The Economy Hits Bottom – practice
Economy 
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During Phase III, Asian currencies appreciated on the back of the liquidity-based rally. However, during Phase IV, trade and current account surpluses peak as import demand hits bottom. This is of course good news for the domestic economy, however it temporarily reduces the beneficial liquidity effect on local assets and local currencies. For this very reason, just as Asian economies bottomed around the turn of 1998/99, so Asian currencies started to weaken again, giving back some of the ground they had gained during the second half of 1998. More specifically, the Thai baht, which had risen to a high against the US dollar of THB35.65, fell back to around 38–39. The same kind of thing happened to the Indonesian rupiah, the Philippine peso and the Singapore dollar. The Malaysian ringgit was pegged to the dollar on September 1, 1998 at 3.80, hence it did not experience this renewed setback, nor for that matter did it experience the fundamental recovery which most Asian currencies subsequently enjoyed. In the case of Brazil, Phases III and IV happened much more quickly, partly because Brazil, unlike in Asia, was alone in its devaluation and not affected by region-wide devaluation. In addition, it continued to benefit from strong demand for its exports. Finally, at the corporate level, there was not nearly the same degree of structural dislocation, as Brazilian corporates were by then well aware of what had happened to their Thai and Indonesian counterparts and had already begun to hedge external liabilities long before the real’s final devaluation in January 1999. The case of Russia is special for many reasons, not least because several key elements of the Russian government were not informed of the decision to devalue the rouble and default on the domestic debt market until the actual announcement was made. In addition, the size of the black market economy relative to the real economy, and the seemingly persistent state of chaos in the Russian government, has somewhat distorted price and economic development as anticipated by the model. Nonetheless, the key aspects of the model — the turnaround in the trade account, the defeat of inflation, the liquidity-based rally, still held true. So Phase IV sees a decidedly more bumpy ride for emerging market currencies than Phase III. Yet, economic stabilization, all else being equal, gradually becomes economic recovery — the person eventually picks him/herself off the floor after lying there in pain after the fall.
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