levels are at all-time lows while
cashflow compares favourably
to any other region of the world.
Interestingly, it is developed
economies that are now showing
the stresses Asia encountered
and recovered from 20 years
ago; Asia in comparison looks
favourable.
[1] Debt can be issued in a various
currencies and because the value of these
can shift around, hedging is the process
of protecting yourself against adverse
movements, usually through the use of
derivatives.
Past performance is not a guide to future
performance. The value of an investment
and the income from it can fall as well as
rise and you may not get back the amount
originally invested.
The information in this article does not
qualify as an investment recommendation.
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