Is 1997 Crisis Going To Repeat in 2015?

In The Edge Weekly latest issue (29 Dec to 4 Jan), the paper has provided several points to support the belief that 1997 Crisis is unlikely to repeat in 2015. Key points provided are as follow:

1. USD240b pool protection of Chiang Mai Initiative. The article quoted Ambank Group forex strategist Wong Chee Seng saying that the 10 ASEAN countries enjoy the protection of the Chiang Mai Initiative (CMI). Note that CMI is a multilateral currency swap arrangement to address short-term financial liquidity problems. It was understood that CMI has a pool of USD240b which is intended as a means of support when any member country face a financial crisis.

2. Forex reserves across ASEAN countries are now much higher or multiple times higher as compared to 1997 crisis time (The Edge quoted UOB Research). Additionally, corporate leverage is lower and debt is mostly denominated in local currency.

3. Malaysia current account balance and trade balance are both still in surplus. This is compared with deficit level incurred in 1998. It was mentioned that even with low crude oil and continued capital outflow, the account balance and trade balance will narrow but still in surplus. (The Edge quoted UOB Research).

4. Ringgit to decline to 3.63 if Brent crude oil stay at USD60 per barrel by 3Q15. (The Edge quoted Maybank IB Research). On the positive side, Ringgit can strenghten to 3.20 if Brent crude oil recover to USD100 per barrel.

5. Timing of US interest rate hike to affect Ringgit. (The Edge quoted Ambank). Consensus expectation is by mid-2015.

My view:

Regardless of the timing when US will raise its interest rate, it is quite sure that 2015 will be the year that US will begin raising its interest rate. 1Q15 should be safe as US Fed Reserve should take a wait and see attitude in view of slow growth globally. However, if US GDP growth can continue its strength of more than 3.0% for several quarters, we shall see first interest rate hike latest by Sep-2015. When that happen, global money flow is likely to return to US and Malaysia bond likely to decline. Having said that, all points above are valid and we unlikely to see 1997 kind of drop.

Hence, expect a bearish market in 2015... looking at FBMKLCI to test 1500 by Jun-2015 or Sep-2015. It won't tumble to 300 points like 1997/98 but slight decline of 200 points seems likely at this juncture.