Aim higher, reach further.

Echoes of the Asian Crisis

The Nation International Conference in Bangkok, Thailand
Bloomberg News

Anyone studying the current emerging-markets landscape would do well to reflect on the lessons of the late 1990s Asian crisis.

By the mid-1990s, all the major East-Asian economies, with the exception of China and Taiwan, were running substantial current-account deficits. And in China’s case, the current account was only just in balance. In 1995, Malaysia’s deficit hit 10% of GDP and Vietnam’s 13%, while the following year Indonesia’s was a 3% shortfall, South Korea’s and the Philippines’ were 4% and Thailand’s was 8%.

Then the crisis hit. Investors who had been pumping money into these economies, especially into their property sectors, as if there’d be no end to their growth, suddenly developed cold feet. Developers were finding it hard to let out the huge amounts of office space that had been created at economic rents. Regional banks with hefty exposures to property markets looked a bad bet. It was their bad luck that much of their funding was short term and foreign. Local and international investors pulled their money out, causing runs on regional currencies. Falling currencies sparked yet more panic and ultimately various emergency measures had to be taken, from capital controls to International Monetary Fund rescues.

By 1998, all these countries were running current-account surpluses apart from Vietnam, which didn’t generate a surplus until 1999, in some cases massive ones. That year, Korea, Malaysia and Thailand all posted surpluses equivalent to 12% or more of GDP.

Why does this matter? Because history might be repeating itself.

The emerging-market darlings of international investors of the past decade–India, Turkey, Brazil, South Africa–have all been running substantial current-account deficits. This year, Brazil’s will be equivalent to 2.4% of GDP, India’s 5%, South Africa’s 6.4% and Turkey’s 6.8%, according to IMF estimates.

Investor unease has already shown itself through sharp currency devaluations across most of these countries. Fearful of inflation triggered by capital flight and rapid devaluation, these countries have imposed various measures, from restrictions on gold imports in India to rate hikes in a number of these countries.

Will these policy actions be sufficient?

Maybe. But they’ll slow growth even more and this will put pressure on domestic banking sectors that have been leveraged into booming property markets. In other words, it’s starting to look like a replay of 1997.

But it’s not just emerging markets that need worry.

Developed-economy commodity producers have also been running big current-account shortfalls. The IMF forecasts Australia will run a deficit of 5.5% of GDP this year, Canada’s will be 3.5% and New Zealand’s 5.8%. What’s more, all these countries have been running very large deficits for years. If the commodity cycle turns, as some commentators expect it to, these countries will also be subject to investor nervousness, especially as they’ve all also seen massive property booms.

Currency crises aren’t just an emerging-market phenomenon, as students of the U.K. economy (another substantial deficit country) well know.

Show More Archives

Popular on WSJ


11 Picks from Warren Buffett’s Bookshelf