Growing chasm between world markets warns of new crisis

File photo of ringgit bank notes of different denominations. The ringgit is at a three-year low against the US dollar, having shed over 7 per cent in value versus the greenback since the start of the year. — Reuters pic
File photo of ringgit bank notes of different denominations. The ringgit is at a three-year low against the US dollar, having shed over 7 per cent in value versus the greenback since the start of the year. — Reuters pic

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KUALA LUMPUR, Aug 24 — Concerns over a global meltdown reminiscent of the Asian financial crisis are mounting as the gap between emerging markets such as Malaysia and top developed nations has begun to accelerate.

Since the start of the year, the world’s top 10 developed nations have steadily outperformed emerging markets — once the darling of investors — with the former group expanding even as the latter economies regress.

A record of the MSCI world index starting from New Year’s Eve shows that, cumulatively, the 10 largest developed nations have gained 12 per cent in market value for the year to date.

And while developed nations are heading up, developing countries have gone in the opposite direction; MSCI’s Emerging Market Index showed a loss of 13 per cent in equity since the start of the year.

Worryingly for observers, this is the biggest the gap between developed and emerging markets has been since the 1997 Asian financial crisis.

The situation is exacerbated by the US Federal Reserve’s expected cutback on its bonds-buying programme from the current US$85 billion (RM280 billion a month). It has said the withdrawal of the stimulus will be gentle, but signs of a turbulent exit are already there.

“Hot money is flowing out of Asia and Latin America, pushing up effective interest rates in economies where rates of growth had started to slow anyway,” financial columnist Nils Pratley wrote in his column for British newspaper The Guardian yesterday.

“The Indonesian rupiah has fallen 11 per cent against the US dollar in the past three months. The Indian rupee is off 13 per cent in the same period.”

The ringgit is also at a three-year low against the US dollar, having shed over 7 per cent in value versus the greenback since the start of the year.

“Much more of this, and we’re looking at a proper crisis,” Pratley added.

According to report in the New York Times yesterday, the susceptibility of emerging markets to a possible repeat of the Asian financial crisis was rooted, ironically, in the measures they took in the aftermath of the 1997 crash.

“The Asian financial crisis, in which developing countries that had maintained fixed exchange rates were forced to abruptly devalue their currencies, turned out to have a lasting effect. Countries decided that it was critical to run balance of payments surpluses and to build up foreign currency reserves.

“That stood the developing countries in good stead when the credit crisis erupted in 2008, but afterward, it became harder for the developing countries,” the US newspaper wrote.

Pratley also noted that the world economy was now even more intertwined than it had been in the ‘90s, magnifying the vulnerability of other emerging markets should one peer succumb.

“In the 1997-98 crisis there was a domino effect as Thailand, Malaysia, South Korea and Indonesia were sucked in. What we know about today’s global economy is that it’s even more interconnected,” he wrote.

But he also predicted that this interconnection will see emerging markets through, expecting the rise of Western nations to provide sufficient impetus to avoid an outright crisis.

“A muddling through is probably still the safer bet on the grounds that the economies of the US and parts of Europe appear to be recovering. That’s the fundamentally bullish reason why a US exit from QE is in prospect.”

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