As global inflation remains high and the Federal Reserve tightens monetary policy, Asia-Pacific economies, including emerging markets such as Japan, South Korea, and China, are generally facing greater external pressure, resulting in the depreciation of Asia-Pacific currencies. Currently, the U.S. dollar index has appreciated by more than 15% during the year, while the currencies of major Asia-Pacific economies such as the Japanese yen, the Korean won, and the Chinese renminbi have been depreciating. This, in turn, has also brought about volatility in the capital markets of these countries. Emerging market currencies such as Vietnam and Indonesia are also declining, and countries with heavy debt burdens such as Sri Lanka have defaulted on their debts, resulting in an intensifying trend of "currency wars" in the Asia-Pacific region. Against this backdrop, there is growing concern that the 1997 Asian financial crisis may be repeated, and the economies of the Asia-Pacific region are facing a precarious situation.
Major economies in the Asia-Pacific region such as China, Japan, and South Korea remain stable, and the impact of currency depreciation is mainly reflected in the capital market fluctuations caused by asset value revaluation and the flow of international capital, which has not had a substantial impact on the real economy. However, Vietnam, touted as the "rising star" of Southeast Asia, sees significantly deteriorating market conditions. The Vietnamese dong has been depreciating continuously, and the Vietnamese stock market is also in turmoil. Since April this year, Vietnam's stock market has suffered a panic sell-off, falling from a high of 1,500 points to 1,063 points today, a decline of as much as 30% in half a year. Not long ago, the State Bank of Vietnam (SBV) announced that it will expand the daily trading range of VND against the USD from 3% above and below the central price to 5%. The move by Vietnam's central bank shows that it is more willing to tolerate further weakening of the currency to protect its foreign exchange reserves. According to an estimation by Maybank, Vietnam's central bank has used USD 23 billion in foreign exchange reserves to intervene in the market, making the current amount could slip to less than USD 90 billion. Under such circumstances, it is difficult for Vietnam to resist the general trend of the depreciation of the dong, which will further deepen the currency crisis in the Asia-Pacific region.
According to researchers at ANBOUND, the root cause of turmoil in Vietnam's monetary and capital markets also comes from within. Recently, some media reported that the arrest of a real estate developer in Vietnam triggered a run on the relevant banks, reflecting the chaos in Vietnam's real estate sector and the huge financial risks brought by it. As Vietnam's economy accelerates, the manufacturing industry continues to develop. This has led to a large amount of hot money pouring into the real estate market, making land and housing prices continue to soar. Property prices in Vietnam, as a result, are almost out of control. In the first half of 2022, Ho Chi Minh City, Vietnam's largest city, and Hanoi, the capital city, squeezed into the top ten in Asia, with Ho Chi Minh City rising by more than 20% in the first half of the year, with an average price of more than the equivalent of RMB 35,000. Since the beginning of this year, the Vietnamese government has set off a financial anti-corruption storm and stepped-up efforts to rectify the real estate market. Some real estate groups have collapsed one after another. In recent years, to cool down the real estate market, the Vietnamese authority has begun to tighten credit policies. This causes the bad debt ratio of banks to rebound, and the capital adequacy ratio to decline, while the financial industry experiences multiple hidden dangers.
As far as the current economic situation in Vietnam is concerned, there are still no signs of crisis. According to the latest official news from Vietnam, Vietnam's economy has fully recovered from the COVID-19 pandemic, and its GDP increased by 13.67% year-on-year in the third quarter of this year. In the forecast released by the Vietnamese government on October 11, it is mentioned that Vietnam's economy will grow by 8% this year, higher than the previous growth target of 6.0%-6.5%. Among them, Vietnam's exports will increase by 9.5% this year to reach USD 368 billion, and foreign direct investment is expected to increase by 6.4%-11.5%, i.e., USD 21 billion to USD 22 billion. The Vietnamese government also said it would implement a flexible and prudent monetary policy for the rest of the year to ensure macroeconomic stability, targeting 6.5% economic growth next year and considering keeping inflation below 4.5%. Vietnam's total foreign trade in September was USD 58.74 billion, an increase of 8.4.% year-on-year. In the first nine months of this year, the country's total foreign trade volume was USD 558.52 billion, an increase of 15.1% year-on-year. In the first nine months, Vietnam's cumulative exports reached USD 282.52 billion, a year-on-year increase of 17.3%. In the same period, it enjoys a trade surplus of USD 6.52 billion. Both foreign trade and the internal demand of the Vietnamese economy itself still maintain rapid growth. Such circumstances determine that an economic crisis in Vietnam is not very likely.
