The impact of recession in nine Asian markets surveyed is almost as high as in mid-1997, according to a Bank of America-Merrill Lynch report.
Singapore (strong external balances, but a significant credit boom), India, Malaysia, China, Hong Kong and Indonesia — are all seeing financial vulnerability in the top third of history.
The least stressed are Korea and Taiwan. Thailand is in the middle, wrote Ajay Singh Kapur, equity strategist.
DIFFERENT PROBLEMS
While some markets have a problem with credit booms (Singapore, China and Indonesia), others like India have external account issues.
What happens in the US has a disproportionate impact on Asian markets, the report said, sounding a note of caution.
Individually, a transition of the Fed Chairmanship, tapering, and a narrower US trade/current account deficit are all challenges for these markets.
An improving US current account deficit is often associated with a cluster of emerging market crises. It cited the years 1982, the early 1990s and 1997-98 in support.
US GUIDANCE
It is not a good time to have worsening external balances that require dollar financing, or indeed too much foreign debt, especially of the short-term variety, or an uncompetitive exchange rate.
“But the intensity of the crisis is not quite as high as prior to the start of the Asian crisis, still this is concerning,” the report said.
As for India, while the lending boom of 2002-07 is over, the consequences in terms of bad loans are showing up only now.
“India needs resolute policy action. With an election looming, we see the year-1991 reform route challenging.”
Valuations are getting better and there is a small probability of policy action, which could lead to whipsaw gains, the report said affirming a ‘neutral’ stand on India.