‘THE NEXT FINANCIAL CRISIS WILL BE BIGGER’: MALAYSIA EXPERTS START TO TALK OF ‘WHEN’ – NOT ‘IF’

The increasing pace of US rate hikes and fears of a global slowdown are fuelling growing concerns over the next financial crisis.

This time, the trajectory suggests a crisis similar to the emerging market (EM) crisis of 1997/98, which centered on Asian EMs. Debt-fuelled economies are most at risk, especially those with high corporate debt denominated in US dollars while rising household debt can be another stranglehold. Global debt has hit US$240bil, an increase of 43% from 10 years ago.

With talk of possible recession, a synchronised global slowdown will make matters worse as debt servicing will be a problem.

“Rates going up is manageable. If there is a recession, the economy slows down and debts turn bad, there will be no jobs and less affordability. The next financial crisis will likely be bigger than the one in 2008 which occurred when the credit market froze up.

The final target may be a so-called fairer trading system and the ‘beggar thy neighbour’ policies will mostly backfire and drag many people down.

Protecting the trade balance of a large economy through imposition of tariffs and other means, leads to domino effects on countries’ supply chains, trade and investments and eventually cause a slowdown.

It is not as simple as the famous American quote: “It is our currency but your problem.’”

China’s factory gauge dropped more than expected last month, with trade war dampening outlook. South Korea, which saw an unexpected dip in exports last month, is likely to be hurt by this titfortat trade war, as it is a major exporter of parts to Chinese factories.

The problem is not just complicated by rising rates and trade war, the quality of debt has also deteriorated, as investors had turned to more risky high yield junk bonds for better returns. Covenantlite junk bonds that have few protections written into their deal documents, have become popular.

“There may be a panic rush out of narrow exits if a crisis ever begins,’’ said Pong Teng Siew, head of research at InterPacific Securities.

Strong appetite for junk issues has lulled investors into such risky instruments, thinking that there should be enough liquidity to absorb their selling if the market turns bad.

“The trouble is that such liquidity has the habit of drying up just when you need it most.

“So, investors may find themselves with massive losses,’’ said Pong. Debt-fuelled growth that leads to unproductive investments can spark a financial crisis. For too long, governments have relied on low interest rates to boost spending and lending.

“We have to quickly abandon debtfuelled growth before the postcrash recovery runs out of steam,’’ said Lee Heng Guie, executive director of Socio Economic Research Center.

The pressure is piling with the dollar strengthening, global liquidity starting to tighten on US rising rates and ending of central bank bond buying to support markets and the economy. One danger sign is the possible inversion of the Treasury yield curve, where shorter term yields are higher, indicating little confidence in the near term economy. Recession is usually on the cards.

Any Fed move to slow down its rate hike, due to the impact of trade war or recession, could slow down the inversion of the yield curve. “(When the curve inverts), the banks’ business of funding longer term lending with short term liabilities becomes unprofitable,’’ said Pong. A credit crunch emerges. With banks stronger now; a banking crisis similar to that of 2008 is unlikely. There are worries of a potential tech bubble.

“The likely bursting of the tech bubble, preceded by an EM crisis, echoes eerily of the 1997/98 (Asian financial) crisis, after which came the bursting of the dotcom bubble,’’ said Pong.

Goldman Sachs, which disagrees on the tech bubble, mentioned solid earnings of tech giants and opined that tech’s dominance is far from over. High valuations are supported by rapid earnings growth which may not be the case, going forward.

“Mobile penetration has reached its sales limits in the most populous markets like the US and China. It is coming up strongly in countries where mobile broadband is not in such wide usage. The market is likely not growing as fast anymore,’’ said Pong.

“Earnings growth will be slowing down.’’

-Columnist Yap Leng Kuen hopes things do not fall apart; the centre cannot hold.

– ANN

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