With the BRICS proving to be something of a disappointment at the moment, it is time for investors to look elsewhere. Today I examine a few reasons why they may not need to look any further than the bottom right hand corner of Asia.
Back in 1994, the US Federal Reserve upped interest rates. The implications were not obvious. But gradually investors began to pull their money out of emerging markets, and put it back into the US and other western markets where rates were at last so much more attractive. By 1997, the result was a crisis in South East Asia, with many countries in the region eventually being forced to call the IMF in for help. The crisis spread to Russia in 1998, and later that year we witnessed the collapse of Long Term Capital Management. It was the like forerunner of the crisis of 2008, except that the Fed, and what is often referred to as the Washington Consensus, managed to contain the pain. Sure the result was economic disaster in South East Asia and Russia and economic depression for many countries, but there was no banking crisis in the West. Equities tumbled but soon recovered, and the economies of the US and Europe barely flickered.
Many fear a repeat of that scenario over the next few years as, once again, interest rates in the US slowly start to rise.
This may be right, and some countries may indeed prove to be the losers as money flows back towards the US, but this argument does not seem likely to apply to the majority of economies that make up the so-called ASEAN countries, and I am thinking here in particular of Malaysia, Indonesia, the Philippines, and Thailand.
I cannot examine the argument in detail in one article, so this is a theme I shall return to at a later date. But here are some reasons why.
First is some anecdotal evidence. Frederic Neumann, co-head of Asian economics research at HSBC Holdings plc, recently told Bloomberg that he thought that this time around there are significant differences, with banking systems apparently being more robust and many countries in the region now seeing current account surpluses. See: No 1997 Asian Crisis Return as China Trembles
Or take the views of Matthew Dobbs, fund manager of Asia ex Japan equities at Schroders. He recently waxed lyrical about the prospects for the region, although he was mainly focused on Thailand. He said: “Whereas 1997 was a currency crisis, caused by an unsustainable accumulation of US-denominated debt, the country’s foreign-denominated debt, as well as those of its neighbours, is at a far more stable level.
“Thailand’s domestic economic engine is also being driven by policies aimed at growing consumer spending power and accommodating business growth – such as a near-40 per cent increase in the minimum wage that came into effect in April this year as well as a corporate tax rate cut in two phases, from 30 per cent to 20 per cent by the end of 2013. The ongoing urbanisation process in the country continues to spur growth as GDP came in at a salubrious 6.4 per cent in 2012 and is projected to grow at 5.3 per cent this year. Thailand’s latest private consumption growth figures witnessed a healthy increase of over 12 per cent year-on-year in the fourth quarter of 2012.
“Meanwhile, Thailand’s public debt-to-GDP ratio is a respectable 44 per cent, with most debt domestic and baht-denominated. It’s this fiscal room that has allowed the government to take on an ambitious multi-year infrastructure spending plan which seeks to invest up to THB2tn (US$68bn) over the next seven years. This push in spending will mainly go towards transport, with high-speed rail projects, an extension of Bangkok’s MRT and dual tracking of more than 2,000km of existing rail lines all forming part of the government’s vision.”
Moving away from Thailand, in Malaysia the savings ratio was 39 per cent of GDP last year.
Or take Indonesia. Take a look at this report from the IMF, and observe page 114.
The difference between Indonesia’s external debt today compared with the 1990s is startling. In the 1990s, external debt peaked at around 150 per cent of GDP, and public debt at around 90 per cent. Today, both forms of debt are now worth around 30 per cent of GDP. Credit levels in the 1990s were twice what they are today.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees