Storm Warning?

It’s been a mild hurricane season so far. Will it stay that way?

At this time of year people watch a storm center in the Caribbean to see how tropical storms develop. In the same way, observers can watch storm centers in the global economy to see if financial problems might be headed our way. For the past several years we’ve kept an eye on Southern Europe, but recently South and Southeast Asia has become a new global storm center.

The Indian Rupee is down 12%; the Indonesian Rupiah 10%; and the Malaysian currency 8%, and their stock markets have fallen 10-20%. Capital is leaving the region and financing costs are increasing. For many, this is reminiscent of the "Asian Contagion" of some 15 years ago. Are we headed there again?

Probably not. Back then, a major issue was the fixed exchange rates that many countries maintained against the dollar. When capital fled, they had to use up their hard-currency reserves to support the fixed rate. Now their currencies float. Also, the most vulnerable countries–Indonesia and India–are much less levered than Thailand and Singapore were in the late ’90s. And the region is more diversified and flexible than it was before 1997.

This means that while foreign lenders to these countries will likely feel some pain, there aren’t that many, and their currency exposure is probably hedged in some way. The hurricane season isn’t over, and economic issues in Asia could still organize themselves into a major gale. For now, however, it just looks like a hard blow.

Douglas R. Tengdin, CFA

Chief Investment Officer

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