FX markets appropriately pricing EM currency risk.
Capital flows uphill when it goes from countries that don’t have it to countries that don’t need it. Private capital floods out of America, where savings are low and into Asian Tiger economies where they are high. These flows do not in any way reflect macro-economic savings surpluses or shortfalls, money simply moves where returns are likely to be highest – which is in well run Asian economies. When it gets there it is bound to cause trouble, particularly for countries like Thailand that have resisted nominal exchange rate increases. Excessive foreign currency reserve growth, which cannot effectively be sterilised, leads to overheating and inflation. Real exchange rates appreciate and current accounts dive deeply into deficit. Crises and recessions follow when investors finally lose confidence.
Asia crisis begins in Thailand in July 1997