HONG KONG -- From India to Indonesia, the currencies and stock markets of emerging economies have been roiled by speculation about when the U.S. Federal Reserve will start scaling back monetary stimulus that has kept interest rates ultralow and sent investors to developing markets in search of higher returns. Separately, Asian economies that had been star performers are now in the dumps and the ebbing investment tide has sparked fears the region will suffer a rerun of its 1997-98 financial crisis.
Q: Why are investors fleeing Asia?
A: The looming phaseout of the Fed's cheap money policy is having a sobering effect. Investors are being lured back to advanced economies such as the U.S., where growth is recovering, while Asia's prospects look less attractive as China shifts into a lower gear after years of torrid expansion. The pain is being felt most in India and Indonesia, where the investor exodus has sent currencies plummeting, threatening to fan inflation and widen current account deficits. The two governments have been forced to step in with measures aimed at boosting confidence. Also feeling the heat is Malaysia, where the central bank this month slashed its 2013 economic growth forecast to 4.5-5 percent from 6 percent. In Thailand, the economy contracted unexpectedly in the second quarter.
Q: Will there be a replay of the Asia financial crisis, as some fear?
A: In the late 1990s, a sudden withdrawal of foreign investment from Thailand triggered a banking and currency crisis. The contagion spread rapidly to neighboring countries and to Russia and Brazil even as central bankers worked furiously to calm the markets. But this time, many analysts say the turmoil is unlikely to explode into a full-blown crisis because Asian countries are better equipped to deal with sudden shifts in investor sentiment. "Everybody's quite worried about Fed tapering," said David Carbon, head of economic research at DBS Bank in Singapore, referring to withdrawal of the central bank's extraordinary stimulus. "That's natural. At some point the Fed's going to go back to normality. That doesn't mean the end of Asia."
Q: How is the situation now different?
A: Many emerging Asian economies no longer keep their currencies at fixed rates, so they don't have to mount costly defenses against attacks by speculators trying to devalue them. Thailand spent billions of dollars in a failed attempt to prop up the baht in 1997. Asian countries have also amassed big foreign currency reserves, which central banks can tap in emergencies. Even troubled India has about $270 billion in foreign exchange reserves, equivalent to about five months of imports, compared with less than one month's worth back in 1990 when India suffered a balance of payments crisis, according to Fitch analysts. Many are also running surpluses in their current accounts, which show trade and investment income balances. In the 1990s, many were in deficit, meaning they needed to borrow foreign capital to keep their economies and banking systems running. The main exceptions today are India and Indonesia.
Q: What troubles is India facing?
A: The stock market has dropped 10 percent in the past three months and the rupee has lost a sixth of its value against the dollar since the start of the year. The government has introduced new duties on imported televisions, raised gold taxes and hiked deposit rates to combat the outflow of money but analysts say the measures are a panicky response that shows the government lacks a coherent economic plan.
Q: How has the weakening rupee affected Indian companies?
A: Indian businesses that took out foreign-currency loans with government encouragement are now suffering. Companies borrowed at low rates abroad and sometimes parked the cash in accounts back home to take advantage of the high interest rates set by the central bank to tackle inflation. Government policies allowed automatic approval for loans of up to $750 million. "These companies thought the currency cannot move so quickly," said Abhishek Goenka, founder and CEO of consulting firm India Forex Advisors. "But markets always behave in ways that you cannot expect. Markets moved, and the rupee has fallen. So most of these companies are going to have huge losses on their balance sheets."
Q: How much did Indian companies borrow?
A: Based on Indian central bank data, about a quarter of the $300 billion in foreign debt owed by Indian corporations is short-term loans due to be repaid in a year, according to Daljeet Kohli, head of research at IndiaNivesh Securities. Borrowers can usually roll those loans over for another term. Credit Suisse analysts estimated this month that debt levels at 10 of India's biggest corporations had risen 15 percent even as profitability remains under pressure. From 40 to 70 percent of the loans are in foreign currencies, the report said.
Q: What about Indonesia?
A: The rupiah has lost nearly 9 percent so far this year and is at its lowest level in four years. The Jakarta Composite Index is down by more than a fifth in the past three months as economic growth slows after hitting 6.5 percent in 2011. Companies that consume a lot of imported raw materials, like steel-makers and pharmaceutical and food companies, face higher costs. Airlines are pinched by higher jet fuel bills. Some 70 percent of Jakarta-based Lion Air's costs are in dollars but almost all of earnings are in rupiah. "No doubt the decline in the rupiah is affecting us," said spokesman Edward Sirait.
Associated Press writers Nirmala George in New Delhi and Niniek Karmini in Jakarta, Indonesia contributed.