The turbulence seen across emerging markets is following a similar pattern to a crisis that rocked global trading more than two decades ago — it involved tequila.
In the mid-1990s, U.S. interest-rate increases helped spark a Mexican peso devaluation that fueled capital flight and caused the so-called Tequila crisis. Within a few years, the sell-off had spread to Asia, which became the center stage of the emerging-market crisis, during which currencies were devalued as the region was sent into an economic tailspin. Fast forward to 2018, and history is repeating itself, with a crisis brewing in Latin America as Argentina seeks emergency funding just as the dollar and U.S. bond yields spike.
But this time around, Asia is less vulnerable to contagion, says Macquarie Bank Ltd.’s Nizam Idris.
While the current fears emerging out of Latin America remind him of the so-called Tequila Crisis, today “Asian economies are a lot stronger,” said Nizam, the bank’s head of strategy for fixed income and currencies in Singapore. “Current-account deficits are actually smaller, foreign reserves are much larger than before, and currencies are unpegged. The situation today is not entirely the same as compared to 1995.”
He’s not alone. Commonwealth Bank of Australia also sees Asian currencies faring better than their peers elsewhere in the developing world if the crisis emanating out of Latin America intensifies. While there are exceptions — the Indonesian rupiah is more vulnerable than others since it’s one of the few Asian emerging markets that run current-account deficits — the crises that’s exacerbated the sell-off this time around in Argentina and Turkey are signaling that they are more idiosyncratic in nature with less contagion risks.
After erasing almost all of their gains for the year because of a pick-up in U.S. inflation and global trade tensions, emerging market assets made a comeback last week. Asian currencies have been the winners, with seven out of the 10 best performers in emerging markets this quarter coming out of the region.
Here are the reasons why Asia may fare better after all:
Six out of nine major economies in Asia outside of Japan enjoy surpluses in their current accounts, led by Singapore, Taiwan and Thailand with excesses of more than 10 percent of gross domestic products. Indonesia, India and the Philippines have shortfalls.
Better current-account balances mean that Asia is better equipped to meet their dollar-denominated payment obligations to their bond holders, according to Andy Ji, a currency strategist at Commonwealth Bank of Australia.
A two-year rally that drove emerging-market stocks and currencies to the highest level since at least 2007 was supported by economic fundamentals. And Asia still stands out.