Just how bad is this crisis?
In the mid-1990s, John Darch thought he had struck a potash bonanza in a remote corner of Thailand. The Vancouver-based mining investor had lined up local Thai partners and was planning to push ahead with a mine in the country’s northeast. Southeast Asia was booming and the mine would have enabled them to ship potash to other so-called Tiger economies, which had been growing at an annual pace of about 8 per cent for the previous decade. “It was a bubble waiting to happen,” Mr. Darch recalls.
What came next was the Asian financial crisis. As the chaos engulfed Southeast Asia, his partners’ financing dried up and Mr. Darch’s dream became an early victim of carnage that would crush currencies and claim banks and brokerages from Jakarta to Tokyo. Because what was happening in Thailand was only the beginning.
The trouble spread quickly from a localized crisis in a Thai bubble economy fuelled by bad loans, leaping to Malaysia, Indonesia and the Philippines. It eventually hit South Korea, a country with few of Thailand’s problems. Countries spent billions to defend their currencies before giving up and devaluing. International investors pulled out and ran for safer markets, while the International Monetary Fund lent tens of billions of dollars to stabilize plummeting currencies. The Brazilian and Russian economies tanked the following year.
“I’m sitting on my hands for now, and that’s what I’d recommend others do,” says Mr. Darch, who runs a sustainable coffee business in Thailand as he pursues other mining licences. “If you’re going to invest, I’d stay away. But if you’re already there, then just sit tight.”
At the same time, Mr. Darch says you can’t compare then and now. Others agree. That sort of contagion has not yet happened.
Although united by the fallout from the Fed’s tapering, economists say these countries suffer from mainly unrelated problems, and that investors can see this as a turning point in how to view emerging markets.
“It’s not 1997. Back then, the crisis for emerging markets was they all had similar vulnerabilities,” says Neil Shearing of Capital Economics in London. “Whereas you used to be able to lump emerging markets together as one single homogeneous entity, you can’t do that any more.”
The current troubles are remarkably uneven. In India, slowing growth is laying bare government economic reforms yet to be implemented. In Argentina, economists worry a decade of economic mismanagement and a hastily devalued currency may precipitate a recession. In Turkey, a corruption scandal has led to cabinet resignations while the head of a state-run bank was arrested on graft charges. And in South Africa, falling commodity prices have slammed mining companies and led to violent protests. Hardly uniform problems.
In 1997, countries at the heart of the trouble mostly had fixed exchange rates, little to no reserves, and had coasted on a credit boom that fuelled bad loans and papered over the lack of meaningful economic reforms. They also all had large currency mismatches, in which a country’s residents are not adequately hedged against sharp changes in the exchange rate – a fixture of numerous financial crises in emerging markets.
Now, particularly in Asia, that’s not the case, according to Rob Simmons, who took over as Asia-Pacific regional manager for Export Development Canada in 1997 as markets tanked, and who now heads Alberta’s trade and investment office in Singapore. Exchange rates are more flexible, reserves are much more robust, there are a number of reserve-sharing mechanisms between central banks in the region, according to economists, and there is a lingering wariness about risky investments, particularly in real estate.
“Back then, it was building after building going up in Bangkok,” Mr. Simmons says. “Now, that’s not happening as much. Memories are long in Southeast Asia. Banks, government and investors remember what happened in 1997.”
While many investors are pulling out of emerging markets in general, some of Canada’s biggest players are selectively staying put in particular places – highlighting the varied potential of different emerging markets. Leo de Bever, chief executive officer of Alberta Investment Management Corp., which invests $70-billion on behalf of Alberta public sector pension funds, said the sweeping downturn across markets presents a great opportunity to invest in stronger countries caught in the stampede.
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