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Rising US Interest Rates Won’t Trigger Another Asian Financial Crisis

The ASEAN+3 economies are stronger and more resilient today than they were in the late 1990s. As a result, tighter US monetary policy may lead to higher borrowing costs and trigger portfolio outflows similar to the “taper tantrum” of 2013, but a full-blown 1997-style financial crisis in Asia is unlikely.

SINGAPORE – Hawkish shifts in the US Federal Reserve’s monetary policy have often led to heightened financial and economic stress in emerging economies. In the early 1990s, the Fed raised interest rates preemptively to curb inflation, precipitating the 1994 Mexican “tequila” crisis. In 2013, the Fed signaled its intention to tighten monetary policy, resulting in the major emerging-markets sell-off known as the “taper tantrum.”

Given the region’s history, one might expect that policymakers in the ASEAN+3 countries – the ten members of the Association of Southeast Asian Nations, together with China (including Hong Kong), Japan, and South Korea – would be particularly anxious about the Fed’s increasing hawkishness. Indeed, the Fed’s recent efforts to curb high and persistent inflation have prompted fears of a regional financial crisis, similar to the Asian financial crisis of 1997.

But the Fed’s actions will not have as much impact on the region as they did in the late 1990s. Today, the ASEAN+3 economies are stronger and more durable, making a 1997-style financial meltdown improbable.