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Hasenstab: how the Asian Financial Crisis changed EMs

Hasenstab: how the Asian Financial Crisis changed EMs

Around 20 years since the start of the Asian Financial Crisis (AFC), emerging markets have responded and made themselves more resilient, according to Franklin Templeton’s Michael Hasenstab.

Hasenstab currently has 4.60% of the Templeton Emerging Markets Balanced fund allocated to Indonesia. It is one country where the outlook has improved since the AFC.

‘After living through the crisis’ devastating effects, Indonesia moved to an ambitious structural reform program that sought to strengthen its economy, balance its growth drivers and accelerate domestic development.

‘These ongoing structural reforms have fortified its underlying economy and positioned it better to deflect external shocks.’

Hasenstab said it’s not just ‘mere speculation’ as to whether the structural reforms worked, and that said reforms have been actively tested by real shocks over the last decade.

‘In 2008, the global financial crisis roiled economies around the world. However, Indonesia had far fewer external liabilities and a more balanced, domestically diversified economy than it did in 1997. Consequently, there was no repeat of the AFC in Indonesia this time around, despite the risk-off currency depreciations across emerging markets.

Concurrent with a substantial decline in oil prices, Hasenstab said markets began to fear a contraction in China’s economy in 2015 as its rate of growth moderated, with a collapse in oil prices driving investors out of emerging markets, leading to broad currency depreciation across the board.

‘Indonesia’s economy remained resilient throughout these events, averaging year-on-year GDP (gross domestic product) growth around 5%. Twenty years ago it would have been difficult for countries like Indonesia to weather a commodity price shock, an exchange-rate shock and a trade shock all at the same time.

'But today, many countries have greatly reduced these external vulnerabilities. We see highly compelling value in Indonesia’s local-currency market, and the country’s longer-term prospects continue to look promising.’

Market expansion

Elsewhere, Hasenstab said one of the most important steps many emerging markets have taken over the past decade is the expansion of domestic financial markets.

‘In the past, the lack of a strong domestic investor base often magnified the consequences of financial volatility.

‘In contrast, domestic institutional investors today are far more prevalent in many domestic markets, and often act as a stabilising force when asset prices collapse by stepping in to buy assets when foreign investors may be fleeing them.’

Overall, Hasenstab said the transition to domestic funding has improved financial resilience with many countries, where a number of changes have been enforced such as keeping exchange rates flexible and maintaining substantial stocks of foreign exchange reserves.

'While the AFC had painful consequences 20 years ago, the lessons of that crisis have guided many countries toward far better solutions today,’ he added.

The Templeton Emerging Markets Balanced fund returned 3.57% in US dollar terms, over the three years to the end of June 2017. This compares with a 9.91% rise by its Citywire-assigned benchmark the LCI MSCI EM TR US/JP Morgan EMBI Global (50:50) over the same time period.

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