The financial unraveling of southeast Asia

It is now well underway.  The stock market is Indonesia had several big loss days in a row, with some daily drops over five percent, and their credit-driven economic expansion seems to be over.  Weaknesses in commodity markets will hurt them and they did not use their boom to invest sufficiently in future productive capacity, instead preferring to ride upon the glories of higher resource prices and growing credit.  The central bank is burning reserves and starting to worry about an eventual crisis scenario.

I am puzzled by Krugman’s take on the rupee.  I would not argue that the weaker rupee is bad per se, but rather it is a symptom that an earlier overvaluation of India’s economic prospects is now over.  The country is, sorry to say, the “sick man of Asia,” economically speaking that is.  (Or more literally in terms of public health, for that matter.)  Here is my May 2012 column on India, which I think has held up very well.  One can only hope that this financial crisis will bring reforms comparable to those of the early 1990s; otherwise the momentum for better policies appears to have been exhausted.  Right now the country has about the worst legal system in the world (North Korea and a few other outliers aside) and the ten-year yield has been popping over ten percent.  It is shifting from a better multiple equilibrium to a worse one and foreigners are having second and third thoughts about further investing.

The Thai economy has shrunk for two consecutive quarters and total debt (public and private) to gdp ratio is now about 180 percent.  Malaysia also has serious debt problems.  The uncertainty coming out of China is not helping either.

Singapore is doing fine.

I don’t expect these crises to have serious “knock on” problems for the developed nations, but hundreds of millions of vulnerable individuals now face a much worse economic future, at least in the short to medium term.

Addendum: There is also mounting evidence that QE has been to some extent responsible for southeast Asian financial bubbles, market monetarist evidence one might say, if I may be allowed to needle Scott.  Call it Austro-Indonesian business cycle theory.


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