Most of the prominent figures in Asia's financial sector are still optimistic about future economic trends at the moment. Generally, they are of the opinion that after rounding off a few percentage points, global economic growth in 2018 is a simple issue about numbers. Their optimism might be challenged, however, when they are faced with a rapidly changing financial situation that was not faring well to begin with. In an earlier analysis of the wave of protectionism sweeping across the globe, Anbound Think Tank predicted that there will be a global dollar shortage. Here, Anbound reiterates this warning: the dollar shortage crisis is close at hand, and it is likely that it will cause Asia to suffer another financial crisis. This crisis is will have far-reaching and complicated consequences as its scale is estimated to be similar to that of the Asian financial crisis in 1997.
Bleak as this prognosis may be, it is based on two main reasons:
Firstly, Asian countries have had to pay twice as much in dollars for oil as a result of oil prices rising. Since January this year, oil prices have already risen by 20% with prices approaching 80 USD per barrel, while previously, the highest price per barrel of oil since 2014 was only 40 USD. Due to the fact that practically all crude oil is priced and traded in US dollars, in addition to the fact that the dollar is getting stronger by the day, it is likely that many Asian economies will have to take the brunt of this increase in oil prices, especially those that are heavily dependent on oil imports, such as China. Ultimately, rising oil prices will lead to an overall increase in prices and contribute to inflation. Consumers and businesses alike will likewise be hit negatively as consumption and production costs increase accordingly. Things will become increasingly challenging for everyone, but businesses especially will be ever more burdened.
In reality, Asia is the most vulnerable to the impact and effects of soaring oil prices. According to statistics, the global oil usage is 100 million barrels per day, more than 35% of which is consumed within Asia Pacific. What's more, this proportion is increasing steadily alongside the progress in urbanization. At the same time, Asia is still the region that produces the least crude oil—its production makes up less than 10% of the global output—and is thus heavily dependent on oil imports. Considering how little leverage Asia has in this aspect, it will undoubtedly be the first to be affected by fluctuations in oil prices.
Currently, China is the largest crude oil importing country both in Asia and in the world. In April, China's crude oil imports were as high as 9.6 million barrels per day— almost 10% of daily global consumption. This means that based on current oil prices, China's expenditure on oil imports is 768 million USD daily, 23 billion USD monthly, and as much as 280 billion USD annually. China is not alone in this, however, for countries like India and Vietnam find themselves in a similar situation. Not only with so high dependency of oil imports, these countries do not possess enough wealth to effectively absorb any sudden increase in prices.
According to statistics provided by Reuters, in developing economies like India, Vietnam, and the Philippines, most people spend about 8-9% of their income on fuel. On the contrary, those living in rich countries like Japan and Australia spend only 1-2% of their income on fuel. Countries with less wealth per capita are thereby more vulnerable to the impact of rising oil prices and the resulting social unrest.
Secondly, US bond yields are rising sharply alongside the increasing value of dollar assets, people are more compelled to hold on to their dollar assets. In turn, this makesa dollar shortage and consequently, a depreciation of local currencies. Additionally, the 10-year treasury yield of the US, which already rose above 3% a while ago, is currently hovering around the highest point it has reached in seven years. This is closely connected not only to the performance of the US economy in the second quarter, which has been growing ever stronger, but also to the policies of the Federal Reserve. From a long-term perspective, all of this is also related to the wave of trade protectionism sweeping across the globe; we have been seeing more and more USD flowing back into the US market ever since the introduction of protectionist policies in the US.
Because these issues directly inform the US Dollar Index rising continuously as a result. Consequently, the depreciating values of Asian currencies and the market assets in other emerging markets have placed their corresponding economies under ever more pressure. On a related note, an investigation by the financial market has revealed that the bear position of the Indian rupee has risen to its highest since last August. Even though it has not fluctuated against the dollar, the Indian rupee, like the Chinese renminbi, has continued to depreciate. Indeed, it has already dropped by almost 6% to date this year, making the outlook for India's current account deficit and fiscal deficit even worse.
The situation is also rather dire in ASEAN, which was hit the hardest by the past Asian financial crisis. For one, the Indonesian rupee has already depreciated by about 3.6% to date this year, and future prospects are none the brighter. Indonesia also recently announced that this April, it experienced the largest trade deficit it has seen in four years. It is also worth noting that the stock and bond markets of Indonesia were among the Asian markets greatly hit by capital outflow when the USD was rising steadily. Under all of these circumstances, ASEAN countries will not be able to cope for long.
As for Malaysia, the newest development is that Mahathir has returned to power as the newly elected prime minister. Analysts at Anbound Think Tank predict that while he had a rather tough stance towards China during his campaign period—as perceived by most people in China. The new leadership of Malaysia is facing problems such as currency depreciation and the dollar shortage. In fact, some of the reasons why Mahathir stepped down from the prime minister many years ago was due to pressure resulting from the Asian financial crisis, debt, and the depreciation of the Malaysian ringgit. Considering the current conditions of the financial market, things aren't too different; for one, it is obvious that any hedges that the Malaysian ringgit will be bullish have long been thrown out the window.
Even Australia can not been excluded from all this; it is likely that the Australian Dollar is about to take the plunge soon, and the country also has inextricable ties with the US. Currently, the 10-year treasury yield spreads of Australia and the US have already widened to the highest level since the early 1980s, and this has led investors to sell off their Australian Dollars in droves in exchange for US Dollars. What's worse, the Federal Reserve has quickened the pace to hike interest rate, and US Treasury yields exceeded 3%. All of these circumstances are placing an incredible amount of pressure on the Australian Dollar.
The obvious question then is why Australia does not increase interest rates to protect the Australian dollar if the Federal Reserve keeps raising its interest rates. Well, it isn't really a matter of whether or not Australia wants to do so, rather, its economy simply cannot handle an increase in interest rates. And as before, other Asian countries are faced with a similar predicament; from China to Hong Kong, from Australia to ASEAN, they are all more or less in the same situation. Ultimately the nature and aim of trade protectionism, and accordingly, the policies of the Federal Reserve, is to make the US economy great again. This brings with it the risk of another Asian financial crisis.
The growth of Asian economies in 2018 would be severely affected by such a crisis should it ever occur. Among some of the things that will happen are a steep depreciation in Asian currencies, outstanding debts, a more hostile business environment, as well as tighter funding. Eventually, all of this will lead to social unrest and political instability. Overall, the phenomena discussed here are all interconnected, and why it is crucial for us to ponder over the trends that might lead to another Asian financial crisis.
