Return of Asian Currency Crisis Is Unlikely: ADB

Many emerging Asian economies are facing balance of payment challenges but their currencies are unlikely to come under stress or significant pressure in the coming months or years, the head of the Asian Development Bank said on Friday.

Sovereign Funds
Sovereign Funds

The region's biggest concern was inflation and Asian central banks have successfully tightened monetary conditions so far, Haruhiko Kuroda said, although he added that the wider interest rate differential between Asia and the United States could destabilize financial markets.

"I'm reasonably confident that nothing like the Asian currency crisis 10 years ago would happen in the region, simply because many emerging economies in Asia have accumulated a large amount of foreign exchange reserves," he told a news conference.

Many emerging economies have also reduced their reliance on short-term external finances, making them less vulnerable to currency rate volatility, he said.

Still, Kuroda said an escalation in global financial instability, which started with the U.S. subprime mortgage crisis last year, was a worrisome risk for the region.

"A re-pricing of risk can lead to greater volatility and cause abrupt changes in capital flows or disorderly exchange rate adjustments," he said.

Most Asian currencies, led by the South Korea won and the Indian rupee, have fallen in recent weeks due to concern that central banks are not doing enough to bring prices under control as high fuel and food costs stoke wider inflationary pressures.

Central banks in Indonesia, India, the Philippines, Taiwan and Vietnam have raised interest rates this year, but analysts believe Asian authorities need to act much more aggressively to contain inflation expectations and restore credibility.

Annual inflation rates have reached alarming levels in several countries -- 26.8 percent in Vietnam in June, 11.42 percent in India and 11.4 percent in the Philippines.

Policy Dilemma

Kuroda said many Asian countries faced a growing dilemma on monetary policy as they try to control inflation without excessively slowing economic growth.

"If Asian authorities raise rates to combat inflation, the wider (interest rate) differentials may attract volatile portfolio investments and fuel asset-price inflation, increasing the risk of a hard landing," Kuroda said. "But the risk would be even greater if prices spiral out of control and feed higher inflationary expectations," he said.

Slowing global growth has kept central banks in many industrialized nations from hiking rates aggressively.

A downward spiral in the U.S. labor market has made it more likely the Federal Reserve will refrain from raising rates from the current 2.0 percent, while Japan's benchmark rate is seen stuck at 0.5 percent at least for the rest of this year.

While the European Central Bank on Thursday hiked rates to 4.25 percent, that is still lower than rates in many Asian economies, such as Indonesia's 8.75 percent.

Reflecting slowing global growth as well as soaring food and energy costs, Kuroda said the ADB is expected to cut its 2008 economic forecast for many of the region's emerging nations while raising inflation projections.

"No economy, no region can be decoupled from rest of the world," Kuroda said, shrugging off the view that Asian economies would be immune to the impact from the U.S. economic downturn.

But he said it was highly unlikely for Asia to experience a recession as growth in the region was still fairly robust.

Kuroda, a former top Japanese currency diplomat, will attend the Group of Eight summit to be held in Japan's northern prefecture of Hokkaido next week.