8/13/2019 BBC News - Great Reversal and the Fed

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8/13/2019 BBC News - Great Reversal and the Fed

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According to HSBC, foreigners own about 40% of Mexico's debt market now, compared with just 2.5% in 2003. For Poland, it is 37%

versus 17% then. And, in Indonesia, foreigners hold 30% now, which doubles their holding since 2009.

In absolute numbers, Brazil has most dollar loans at $287bn. But, on a relative scale, Turkey's $172bn of dollar loans equals 22% of the

entire economy.

Other countries that are at greatest risk are those with large external deficits to finance. India's current account deficit, the broadest

measure of trade including investment flows, is at 4.8% of GDP, while Indonesia's stands at 3.2%. It's unsurprising that their currencies

have fallen so dramatically this year.

Again, it's not just in Asia. The rupee is the worst performing currency in Asia, but it jostles with the Brazilian real and the South Africa

rand for the worst performer in the world this year. Both of those countries have struggled to cope with appreciating currencies in the

past few years as cheap cash entered their borders. Now, their currencies are declining as the money leaves.

Where could this all end up?

A worst case scenario would be a repeat of the 1998 Asian financial crisis. That's when Asian economies, starting with Thailand, saw

their currencies depreciate when "hot money" left their borders, and it ended up with several countries being rescued by the

International Monetary Fund. As India and other countries have emphasised, they have foreign exchange reserves that can cover six

months of imports, which gives them some protection.

Also, unlike the Asian crisis, this is not a shock development. The Fed was always going to end its QE programme at some point.

Better prepared?

But, here's the most worrying aspect.

The impact of the Asian financial crisis was unexpectedly global. Thailand had too much crony capitalism that ended up generating

unsustainable debts that caused investors to leave. Similar problems in other parts of Asia as well as the close trade and investment ties

in the region may explain why the money left. However, investors not only pulled their money from there but also from Russia, Turkey,

Brazil, and Argentina, which plunged those economies into crisis in the aftermath. Argentina then ended up with the largest sovereign

default in modern times in the early 2000s until Greece sort of took that title.

This time around, will investors be more discerning so that just countries with weak fundamentals lose out? Or, are emerging markets sttreated largely as one investment class, so when the risk appetite recedes, they all lose?

Most importantly, are emerging economies now better prepared should the money leave?

The answers to these questions will determine whether the great reversal of cheap cash results in a crisis.

This reminds me of those who warn that the solution for the last crisis usually paves the way for the next one. Recall the criticism that th

low interest rates that addressed the bursting of the 2001 dotcom bubble fed into the US sub-prime housing bubble. Now, the cheap

cash injected to address that crisis may end up contributing to the next crisis - this time in emerging economies.

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Linda YuehChief business correspondent

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