By Anjani Trivedi, Mia Lamar and Gregor Stuart Hunter
As wild swings in Russia's ruble fan fears of a crisis in
emerging markets, veterans of the late-1990s Asian financial crisis
say they have been surprised by market fluctuations but note the
region's economies are showing few signs of heading toward another
meltdown.
Ewen Cameron Watt, chief investment strategist for BlackRock
Inc.'s investment institute, ran an emerging-markets fund during
the Asian financial crisis. At the time, currency crises raged
throughout the region, stock markets slid and severely indebted
nations and companies defaulted.
Mr. Watt said he watched an investment in an Indonesian
supermarket chain "go up in flames," literally.
"They turned on the television and there was the mob burning
down the supermarkets," he said.
The recent bout of volatility in Russia hasn't seen the same
kind of drama. It has, however, defied textbook assumptions about
currency crises and created uncertainty in emerging markets from
Brazil to Indonesia. Russia has a floating currency and sizable
foreign-exchange reserves, both of which are traditionally expected
to serve as a buffer against a quick drop in a currency's
value.
"One of the things about exchange-rate crises is that it's
almost unprecedented in history for a floating currency to devalue
in more than 50% in one go," Mr. Watt said. So far this year, the
ruble has lost almost half its value against the dollar.
Analysts too point to a starkly different economic landscape in
Asia today than the late 1990s, when most currencies in Asia were
pegged to the strengthening U.S. dollar. As the dollar rose, so did
Asian currencies, putting pressure on the region's competitiveness.
When the currency pegs came undone during the crisis, some
countries struggled to pay back their massive foreign borrowings
that had driven much of their growth, as the value of their
currencies collapsed.
Today, exchange rates are largely determined by how much
investors are buying and selling in the market and adjust in value
as pressure mounts. Countries have bigger war chests to fight off
any signs of crisis or speculative attacks on their currency.
Foreign-exchange reserves across the region are seven times larger,
on average, than they were in 1997. India's central bank has been
stocking up on foreign-exchange reserves after its currency dropped
11.5% in 2013. Indonesia and Thailand have taken similar
action.
Countries, too, have more prudent economic policies, and
productivity has increased. Total debt levels in the region have
risen to similar levels as seen in the late 1990s, although remain
largely denominated in local currencies, reducing the risk of
currency mismatches. And, countries have reduced their short-term
borrowings with governments across the region amassing
foreign-exchange reserves that amount to, on average, more than
three times their debt obligations.
The Russian currency closed up 1% on Thursday, after recovering
more than 10% of its value during the week, after the country's
finance ministry said it would start selling its foreign-currency
holdings. Oil prices, which have plummeted for months on ample
supply from oil-producing nations, recovered modestly. On Friday,
oil prices traded at $59.42 a barrel, up 0.13% from the day before.
The U.S. Federal Reserve said it would be "patient" before raising
interest rates at its latest meeting, a good sign for higher-return
emerging markets.
Still worrying, though, is the concentrated nature of the debt
among weaker firms in India and Indonesia, according to a recent
report from the International Monetary Fund. China's slowing growth
and rising borrowing costs also pose issues, the agency said. The
U.S. dollar, too, has broadly rallied this year as the U.S. economy
stages a recovery, making the currency more attractive.
Investors have already started to leave Asia's emerging markets.
For the past month, emerging Asian stocks and bond funds have
recorded net outflows--a reversal from the $105 billion that had
poured in through November. For the first time since March,
investors have pulled money out of emerging-market debt.
"There is some potential contagion in emerging bond markets, but
I don't think it could be anywhere as extreme as what happened in
1998 for Asia, " said George Long, who founded Lim Advisors Ltd. in
1995, making it one of Asia's oldest hedge funds.
Mr. Long remembers the 1997-1998 Asian financial crisis as one
of severe turmoil. One of Lim's prime brokers, which lend
securities and provide services to hedge funds, lost its credit
rating, and a counterparty of the firm, Peregrine Investments
Holdings Ltd., collapsed in spectacular fashion.
"It's very different this time," Mr. Long said. "Asia in general
is not that leveraged." He noted two exceptions--China's debt-laden
banking sector and Australia, where household debt is fairly
high.
Government officials this week dismissed comparisons to the
1990s crisis.
The Indonesian rupiah hit its weakest level in 16 years on
Tuesday, forcing its central bank to intervene in the
foreign-exchange market and buy government bonds to halt the
spiking bond yields, which move inversely to prices.
"The (big) problems in 1998 [were] political," said senior
deputy governor Mirza Adityaswara of Bank Indonesia on Wednesday.
"We believe the recent rupiah fall is temporary because our
economic fundamental and fiscal standings are improving."
I Made Sentana contributed to this article.
Write to Anjani Trivedi at anjani.trivedi@wsj.com and Mia Lamar
at mia.lamar@wsj.com
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