With inflationary pressures building up and the Vietnamese central bank devaluing the dong on Wednesday, Christina Liu (劉憶如), chief economic adviser at Daiwa Institute of Research Ltd (大和總研), warned yesterday that a financial crisis — similar to the 1997 Asian financial crisis — may be taking form.
Taipei Times (TT): You have expressed concern about a ripple effect from Vietnam’s economic downturn, which could trigger another Asian financial crisis similar to the one in 1997.
Liu: There are already some worrying signs. Vietnam has a big deficit although its currency had grown stronger. It’s very similar to what happened in Thailand and Malaysia before 1997. Inflationary pressures will worsen the situation in Vietnam.
The latest statistics available showed that two-thirds of the world’s population may face two-digit inflation before July or August. Which countries will these be? Most of them will be emerging countries in Asia. These countries have had robust growth in the past few years driven by sky-high demand. So, there are concerns whether these economies may experience a hard landing soon, which is worrisome.
The Vietnamese economy is red-hot and growing quickly. But consumer prices in Vietnam have skyrocketed in recent years by about 30 percent. Thus, there are concerns about an exodus of foreign investments there and from other Asian countries. That was what happened in Thailand, triggering the 1997 crisis. Another concern is which countries will subsequently be negatively affected next.
TT: Which countries are they, in your opinion?
Liu: I’m not at liberty to comment. But Asian countries with two-digit inflation and a deficit while their currencies are weakening will be vulnerable.
TT: Countries like China and India?
Liu: It will never be Taiwan.
TT: Financial authorities said yesterday Taiwan may soon facilitate the yuan’s full convertibility before the influx of Chinese tourists. Do you support this policy?
Liu: If there’s a short supply of yuan, buying sprees may disturb the local currency exchange market. There is a discrepancy between the yuan’s official price and market price. Some investors may clear out domestic banks’ yuan-denominated reserves and sell them to the black market for a profit. We’ll then be creating a disturbance and supporting a black market, which will negatively affect the local financial market. That’s why I don’t really agree with the policy.
TT: Why has the TAIEX been on a downtrend since May 20 contrary to expectations that investors would be more optimistic about the local economy, propped up by potential benefits of closer ties with China?
Liu: The TAIEX is one of the 11 Asian stock markets that have been on a downtrend recently. Its decline after May 20 was the second-largest among Asian markets.
However, if you look at the TAIEX’s performance since early this year, it’s actually flattened in the past six months. Local investors might be shocked or dissatisfied with its performance. But again, if you compare it with its 11 Asian peers, the TAIEX has outperformed them all. The main reason behind that is we have a cross-strait story this year, and foreign investors are also upbeat about that.
However, there’s this bad news that no market in Asia will be able to weather easily: inflationary pressures. The pressures will have a greater impact on Taiwan since we have been slow in raising our fuel prices to keep up with world crude oil prices, while other Asian countries have been gradually adjusting their fuel prices. Any further hikes will build up the pressures. Taiwanese shares are thus experiencing both good news and bad news.
TT: How should the government alleviate rising inflationary pressures?
Liu: In theory, there are only two options: a tight fiscal or currency policy. That is, the government should refrain from massive spending while raising interest rates and tightening money supply. In reality, however, a tight fiscal policy could incur criticism on the government’s failure to lift economic growth.
There are excess problems in Taiwan and all over Asia that only tight policies can address. However, our new government is doing the opposite by funding many infrastructure projects.
That leaves only one option, which is to allow local interest rates and the currency to rise. Take Vietnam as an example. Vietnamese shares have dropped 60 percent since early this year with interest rates standing at a high 14 percent. A high interest rate will further contain its economic growth. So, Vietnam is in a critical period, a real dilemma. And any wrong step could hurt the economy.
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