The next emerging market crisis - courtesy of Asian currencies
With most Asian countries continuing to rapidly build up forex reserves (especially US dollar holdings), the contrarian approach recently taken by the RBI w.r.t. the Indian rupee has caught a lot of attention:
Bloomberg: India’s ‘Madness’ Is Worthy of Attention in Asia
The finance minister no longer seems to be fighting the tide. Indian officials may realize that pumping up economic growth with a weak currency is counterproductive. It takes pressure off politicians to modernize economies and reduces the urgency for entrepreneurship in the private sector. It increases the risk of importing inflation amid high commodity prices.
Except for Korea, no other Asian central bank is yet bold enough to give RBI company; and this could very well be the source of the next Asian financial crisis:
Roubini @ RGE Monitor: Asia is learning the wrong lessons from its 1997-98 crisis
. . . the current East Asia financial and currency policies represent a return to fixed exchange rates as most - but not all - of the policy makers in the region are aggressively preventing a necessary currency appreciation via massive and growing amounts of forex reserve accumulation.
These policies are however creating - via partially sterilized intervention - a massive growth of monetary base and of credit in Asia that is feeding a variety of asset and financial bubbles as well as leading to goods inflation in some countries; these bubbles are dangerous and likely to lead to a financial bust over time.
This begs the question - can we time the bust? Back to Bloomberg: Next Emerging-Market Crisis Is Five Years Away
Harvard University economist Jeffrey Frankel: “Capital flows into developing economies follow a 15-year pattern: seven fat years followed by seven lean years. The year between the two phases is when the flow of money suddenly stops. After 15 years have gone by, there is somebody new on the trading desk who did not personally live through the last crash.”
By this logic, the next blow to emerging-market economies will come in 2011 or 2012.
Now that we know what & when, it’s time to figure out how to make money from this, right? And until then, party on!
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May 10th, 2007 at 5:36 pm
It is wrong to follow the models of other Asian whose principle is “export or perish”. Since we have a large potential market and foreign exchange from remittances from Indian workers toiling in Gulf etc. (not the greedy US/UK NRIs), there is no need to lay special emphasis on export. Instead if we can develop the markets ourselves with the assistance (nor enslaving) of foreign experts, then currency will not be a big factor and development will be more egalitarean. Presently tech/bpo culture is only benefitting a small section of the society. However the power of elites and their International partners are also strong. A balance between the two may be the best solution.