The situation facing Vietnam is actually very similar to what it experienced in the previous Asian financial crisis. Other emerging market countries, including China, had a similar experience to varying degrees in the process of opening up. Lian Ping, the chief economist of Zhixin Investment Research Institute, recently pointed out that some emerging economies in Asia have huge capital outflow, where their balance of payments has deteriorated, the economic expectations have weakened, the financial system becomes weak, and the local currency exchange rate is facing the risk of sharp depreciation. Exports play a pivotal role in the growth of Asian economies. Asia's industrial chains are closely interconnected, and due to the weak level of technology and scientific and technological innovation, most of its export products are interchangeable. To enhance the price competitiveness of export products, the currencies of relevant countries may compete to depreciate to a certain extent in order to seize more market share.
This deepening currency crisis will increase financial risks and affect economic growth. Unlike countries that have felt previous crises, Vietnam remains healthy in its balance of payments, with no large deficit and manageable short-term external debt levels. Although the bursting of the bubble in Vietnam's real estate market will have a certain impact on economic stability, the possibility of a further spillover of this internal cause is not large. In terms of national situations, countries in the Asia-Pacific region face similar problems. The continued decline in China's real estate market also poses a threat to economic stability. According to the Global Liabilities Report recently released by the Institute of International Finance (IIF), nearly three-quarters of South Korean household wealth is closely linked to real estate. Statistics from the Bank of Korea show that in August this year, the South Korean housing purchase price index increased by 5.3% year-on-year, down 9.8 percentage points from the same period last year, and has fallen for five consecutive months. If the won depreciates, and inflation is high, with the central bank raising interest rates, coupled with the declining economy and the adjustment of the property market, this may trigger the problem of household debt in South Korea. These developments show that the deadliest threat to economic stability still lies within the major economies of the Asia-Pacific region.
Although the collapse of individual economies and sovereign defaults are inevitable, in the context of enhanced currency elasticity, Asia-Pacific countries have adopted the strategy of competitive currency devaluation, which has released the pressure of external shocks to a certain extent. At the same time, the economic scale of the countries in the region has been greatly improved, the structure of foreign exchange reserves and external debt has been significantly strengthened, and the ability to withstand external shocks has been greatly enhanced. In addition, the inflation problem is more serious in developed countries, while relatively light in the Asia-Pacific region. Therefore, although the currency crisis in the Asia-Pacific region has intensified, which has increased the turmoil in the capital market, and even dragged the economy into recession, if there is no problem with monetary liquidity, it is unlikely to trigger a financial crisis similar to the 1997 Asian financial crisis. For the Asia-Pacific region, hidden dangers such as real estate bubbles, capital market bubbles, and excessive debt leverage caused by rapid economic development are the main issues that they should seriously consider and deal with.
Final analysis conclusion:
Vietnam, once a rising star in Southeast Asia, is now experiencing significant deterioration in its domestic market. The bursting of the property bubble could lead to systemic risks in the financial system, hurting the Vietnamese economy and exacerbating the currency crisis in the Asia-Pacific region. However, in the context of great changes in the economic situation, the possibility of currency risk in the Asia-Pacific region evolving into a full-scale financial crisis is still unlikely. That being said, it is still necessary to pay attention to the hidden dangers caused by the bubble in the real estate and capital markets under high leverage.
