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Opinion

Asia can survive the Turkish storm

But if Trump's trade war worsens the turmoil, contagion risks will grow

Turkish President Recep Erdogan imitating Malaysian Prime Minister Mahathir Mohamad from 1997 is not the only parallel between the Asian crisis and today's turmoil. (Source photos by Getty Images, Reuters)

If any world leader seems inspired by Mahathir Mohamad's return to power in Malaysia it is Recep Tayyip Erdogan.

As short-sellers stalk Turkey's economy, President Erdogan lashes out at markets for financial misjudgements of Ankara's own making. On Monday, he accused "economic terrorists" and a "network of treason" of plotting against the Turkish people and called for stricter security laws to fight them.

That is straight out of Mahathir's 1997-1998 playbook. As prime minister during the Asian financial crisis, Mahathir labeled speculators "traitors" and "unscrupulous profiteers" who were "impoverishing" Malaysia. He called for currency trading to be made "illegal."

It "does seem that Mahathir would have a solid copyright claim, and that at the very least Erdogan should have to answer some serious plagiarism charges," says Louis-Vincent Gave of Gavekal Research.

Erdogan channeling 1997-era Mahathir is only one link between the Asian crisis and today's turmoil. Two other parallels are particularly worth exploring. First, Asia is quickly finding itself once again on the front lines of contagion fears. The Indian rupee, Indonesian rupiah and Philippine peso are all having a rotten week. Secondly, as with Malaysia back then, no one is likely to rush to Turkey's defense should the lira's woes deepen. While there is plenty of blame to go around, it was U.S. President Donald Trump's punitive tariffs that kicked off an accelerating run on Turkish assets.

Clearly, if Turkey had spent the last five years strengthening the financial system, taming inflation and reducing debt, its currency would not be down an eye-popping 66% versus the dollar this year. Ankara's last brush with crisis came in 2013 amid the Federal Reserve "taper tantrum." Back then, Morgan Stanley published a "Fragile Five" list that no government wanted to be on: Brazil, India, Indonesia, South Africa and Turkey.

Admittedly, India and Indonesia have done a lot since 2013 to reform. Both have been opening their economies further, strengthening the national balance sheets, curbing graft, amassing currency reserves and increasing transparency.

But as the U.S. president blows up the global trading system, investors are still pointing the finger at twin-deficit economies -- those carrying both budget and current-account imbalances -- and away from better-balanced rivals. That puts India and Indonesia (and the Philippines) in the same boat as Turkey. All stand at a disadvantage to China, South Korea and Taiwan, which have big external surpluses. Hence big sell-offs in the rupee (down 9.4% versus the dollar this year), rupiah (down 7.9%) and peso (down 7.3%).

To be sure, 1997 is unlikely to happen again. Developing Asia has come too far in liberalizing financial systems, floating currencies and cultivating domestic private sectors. Yet vulnerabilities abound. Much of Asia is still too reliant on exports, and therefore directly in harm's way in the Trump era. Others are too susceptible to market chaos thanks to chronic balance of payments troubles.

Given all the heavy lifting Asia has done these last 20 years, it is well positioned to withstand

shocks emanating from Turkey. But there is no telling what Trump might do next. And if the financial market turmoil gets bad enough, could punters revert to grouping global emerging markets together? They might.

Though India and Indonesia are far less fragile today than they were, the odds of skittish investors connecting dots remain high. It hardly helps that "the situation in Turkey is likely to get worse before it gets better," says economist Nicholas Brooks of Intermediate Capital Group.

In 1997, remember, no one came to Mahathir's rescue. That was partly by his choice: he had no intention of accepting the harsh reforms the International Monetary Fund demanded of Thailand, Indonesia and South Korea in exchange for bailouts. Nor did the IMF and U.S. Treasury Department like Mahathir's anti-market rhetoric, capital controls or him pegging the ringgit to the dollar.

Turkey may be similarly devoid of benefactors, increasing contagion risks. Trump's America seems happier destabilizing Turkey than saving the day. Trump is angry over Turkey not releasing an American pastor in detention there for two years. It is hard to see the IMF cobbling together an aid package with the White House kicking Erdogan's economy while it is down.

Besides, Gave says, Team Trump could be actively courting emerging-market turmoil. "As Turkey hits the skids, and likely infects European banks, U.S. Treasuries get bid up and the U.S. budget deficit gets funded on the cheap," he explains. "So, there may be financial as well as political reasons for the U.S. to let Turkey twist in the wind."

Meanwhile, China may be hard-pressed to help Ankara. Growth is slowing at the same moment grumbling is rising over the costs and risks of President Xi Jinping's huge "Belt and Road" initiative. Trump is adding to the strain by taking direct aim at Xi's "Made in China 2025" dream. Beijing's pockets may not be as deep as they were in, say, 2013.

Europe may assist only if its own financial interests are at stake. "The question is whether mass defaults of Turkey's corporate borrowers, with or without an all-out sovereign debt crisis, will destabilize the eurozone's already fragile banking sector," says Carl Weinberg of High Frequency Economics. Yet with Italy's troubles festering under the surface, Europe may opt to hold its bailout fire.

Saudi Arabia could always step up, given Turkey's sizable Sunni population. But then, Erdogan's outreach to Iran and Russia is winning his regime few friends in Riyadh. Tesla's Elon Musk, it follows, may have a better chance of scoring a Saudi bailout than Ankara.

Turkey's troubles are not going away, though. Not when its unwillingness to tame imbalances collides with a global trade war. You would thinkErdogan would know better after his long years in power (He was prime minister from 2003 to 2014 before becoming president). But it seems he doesn't.

The lira's free fall does not necessarily spell trouble for developing Asia. But coming amid an escalating trade war, who really knows where a financial storm might hit? This is a moment for India, Indonesia, the Philippines and a Malaysia that Mahathir is once again helming to take contagion risks seriously. That means battening down the hatches to remind investors why they are right to bet on Asia.

Central banks must be nimble and creative about protecting domestic economies and markets. Fiscal policymakers must narrow budget and current-account deficits. Leaders must hasten efforts to create domestic demand-led growth drivers that cushion economies from periodic market chaos.

A necessary precondition is looking in the mirror and owning how much remains to be done to strengthen the global economy. If there is any lesson Erdogan should heed from 1997 is the futility of playing the blame game. But then, Asia too must keep learning from the past to stop it repeating.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.

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