Here’s an interesting predicament.
According to the Financial Times (paywall), HSBC Economist Frederic Neumann sees a lot of red flags hanging over Asia ex-Japan at the moment. To be specific, he sees a nasty revisit to 1997’s Asian crisis if inflation in the region gets out of hand.
Apparently, debt servicing costs in emerging Asia have continued to rise despite a multitude of rate cuts – a worrisome data point given the region’s record-high debt levels.
No need to hit the panic button just yet though. As the FT says, in the short-term this shouldn’t be a problem, but as Neumann points out, interest rates have to rise sometime, and worse still is this:
“(H)aving crunched the numbers, he says that the ratio of debt servicing costs to GDP is nearing a level comparable of that to just before the Asian Financial Crisis of 1997.”
Apparently, a 100 basis point rise in emerging Asia’s interest rates would nudge costs halfway up to 1997 levels. A 300 basis point rise? That might put Asia in a tizzy and make headlines worldwide.
A sure-fire way for this to happen is for inflation in the region to get out of hand and force central banks to begin tightening. With inflation at their current levels however, that seems highly unlikely. Sweet.
Photo credit: Andy Maguire via Flickr