Great Forex-pectation (2)

(Continued)

Still along the lines of currencies and financial issues, a few days ago, I received another spontaneous question (during a wedding reception, of all places), “Is it true, what they’ve been saying, that there’s going to be another financial crisis? Isn’t one unfolding in Thailand right now, as we speak? Is it going to have a contagious effect again, thus spreading to Indonesia? What if the exchange rate shoots up to 20.000 IDR per USD? ”

Interestingly, this particular query hailed from someone who is an importer of sorts. To my understanding, she is about to sign a purchase order contract for a few years with a foreign supplier, but is concerned that the imported products might not sell very well at home, if there is a crisis that would prompt a significant increase in the prices of these particular goods.

To be honest, I had no ‘well-rehearsed’ analytical and comprehensive response to her query. This past year, my research mostly dwells on trade and regionalism issues, so yes, I’m a little rusty on my finance and monetary. Yet I still had the audacity to confidently respond to her, “No, Tante, I wouldn’t trust the ‘rumors’ so much. True, no one has control over financial crises, in fact history has shown that the financial crises-triggered panic are over the world [I was thinking of Charles Kindleberger’s classic: Manias, Panics, and Crashes : A History of Financial Crises], yet I would not bank on another crisis of a similar magnitude and depth as that of 1998. Yes, [short-term] shocks could happen, but as of this moment, I do not see that there is anything to worry about.” I paused for a moment, ”Not yet, at least!”

I based my argument mainly on two assertions/observations: (1) Macro and finance indicators suggest that Indonesia is now less vulnerable and (2) Authorities are now better equipped to deal with the crisis. A lot of (IMF-induced) financial reforms have taken place to restore the banking and finance sector, as well as set the scene for a more salient and prudent regulatory regime. Furthermore, East Asian countries have stepped up regional financial cooperation within the spirit of preventing the recurrence of the 1997/98 events. The crisis, interestingly, prompted a strengthening in the wave of regional financial cooperation. A lot has been discussed at the ASEAN Plus 3 (ASEAN + Japan, China and South Korea) Finance Ministers Level. A notable one would include a mulilateralization of Bilateral SWAP Arrangements known as the Chiang Mai Initiative (see here). ASEAN Plus Three Finance Ministers supported the idea of pooling their reserves as some kind of stand-by arrangements. The idea is that in the event of a liquidity crisis in a particular country, each central bank, according to how much it pledges, will release the funds to help the country experiencing liquidity problems.

Besides, I added, even if there is going to be another financial shock/crisis, the Rupiah would not depreciate by the same magnitude as it did in 1998. The pre-crisis level of 2,500 IDR per USD was undoubtedly undervalued overvalued, while the current level of 8,900-9,200 seems to reflect the ‘equilibrium’ more. Adjustments, if any, would not be as grave as before.

This particular query, delivered while I was ‘elegantly’ munching away on Poffertjes at the wedding, had the predicted effect of triggering my curiosity. Later on that night, when my mind was more free to contemplate, I thought more about all these currencies and crisis issue. Curiosity nearly killed the cat. I got to thinking, what lies behind all this recent worries about the likelihood of another crisis? Why now, ironically, when the region in growing again, such that it has been touted as the fastest growing region in the world (see Eichengreen’s commentary here)? What exactly is happening in Thailand right now? What are the financial and prudential indicators like: are we exhibiting signs of vulnerability? Are there signs that the fundamental macroeconomic and monetary conditions that preceded the 1997 crisis are now recurring?

An attempt to answer the above, and some insights on lessons-learnt from the Asian Crisis, are coming your way…Stay tuned…!