Twenty years on from the Asian financial crisis seems an opportune time to reflect on the subsequent re-shaping that took place within the region’s economies as efforts were made to achieve greater resilience and avoid repetition of the past.
Reflecting on the Asian crisis
By way of a brief recap, the crisis stemmed mainly from a rapid accumulation of debt, facilitated by a wave of carry trades (investors borrowed cheaply in dollars and invested it in higher yielding Asian economies that pegged their currency to the dollar). Whilst headline debt-to-GDP ratios were modest at the time, the reliance on foreign capital to support rapid economic expansion resulted in debt profiles that were heavily skewed towards short-term maturities and many countries in the region ran large current account deficits (government expenditure exceeded income). Once this ‘hot money’ withdrew - triggered by rising US interest rates - Asian central banks fought a losing battle to support their currencies, some eventually having to remove or loosen their dollar pegs (as was the case with the Thai Baht). Once floating, the currencies rapidly devalued, causing a downturn in the economy. Especially hard hit were Thailand, Indonesia, the Philippines and South Korea.
In the aftermath of these events, the IMF stepped in with a $40 billion stabilisation package, conditional on reforms to recipients’ financial systems, including the reduction of government spending to reduce deficits and the hiking of interest rates to restore confidence in their currencies. These austerity measures may have made the crisis more acute at the time; however, a subsequent period of strong and stable economic growth across the region appears to have vindicated the IMF’s methods.
Progress after the crisis
The legacy from this turbulent time is that Asian economies learnt to become more self-sufficient and not reliant on fickle foreign capital flows. Unhedged foreign currency debt was curtailed, foreign exchange reserves were built up, exchange rates became more flexible, regulatory oversight increased and corporate governance improved. This put them in good stead for the subsequent 2008 financial crisis that emanated from the West. Today, most economies in the region enjoy healthy current account surpluses (Singapore, Taiwan and South Korea now have some of the largest current account surpluses in the world) which act as a buffer when periods of capital outflows occur.
According to the Asian Development Bank, export demand was stronger than expected in the first quarter of 2017 due to the pickup in some of the developed economies, especially the US and Eurozone. The region’s gross domestic product (GDP) is forecast to expand by more than forecast in their previous outlook compiled in April. Developing Asia - which contains 45 Asia-Pacific countries excluding South Korea - is now expected to grow 5.9% in 2017 (up from 5.7%) and 5.8% in 2018 (up from 5.7%). Whilst this figure looks robust, it would mark the slowest annual growth rate in sixteen years.
We will now look at some individual economies.
Review of key countries’ recent performance
The Asian Development Bank upgraded China - the most important economy in the region - to a 6.7% growth forecast in 2017 and 6.4% in 2018. Economic growth in the second quarter beat expectations with an annualised growth rate of 6.9%. Despite these strong figures, some commentators have warned that the economy is on a dangerous trajectory. The ruling party’s relentless focus on headline growth comes at a cost of rising risks due to higher debt, according to the IMF in a recent report. Total government, household and corporate sector debt should exceed 290% of GDP by 2022 - a sharp rise from 235% recorded in 2016. Reducing debt and curtailing credit expansion is likely to result in missed growth targets, highlighting the government’s reluctance to tackle the potential problem. