Ten years after its devastating financial crisis, Asia has in many respects bounced back: its economies are richer and have a bigger share of the world economy than in 1997, when the crisis – sparked by a plunge in the Thai baht – dragged the region into recession.
Asian governments today have far more balanced accounts, higher foreign exchange reserves and less debt, while the region’s corporations are, by and large, better financed. Last year, developing Asian economies as a whole grew at an astonishing 8.3%.
“I think the world today is very different than a decade ago,” Thailand’s central bank governor Tarisa Watanagase tells Emerging Markets. Back then, banks and companies across the region took on large amounts of short-term foreign currency external debt, partly because of exchange rates that had been effectively pegged to the dollar – a fact that encouraged widespread external borrowing that led to excessive exposure to foreign exchange risk. Tarisa says that financial sector improvements since have helped to change the picture dramatically. (For a detailed overview of the region's bond market see A dry season for Asian bond issuance)
“Risk management has taken root in the mindset of bankers. The way central banks approach commercial banks has been overhauled,” adds Tarisa, whose country was at the epicentre of the turmoil that slammed the region a decade ago.
Fears of a return to the dark days of 1997 resurfaced momentarily last December when Thailand imposed capital controls in a bid to curb appreciation of the baht. Coming three months after a military junta seized power, the move spooked foreign investors and sent Thai stocks plunging nearly 15% in one day, before the government partly reversed its decision. Yet regional markets and investors largely shrugged their shoulders, suggesting considerably less anxiety about contagion than before.
On the macro level, the capacity for countries across the region to withstand sudden domestic and external shocks has vastly improved; the large build-up of foreign exchange reserves also acts as a cushion against such events.
Governance
Yet profound concerns remain. Ten years on, the growth record of the five worst-hit countries is slipping by an average of 2.5% a year, according to the ADB. Many countries suffer from weak investment in industry and infrastructure and a growing rich-poor gap; 29% of the region’s population live on $2 a day.
In a recent op-ed, former US treasury secretary Larry Summers and Unctad secretary-general Supachai Panitchpakdi wrote that “tempering this overall positive picture is the fact that some of the fastest-growing countries will still have large numbers of poor people. Asia will continue to have many low-income or fragile economies with large development challenges.”
Anwar Ibrahim, Malaysia’s deputy prime minister and finance minister at the time of the crisis, believes that Asia is still open to speculative attacks from investors, then as now, largely as a result of institutional failure. “The central issue was then and still is governance – ensuring that the market economy is in place together with institutional governance,” he tells Emerging Markets. “In any period of euphoria like today, people tend to ignore the negative possibilities. While we see some changes, the system of governance has not been fully repaired or strengthened. Corruption is now endemic, and institutions have been weakened across the region. There’s a reluctance on the part of political leaders to make the adjustments.
“No financial system or economic order can be sustainable in the long term if you condone these kinds of excesses and cronyism,” he adds. Anwar, who spent five years in jail on sodomy and corruption charges, and who is now launching his bid to re-enter local politics, rejects the view – still held by his erstwhile boss Mahathir Mohamad [see box] – that foreign speculators are exclusively to blame for the crisis.
“The entire blame is on [currency] speculators but I don’t share the view that the major part of the blame is on them. Due to weak fundamentals, we were vulnerable to speculative attacks. The lack of proper institutions and accountability means we have not progressed much since then,” he says.
When the crisis struck, investors pulled more than $100 billion out of five East Asian countries – Thailand, Korea, Malaysia, the Philippines and Indonesia – in 1997 and 1998, about 5% of the region’s GDP each year, leading to recessions, huge currency devaluations, soaring inflation and a crash on stock markets in the five crisis countries.
UC Berkeley economist Barry Eichengreen agrees that, while Asia has “gone a long way to addressing macroeconomic problems, structural problems remain.” Chief among them, he tells Emerging Markets, is corporate governance. “By any objective measure, the kind of accounting firms release – the means by which investors can assess governance of firms – Asian countries have fallen behind even Latin America,” he says. “This was not true 10 years ago.”
Eichengreen stresses the continuing scope for poorly allocated investment. “One of the problems that set the stage for the crisis 10 years ago was uneconomical decisions by firms interested in skyscraper building rather than sound investments. Those problems have not gone away.”
Volatility
Risk has not gone away, as the possibility that there could be a dramatic shift in investor sentiment remains. “One could imagine a dozen different triggers for such an event,” says Eichengreen. The global rout of financial markets that followed a 9% slide in the Shanghai stock market on February 27 was a sharp reminder of this.
Tarisa admits that the return of volatility presents new challenges for the region. “The world today is a lot more volatile than previously, even though you have a risk system in place,” Tarisa warns. “Even with good policies in place today we need to be very vigilant, very observant.”
Global financial markets are heading into choppy waters as the world’s economy slows down and interest rates rise, increasing concerns about the health of the weakest market players. A sharp US slowdown or the prospect of a hard landing for the Chinese economy could wreak havoc on markets and open the door to a return of Asia’s financial demons.
The debate about the extent to which the world has decoupled from the US economy rages on. Ken Rogoff, a Harvard professor and former IMF chief economist, believes Asia is not immune to a US slowdown. “I don’t buy the decoupling story at all,” he says. “Asia is clearly vulnerable. If we see a more serious US slowdown, it would be very tough on Asia.”
Analysts have warned that the world’s biggest economy could be in line for stagflation – slow growth coupled with upward pressure on prices – as US growth fell to 1.3%, in the first quarter of 2007, its lowest in four years.
Says Tarisa: “We should be grateful we are facing this volatility with much stronger foundation. Ten years ago, the impact would be much worse.”