Ghosts of 1997 financial crisis return to haunt Asia

malaysia ringgit

In Asia, it's starting to look a bit like 1997.

Eighteen years after a financial crisis ripped through Asia, toppling governments, bankrupting companies and generally wreaking havoc, the region's currencies are once again coming under intense pressure.

Malaysia and Indonesia, in particular, appear to be in trouble. Over the past year, the Malaysian ringgit has lost nearly a quarter of its value against the dollar. Indonesia's rupiah has shed 15% over the same time period. Both currencies are now at their weakest level since the Asian financial crisis, and losses continue to pile up.

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Adding to concerns, Beijing has devalued the yuan in recent days, a move that some think was designed to boost the country's exporters. If that view finds traction among regional governments, retaliatory actions could spark a currency war in the region, further degrading the rupiah, ringgit and other vulnerable currencies.

While investors are keeping a close watch, they're not yet in a full-fledged panic. That's because most countries in Asia now have large war chests of foreign exchange reserves, which can be used to defend their currencies. Regulation has improved since 1997, and debt levels have dropped.

Daniel Martin, an analyst at Capital Economics, said that with the exception of Malaysia, which has high levels of U.S. dollar debt, currency weakness is not "a major risk to any economy in the region."

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There's more to worry about than just currencies, however. China's economy -- which creates huge amounts of demand in Asia -- has stumbled in recent months. Countries that export to China, including Taiwan, Malaysia, South Korea and Vietnam, could be in trouble as a result.

Meanwhile, many emerging economies' engine of growth is commodities. But prices of oil, copper and soy have also fallen off a cliff over the past year. Malaysia, for example, is a major oil exporter. Indonesia sends huge amounts of coal, palm oil and rubber abroad.

Many experts also expect the U.S. Federal Reserve to raise rates in September, something it hasn't done since 2006.

Related: Why did China crash the yuan

That would increase borrowing costs -- interest on loans -- for companies in emerging markets. It would also make American debt more attractive to investors, meaning emerging market debt could see a sell off.

Sofyan Djalil, Indonesia's coordinating minister for economics, told Reuters in early August that he wants the Fed to act quickly.

"I wish the Fed will decide and the sooner is better for Indonesia because the uncertainty gives ... the financial market a good legitimacy to play around," Djalil said.

Officials in Indonesia and Malaysia, as during the crisis 18 years ago, can still control their response under pressure. If protectionism and political dysfunction can be avoided, the countries stand a much better chance.

But it won't be easy. Malaysia's prime minister, Najib Razak, has come under scrutiny in recent months following allegations of corruption. His Indonesian counterpart, Joko Widodo, has expended much of his political capital since taking office a year ago, with few economic reforms to show for his efforts.

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