PREVENTION AND CURE
Two decades after the Asian financial crisis, the region’s policymakers continue to build up immunity to ensure that history will not repeat.
Two decades have passed since the economic bubble burst and escalated into the 1997 Asian financial crisis, but vivid memories of the calamity linger to this day. The hard lessons learned have led policymakers and households alike to be more prudent as well as properly prepared for future turbulence.
Today, as the financial landscape continues to expand dramatically, with technological advances pushing beyond conventional boundaries, experts say prudential measures are still to maintain financial stability in time of volatility and uncertainty.
Having been through one of the worst financial meltdowns in history, many people in the region appreciate that the key lesson is to build immunity in preparation for any shocks that could potentially cause a new financial contagion or liquidity crisis. Consequently, Asian finance ministers and central bankers have forged close ties to build immunity and resilience as a safeguard against possible financial meltdowns and external shocks.
“While the Asian financial crisis could have caused an inward-looking response from the region and could have led it to permanently close its capital account to international trade and investment flows, this did not occur,” the Asean+3 Macroeconomic Research Office (Amro) said in its report assessing conditions 20 years after the tumultuous events of 1997.
“Instead, regional economies focused on reducing their external and fiscal vulnerabilities and on building up buffers against future potential crises. This improved macroeconomic management framework, particularly improving resilience and buffers against external shocks and allowing the region to reap benefits from intra-regional trade and foreign direct investment flows.”
Reeling from the liquidity squeeze suffered during the financial crisis, Asean member countries, along with China, Japan and South Korea signed the Chiang Mai Initiative Multilateralisation (CMIM) in 2000, a currency swap agreement allowing signatories to borrow dollars from one another in times of need.
The CMIM now has an overall pool of US$240 billion, but just 30%, or $72 billion, can be released with an agreement among the Asean plus three alone. The remaining 70% can be deployed only after a recipient country enters an International Monetary Fund (IMF) financial assistance programme.
To prepare for a possible financial crisis, there is a need to increase the portion of the Chiang Mai pool that is not linked to the IMF in order to empower countries and make them capable of a firmer response to a crisis, said Masatsugu Asakawa, Japan’s vice-minister of finance for international affairs.
“We need to enhance the usefulness of the delinked portion by increasing the share from the current 30% to 40%,” said Mr Asakawa.
Similarly, Asean has been calling for an increase in the rapid-response portion of the pool, citing the amount of time the IMF generally takes to make a decision.
Coordination must also not be overlooked, said former Malaysian central bank governor Akhtar Aziz Zeti, reiterating that such an approach is a key tool for managing crises.
Assessing regional risks and sharing countries’ experiences with different policy options can help the region to address issues collectively and coherently, said Mrs Zeti.
Even though regional economies have managed to weather external challenges through earlier reforms and structural adjustments, domestic monetary conditions will tighten as global central banks begin the process of reducing the supply of cheap credit. The period since Donald Trump’s US presidential election victory has already tested emerging markets with a sharp rise in US Treasury yields, expectations of a faster pace interest-rate increases by the US Federal Reserve, and a sharper appreciation of the dollar.
The risks that policymakers see going into 2017 include disorderly portfolio reallocation, subsequently leading to large capital outflows, excessive foreign-exchange fluctuations, or a loss of international reserves.
In light of these intensifying risks, Japan recently signed a currency swap agreement with Thailand and Malaysia at the 50th annual meeting of the Asian Development Bank in Yokohama. Under the agreement, Japan and the two Southeast Asian countries will be able to swap their currencies with US dollars bilaterally when needed, with the size of the facility set at a maximum of $3 billion.
A currency swap deal allows signatories to borrow dollars from one another. Being the global reserve currency, the dollar tends to run dry in times of financial crisis. Asia had a firsthand experience of this harsh reality during the 1997 regional crisis and the 2008 global financial crisis.
“Looking back at 2008 [when the global financial crisis unfolded], there were no dollars in the market and with the dependence on dollars, that caused problems,” said Japanese Finance Minister Taro Aso.
“The yen is a stable currency and I think it could play a huge role. We had a strong request from Asian countries [about the yen-swap framework] and we thought it was important to answer those needs.”
Japan’s push for a yen-swap framework comes as Asean countries look to become less dependent on the dollar. The world’s third largest economy also has bilateral swap agreements with Indonesia, the Philippines, and Singapore.
Mitigating a liquidity squeeze is crucial. Japanese officials have underlined the importance of this point by proposing for Asean to make it possible to withdraw Japanese yen under existing bilateral swap deals, should Asean countries request to do so. Japan also hopes to establish a new type of bilateral swap arrangement worth up to $40 billion to address short-term liquidity problems.
In any case, a series of structural reforms are still needed to strengthen the resilience of countries’ financial systems against shocks and improve the balance sheets of their corporate and financial sectors.
As recommended by the Amro, the reform agenda can encompass many areas, including financial and corporate restructuring, adoption of new laws to address corporate bankruptcy and governance, improvement of labour market flexibility, strengthening of market competition, and easing of foreign ownership restrictions.
Looking back at 2008 [when the global financial crisis unfolded], there were no dollars in the market and with the dependence on dollars, that caused problems. The yen is a stable currency and I think it could play a huge role. We had a strong request from Asian countries and we thought it was important to answer those needs” TARO ASO Japanese finance minister