Asian countries are feeling the pinch of this global financial crisis. The situation in Korea and Indonesia are especailly worrying.
Two of the big credit rating agencies, Standard and Poor’s (S&P) and Moody’s Investors Service are downgrading ratings of some Asian banks. Korea now comes under spotlight because of its deteriorating current account and fast-sinking currency. According to rating agencies’ point of view, Korea is the most vulnerable in Asia to this global financial crisis.
Korea is one of the few banking systems in Asia where domestic deposits are insufficient to fund loans. It faces a daunting task to regain investor confidence as the global credit crunch could threaten its foreign-currency funding. South Korea’s currency, the won, is Asia worst-performing currency, reaching having its lowest level since the IMF bailed the nation out in December 1997and its money-market rates rose to a post-Asian-crisis high.
Korea’s current account deficit widened to a record US$4.71 billion (Bt 165billion) in August and foreign —exchange reserves have dropped in each of the past six months. The won has fallen some 30 per cent against the dollar this year. Furthermore, South Korea has $175 billion worth of external debt maturing by the end of next June. It is under immense pressure to guarantee bank debts, as credit-rating agencies are pondering cutting ratings of its largest lenders and predicting a more negative outlook for South Korean lenders than in any other Asian country.
While many economists say a repeat of the Asian financial crisis is unlikely, the same kind of pressure is being piled upon Indonesia. Indonesian’s currency and bonds are sinking. The rupiah has dropped below 10,000 to a record high and making it the worst performer of 10 Asian local currency bond indexes. Indonesia is now in talks with the World Bank and other lenders to get US$5 billion in stand-by loans to bolster economic growth next year. Other countries in Asia are also reeling from the effect of this global financial crisis.
To show responsibility and help solve the problem that it has created, the US Federal Reserve recently agreed to provide $ 30 billion each to central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.
The swap line is part of the Federal Reserve’s efforts to alleviate accredit freeze in emerging nations. The fed announcement coincided with a decision by the international Monetary Fund to almost double the borrowing limits for emerging market countries while waiving demands for economic austerity measures.
Emerging-market investors have created massive demand for dollars and a reduction of liquidity in other currencies by reversing course and investing in the US currency. The Fed swap lines are thus designed to restore liquidity to prevent a vicious spiral.
I think we will see more measures from the Fed and the IMF as even the latest measures are not enough to restore full-scale confidence. However, there is a limit to how much they can do. Countries in Asia will have to help one another and rely on themselves. Many governments will have to implement massive rescue packages that generally include providing liquidity, guaranteeing bank deposits and debts and taking equity stakes in troubled banks
By Chodechai Suwanaporn [email protected]
Source: Fiscal Policy Office / www.fpo.go.th