The turmoil in China’s stock markets, coupled with the country’s languishing economy, has sparked concerns about the economic situation in Southeast Asian countries. Is the region on the brink of a new financial crisis?

China’s economic growth for this year is projected by the International Monetary Fund to fall to 6.8 percent – its slowest pace of expansion in over two decades.

The slowdown in China – which now accounts for about 15 percent of the global economic output – is a major factor behind the current volatility in the country’s stock markets.

Fears over a Chinese “hard landing” have also triggered growth worries across Southeast Asia, due to the region’s close trade and investment links with the world’s second-biggest economy.
Exacerbating investors’ concerns are Southeast Asian nations’ tumbling currencies, which have performed poorly over the past year. Compounding the problems is the slow pace of reforms to modernize the countries’ economies.

The worries have led some to fear that the region could see a repeat of the 1997 Asian financial crisis. However, many economists and analysts say it may not be the case as there are many differences between the current situation and the one in 1997-98.

Nevertheless, they note that some countries such as Indonesia and Malaysia appear to be more vulnerable due to their heavy dependence on commodity exports and weak finances.

Bad policies
For instance, in Indonesia – the region’s largest economy – economic growth in the second quarter of this year dropped to 4.67 percent, the slowest rate since 2009.

“The economy is now facing declining investment, diminished job creation, and a fiscal shortfall, owing to lower prices of natural resources commodities and lower demand from China for Indonesia’s exports,” according to a recent analysis published by the Sydney-based Lowy Institute.

The authors of the report, Professor Arianto Patunru and Dr Sjamsu Rahardja, wrote that the policies pursued by the government in response to these problems were “heavily protectionist” in nature and that they considered them to be counterproductive. “This time, bad times are resulting in bad policy,” they noted.

The Manila-based Asian Development Bank (ADB) has also revised down its 2015 growth forecasts for the country from 5.5 percent to 5.0 percent.

“We see delays in government executing its budget; we see lower tax returns than the target; and we see weaker demand from many major trading partners. On top of these factors, the benefits to investment from economic reforms also take time to realize,” Shang-Jin Wei, ADB’s chief economist, told DW.

The Indonesian currency rupiah has also come under increasing pressure due to the country’s big current account deficit and rising private sector debt.

Najib’s troubles
Another major economy in the region is Malaysia, which has been struggling to restore investor confidence. The country’s economy, which is heavily reliant on commodity exports to China, has suffered from weak global raw material prices and a fall in domestic consumption.

At the same time, the ringgit – the country’s currency – has been Asia’s worst performer this year, plunging by more than 15 percent since early 2015 to hit a fresh 17-year low against the US dollar.

Adding to the economic problems is the mounting pressure on the country’s Prime Minister Najib Razak over allegations of graft and financial mismanagement at debt-laden state investment fund 1MDB.

Malaysia’s foreign exchange reserves have also declined to around $94.5 billion – the lowest level since 2009 – according to the nation’s central bank, triggering doubts about its ability to defend the ringgit.

But despite growing fears over a weakening currency and capital flight from the country, PM Najib recently ruled out any government intervention in the form of capital controls or a currency peg.

Analysts say growth prospects of other countries in the region such as South Korea and Vietnam could be affected as a result of China’s slowdown as their economies rely on demand from the Asian giant.

But ADB economist Shang-Jin Wei points out that China’s downturn also presents opportunities for some countries. “Since part of the reason for a slowdown in China is the rise in its wage rate, countries like Myanmar are working to increase their shares in world markets in industries that China used to dominate.”
He added: “The fact that China is gradually exiting many labor-intensive sectors represents opportunities for them, especially if they can upgrade their infrastructure and make their overall investment climate friendlier to domestic and international investors.”

A different situation
Furthermore, many countries have undertaken substantial macroeconomic and banking reforms since the 1997 crisis, say experts, which should help them to manage any challenges arising from either the Chinese slowdown or the US Federal Reserve’s first interest rate hike since 2006, a move that is expected in the coming months.

The financial situation across the region is different now, with many countries running current account surpluses, floating exchange rates and holding significant foreign exchange reserves, argues Gareth Leather, Asia economist at London-based economics research consultancy Capital Economics. At the same time, they have lower levels of foreign currency debt, he said.

Still, the expert warns that the big risk facing many countries in the region today is not a build-up of foreign currency debt, but rather a surge in local currency private-sector debt that could lead to problems in the banking sector further down the line.

“In summary, while an exact repeat of the Asian financial crisis is unlikely, policymakers across the region cannot afford to become complacent,” he said.