The current global financial turmoil may take a bigger toll on emerging Asia than the 1997 to 1998 regional crisis despite the region’s enhanced financial muscle, an international financial group warns.
Economic growth in the region “has been severely affected by the global collapse in goods demand” resulting from the present crisis, said the Institute of International Finance (IIF), a leading association of financial firms.
“As a result, the slump in industrial production has been more significant and more rapid than in 1997-98,” it said in a report released in Washington.
“The severity of this slump relative to 1997-98 is a result of the breadth of weakness in demand components — both domestic demand and, especially, external demand have fallen this time — as well as the geographic breadth in the weakening in growth,” the report said.
Most conspicuously, rapidly growing China has been more affected in the current crisis than it was in 1997 to 1998, the IIF said.
The institute categorizes emerging Asia as China, India, Indonesia, Malaysia, the Philippines, South Korea and Thailand.
The current financial crisis, sparked by a US home mortgage meltdown, has caused a global credit crunch and sent other financial tremors, dampening exports and slamming the brakes on economic growth.
Developed economies such as the US, Britain and Japan and those in the eurozone have plunged into recession, cutting crucial exports from emerging Asian economies, which rely on them as an engine for growth.
The Asian crisis a decade ago was caused by a meltdown in regional currencies, roiling banks, which took enormous risks by financing high level of investments often using foreign currency denominated loans.
“Asian manufacturers have been harder hit by the drop off in global demand than they were during the depth of the 1997-98 regional financial crisis, but domestic financial systems in the region are in far better shape today than they were in that previous episode,” the IIF said.
In sharp contrast to 1997-1998, the external financing picture for Asia also remains one of relative strength, it said, noting “huge” regional foreign exchange reserves and “far more resilient” domestic financial institutions.
The only country that experienced any financial strains in recent months was South Korea where, despite its very large official reserves, extensive short-term external bank liabilities presented some challenges.
The present global financial turmoil is expected to slash private capital flows to emerging markets by more than 60 percent this year to US$165 billion from an estimated US$466 billion last year and a record US$929 billion the previous year, the institute said.
The projected capital flow squeeze is in tandem with an expected fall in GDP growth in emerging markets, from a peak of 6.9 percent in 2007 to just 1.1 percent this year, it said.
For emerging Asia, it said, capital flows would dip to US$65 billion this year from US$96 billion last year and US$315 billion the previous year.
Bank lending to emerging markets were expected to be dealt a severe blow as capital flows dry up.
“While all components of net private capital flows have recently weakened appreciably, the most significant weakness is for net bank lending,” the IIF’s managing director Charles Dallara said.
Banking net flows to emerging Asia declined last year to just US$30 billion from US$156 billion in 2007, it said.