Why Morgan Stanley Does Not See A Repeat Of 1997 Or 2013 Crisis For Asia

Asian markets are unlikely to suffer a financial crisis like in 1997-98 or 2013 even as the U.S. dollar continues to strengthen, according to report released by Morgan Stanley.

The recent sharp run-up in the dollar has prompted concerns about the impact on the rest of the world, the research house said. "Specifically for Asia, investors are asking if central banks in the region will have to hike aggressively and disruptively like in 2013 or will this lead to a financial crisis like in 1997/98.”

However, this cycle is "very different for Asia”, Morgan Stanley said.

“Unlike in 1997/98 or in 2013, Asia had not levered up excessively prior to the US monetary tightening cycle. There are very limited signs, if at all, of a misallocation of capital or overheating in the region,” it said.

Morgan Stanley attributed the current currency weakness "to the sharp rise in commodity prices earlier in the year, but these effects are expected to reverse soon".

Currencies across Asia, it said, are depreciating because of a stronger dollar environment and not because of any existing imbalances related to the Asia macro situation. “This is best reflected by the fact that trade weighted exchange rates in the region have been relatively stable to appreciating.”

Morgan Stanley expects Asia’s growth differentials with the U.S. and other developed markets to rise “significantly” in 2023, provided China reopens in the spring of 2023.

The U.S. Federal Reserve’s continuous tightening of monetary policy in a bid to tame inflation has led to the dollar index surging. In contrast to the U.S., Asian peers haven’t followed suit as aggressively.

“In this cycle, we still see the main anchor to central banks’ policy reaction as being the domestic growth and inflation trajectory,” the report said. “However, because there has been less overheating or mis-allocation and the inflation problem in Asia is more benign than in the rest of the world, we don’t expect central banks in the region to tighten deeper into restrictive territory and sacrifice domestic demand in the process.”

A “rapid and disorderly” currency depreciation in Asia can still impact price and financial stability and can also raise the servicing costs of external debt.

But Morgan Stanley underscores that most Asian economies do have adequate foreign exchange reserve buffers, with reserves more than able to cover the amount of short-term external debt.

It expects policy makers to step in and manage the situation should market conditions turn volatile.

While Asia’s inflation has likely peaked, a renewed rise in oil prices could reinject upward impetus to the inflation path, which would in turn prompt a faster pace of rate hikes and higher terminal rates, it said.