Preventing currency crisis

Content image - Phnom Penh Post
While a nation’s currency depreciation generally works favourably for the export industry of the given country, if the decline goes too far, import prices will rise steeply, potentially causing high inflation. AFP

Capital outflow from emerging economies has been seen led by aversion to high-risk investment prompted by fears over the spread of the novel coronavirus.

According to the International Monetary Fund (IMF), the capital outflow spurred by the coronavirus shock has amounted to about $100 billion. This sharp increase is said to greatly outpace the speed of the outflow that happened during the so-called Lehman shock of 2008.

It is striking that some countries have experienced significant currency depreciation. What matters most is to not let the situation develop into a currency crisis.

Brazil’s real has depreciated against the dollar by 30 per cent this year. The situation is severe not only in Argentina, which is mired in a debt crisis, but also in Turkey and South Africa. Each country should take all possible measures to prevent the infections and stabilise its economy and financial system.

While a nation’s currency depreciation generally works favourably for the export industry of the given country, if the decline goes too far, import prices will rise steeply, potentially causing high inflation. The burden of repaying foreign debt in dollars and other major currencies will also increase, accelerating the economic downturn.

A case in point is the 1997 Asian financial crisis.

Triggered by the sharp currency devaluation of the Thai baht, capital outflow also took place in Indonesia and South Korea, exerting a sudden brake on Asian economic growth.

In Japan, stock prices fell significantly, which became one of the factors exacerbating the recession and financial crisis that followed. The repercussions spilled over into countries including Russia and Brazil.

As globalisation has advanced since then, the nexus of economies and financial markets among countries has become further deepened. A situation must be avoided in which the turmoil in emerging economies will deal a further blow to the slowing global economy.

The IMF assumes a role in providing financial assistance to countries falling into a predicament. After the virus outbreak, the IMF made emergency financing to developing countries in Africa, among other nations. More assistance will be required from the organisation in the future to other states, including emerging economies that have larger economic scale.

Major countries also have a significant role to play.

The Asian financial crisis gave impetus to create the framework for the Group of 20 major economies (G20), joining countries such as China with Japan, the US and European countries. The Lehman shock placed even more importance on the G20.

However, solidarity among G20 members has been shaken as the confrontation between the US and China intensifies. In many parts of the world, restrictions on exporting medical supplies or foodstuff have been introduced. Preventing crises must be the primary role to be played by the G20.

In contrast to developed countries where the virus infections appear to have passed its peak, the infection cases continue to spread in many emerging countries. Their fragile medical system is believed to be one of the reasons that contributed to the ongoing situation.

How to deal with the coronavirus is a global challenge. It is important to work together to prepare for the second and third wave of infections through the sharing of experiences and knowledge with each country. The pressing issue is how to cooperate in such activities as developing vaccines and distributing them while curbing protectionist moves. The G20’s reason for existence is being called into question.

Editorial/THE YOMIURI SHIMBUN (JAPAN)/ASIA NEWS NETWORK