Ghost of 1997 crisis spooks regional market
(FMT) – Regional stock markets and currencies fell sharply yesterday, a condition expected to persist for some time as jittery investors move funds out of the country to places like the US, which has posted positive economic news.
Analysts warned that the impact on Malaysia could be severe with some already drawing comparisons to the capital outflows that preceded the 1997 Asian financial crisis.
“This scenario is slightly similar to what regional economies experienced before the 1997 economic crisis. In 1997, it started with Thailand economy but today it is the Indonesian economy which is under serious deficit,” Inter Pacific Research Sdn Bhd head of research Pong Teng Siew told The Malaysian Reserve yesterday.
Bursa Malaysia suffered losses, along with other emerging markets like Indonesia and India, as investors pulled out capital for safer havens. Yesterday, the FTSE Bursa Malaysia lost 32.94 points to close at 1,745 while the ringgit weakened to RM3.30 against the greenback – the lowest in three years.
Analysts say the economy may face added pressure with a softening ringgit, swelling national debt and a narrowing current account balance, indicating tough times ahead.
“The market is not sure which direction the economy is moving. Growing fiscal deficit and expectation of slower growth in the second-quarter (Q2) is causing uncertainties,” said CIMB forex strategist Suresh Kumar Ramanathan.
Fitch Ratings’ recent downgrade of Malaysia’s economic outlook to negative could further add to its woes.
In addition, the US Federal Reserve (Fed) is planning to limit its financial stimulus programme which has encouraged investors to shun developing markets like Malaysia and divert funds to the US.
“It has caused a reversal of capital flow that once flooded emerging markets. In future, we can expect emerging countries economic growth to slow. There will be pessimism over emerging markets and investors will reduce exposure to these markets,” said RAM Holdings Bhd chief economist Dr Yeah Kim Leng.
Meanwhile, chief economist of Royal Bank of Scotland plc Sanjay Mathur said Malaysia will continue to witness capital outflow because of growth in the US and also due to Fitch’s downgrade of Malaysia’s outlook.
