Emerging markets are in free fall. Currencies are reeling, stocks are tanking and commodities are sinking, evoking memories for many investors of the financial crisis that hit Asia hard in 1997 and 1998.
Concerns over a slowdown in China have dented confidence, while investors have also fretted over the impact on emerging markets of an imminent increase in interest rates by the U.S. Fed.
But Morgan Stanley has identified eight reasons why it believes this latest turmoil is not as grave as the crisis in the late 90's. Here they are, in the bank's words:
Debt profile: A large part of the debt buildup in this cycle has been in domestic rather than external debt. Moreover, the limited buildup of external debt has been denominated in local currency and has been raised by the public sector. In contrast, the external debt buildup during the 1990s cycle was denominated largely in U.S. dollars and was debt raised by the corporate sector.
Inflation: A large part of the region today is suffering from low-flation in CPI (consumer price inflation) and persistent deflation in PPI (producer price inflation). In typical cycles, inflationary pressures act as a constraint to central banks' response but this constraint is largely absent in this cycle.
Current account: Largely in surplus; only India and Indonesia run a small deficit, which is under 2.5% of GDP.
FX reserves: Foreign exchange cover of short-term debt is higher at three-to-five times. Similarly import cover is higher at around 15 months of imports.
Flexible exchange rate: The region's currencies have already been adjusting in the last two years – this ensures a more steady pace of adjustment. Though REER (real effective exchange rate) has been appreciating, Morgan Stanley believe that for most countries, the REER has been transitioning from being undervalued to fairly valued as reflected in the current account balances
External triggers: The pace and magnitude of the rise in real interest rates in the US is likely to be slower/lower, considering that potential growth rate in the US is now lower than in the 1990s.
Monetary stance in Europe: Europe was tightening monetary policy in 1996-97. But in this cycle, Europe has been pursing quantitative easing, keeping real interest rates in negative territory.
Importance of Asia ex-Japan to developed markets: In 1996, a year before the shock, Asia ex-Japan (AxJ) GDP was 9.8 percent of global nominal dollar GDP vs. the current share of 21.8 percent. In 2014, AxJ's nominal GDP now is larger than the euro area's, but still smaller than U.S. In this context, the feedback from Asia's slowdown will affect developed markets as well, challenging the pace of U.S. monetary tightening.