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Eye on Asia | Why US efforts to curb inflation won’t lead to another Asian financial crisis
- Banks, balance sheets and local-currency bond markets are more robust than in 1997, there are no destabilising capital flows, and most currencies are no longer tightly pegged to the dollar
- There could be pockets of weakness but China’s projected economic rebound later this year will help regional recovery
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Hawkish shifts in the US Federal Reserve’s monetary policy have often led to heightened financial and economic stress in emerging economies.
In the early 1990s, the Fed raised interest rates preemptively to curb inflation, precipitating the Mexican “tequila” crisis. In 2013, the Fed signalled its intention to tighten monetary policy, resulting in the major emerging-markets sell-off known as the “taper tantrum”.
Given the region’s history, one might expect policymakers in the Asean+3 countries – the 10 members of the Association of Southeast Asian Nations, together with China (including Hong Kong), Japan and South Korea – to be particularly anxious about the Fed’s increasing hawkishness.
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Indeed, recent Fed efforts to curb inflation have prompted fears of a regional financial crisis, similar to the 1997 Asian financial crisis.
But the Fed’s actions will not have as much impact on the region as they did in the late 1990s. Today, the Asean+3 economies are stronger and more durable, making a 1997-style meltdown improbable.
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The 1997 crisis was mainly caused by macroeconomic imbalances and sharp capital flow reversals, triggered by speculative attacks on the Thai baht and other regional currencies.
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