| The imminent U.S. exit strategy is taking a beating on emerging market economies, which had been propping up the global economy for the past several years. On Tuesday, the Indonesian rupiah plunged to its lowest level since 2009 and the Brazilian real slid 15 percent, while the Indian rupee fell to a record-low. The South African rand also dropped by 17 percent this year. More than 20 emerging market currencies, including those of Malaysia, Thailand and Turkey, dropped en masse. Concerns are growing of an eruption of another Asian currency crisis, which swept the emerging markets in late 1990s.
○ Asian currencies and stock markets plunge
Amid rising anxiety over a possible eruption of a financial crisis in emerging markets, Asian financial markets rolled for the second day Tuesday.
In Korea, the main stock index KOSPI dropped 29.79 points (1.55 percent) to 1,887.85 amid concerns of a possible tapering of U.S. quantitative easing and a financial crisis in India. The tech-heavy KOSDAQ Index rose in morning session but closed down 2.35 percent to 537.57 as individual investors shifted to net sellers. The drop in KOSDAQ Index on Tuesday was the biggest since June 25 this year. The won/dollar exchange rate rose by 5.2 to close at 1,120.8.
Stock market analysts expect low possibility of an eruption of an Indian financial crisis, but they say Korean stock markets will see increased volatility if the U.S. exit strategy starts.
Indonesia`s Jakarta stock index plunged by around 5 percent for the second straight day. India`s Sensex index declined 0.95 percent to 18,133.97, posting its lowest point since September 13 last year. Thailand`s SET index was down 2.49 percent to 1,363.70, and the Malaysian KLCI went down 1.82 percent to 1,745.96.
The Asian currency crisis in December 1997 that also took a heavy toll on the Korean economy had originated from the U.S. Federal Reserve. Former Federal Reserve Chairman Alan Greenspan had pumped dollars into markets for several years to stimulate the U.S. economy. But due to inflationary pressure, he made a surprise rake hike on February 4, 1994. Investors who had flocked their money into emerging markets rushed to withdraw capital on expectations that dollar assets` returns will rise owing to interest rate hike.
Around 20 years later, a similar situation is trying to set in. The dollar has been pumped into markets to solve the global financial crisis, which is different from the past situation that a rate hike was promoted, but there are similar signs of an eruption of a currency crisis in emerging markets. This is because the U.S. Fed officially announced reduction of quantitative easing and will collect back money pumped into markets. Market expectations are that the U.S. will start its exit strategy next month. Since Fed Chairman Ben Bernanke hinted at an exit strategy at the end of May, emerging markets are witnessing a dollar exodus.
○ India will inevitably ask for IMF help
Experts speculate that India could become the first victim of currency sell down. If the economy is solid, a dollar outflow could be safely made up for by foreign exchange reserves. The situation of the Indian economy is not good, however. GDP growth is forecast to drop to below 5 percent this year after a steady growth of around 8 percent over the past several years. Chronic corruptions and political uncertainties are also an Achilles tendon. U.K. daily Guardian reported that India is now in a worst situation that it will have to ask International Monetary Fund for help.
As for the next target, experts point out Thailand and Indonesia that are suffering from surging current account deficit. Morgan Stanley recently said India, Indonesia, South Africa, Brazil and Turkey are the five countries that have potential to fall into currency crisis.