By Tan Shih Ming SINGAPORE, Aug. 24 (Xinhua) -- The recent equity sell-down and currency fall in the high current account deficit economies of India and Indonesia have raised contagion fears across Asia similar to the Asian financial crisis in 1997. But research houses here have said that stronger fundamentals in most Asian economies this time round made such fears seem overblown.
What started off as a relatively contained sell-down in Indonesia and India is now turning into a confidence crisis. The Indian rupee has lost 12 percent since May 2013, making it the worst performer in the emerging market currency basket.
There is now widespread panic over the rupee, and the short- term measures imposed by the Indian government such as curbing the import of gold are widely seen as ineffective.
In Indonesia, the sharp weakening in the rupiah and weak commodity export prices have caused its foreign exchange reserves to fall by a significant 18 percent year-to-date from 112 billion U.S. dollars to 92 billion U.S. dollars, fuelling investors' concerns over the defensibility of the currency and the concurrent risks of sharp policy rate hikes.
While the impact of capital outflows and financial turbulence as a result of India and Indonesia problems will undoubtedly be significant and widespread in other Asian emerging economies such as Thailand, Malaysia and the Philippines where bubbles have been inflated by easy credit and super easy monetary policy.
CIMB Research said contagion fears will ultimately be proven as overblown with Asia's economic fundamentals being much stronger now than in prior crises, such as the 1997 Asian financial crisis and the 2008 global financial crisis. During the 1997 Asian financial turmoil, the currency meltdown in Thailand sent a chain reaction of weaker currencies, falling stock markets and a precipitous rise in private debt across Southeast Asian economies and South Korea, sinking most of them into deep recessions.
In the 2008 global financial crisis, the rising risk aversion and the redemption by investors contributed to massive portfolio outflows, which in turn hit fixed investments and consumer spending, raising credit costs and bank delinquencies as well as undermining asset markets across the region.
CIMB Research said for the rest of the Asian economies, recent developments in India and Indonesia should have very little negative economic impact. Backed by better regulated financial sector and stable domestic growth drivers, Asian financial markets should also be able to maintain a steady inflow of capital.
Credit Suisse Research believed that the impact of India and Indonesia sell-down upon North Asian economies such as China and South Korea will also be limited. While exports to the Association of Southeast Asian Nations (ASEAN) and India account for 8.1 percent of China's total exports, the bulk of China's exports are staple goods, which are less sensitive to a cyclical downturn.
The likely impact may fall upon many Chinese property developers that borrowed dollar debt overseas in recent years to take advantage of cheap funding costs. Should overseas debt market sentiment change due to ongoing sell-off in Asian emerging economies, refinancing may become more problematic for some of them.
Credit Suisse Research is also upbeat about South Korea. As compared to 16 years ago, South Korea's current account balance has swung from a 1.6 percent of gross domestic product (GDP) deficit back in 1997 to a 5.1 percent of GDP surplus now. Its foreign exchange reserves have also increased to 28.5 percent of GDP currently from only 4 percent back in 1997.
Given South Korea's current visibly different conditions versus its own past and those ASEAN countries, the recent fall in its stock market in response to India and Indonesia sell-down should not be seen much a concern, said Credit Suisse research.