Another emerging market crisis? This time it is different…

Millennials and Generation Z are unlikely to remember that, back in 1997, Asia was dealt a significant blow by the United States (US) Federal Reserve (Fed), who, through their actions, caused the US dollar to appreciate substantially. Halfway around the world it was July 1997 and monsoon season was on its way in Thailand, but that year the country’s currency, the baht, would experience a monsoon of a different kind. When the US Fed raised rates in 1997 to fend off increased inflationary pressures, the Thai baht’s peg* snapped against a very strong US dollar. This led to a series of currency crashes, one after the other, across emerging markets (EMs), such as Indonesia, South Korea, and Russia. What happened to the baht, however, was not an anomaly, as similar events led to the Latin American debt crisis of the 1980s and the Mexican crisis of 1994. This begs the question whether EMs and the rest of the world are in for another round of pain as the US Fed battles eye-watering levels of inflation.

But what is needed for an EM crisis? In each of the above-mentioned cases, capital flooded into these markets before the events even started. With their coffers full of cash and most of the debt denominated in US dollars, all that was needed for a financial calamity was for someone to turn up the heat: In came the US Fed with their monetary policy tools and out went most of the capital. This, in turn, highlighted underlying EM problems, such as weak balance sheets, poor regulations, rocky financial systems, etc. Whilst some of the afore- mentioned problems were plain to see before the events played out, it would be naïve to assume that anybody could see the crisis coming, which speaks to the very core of what a crisis is.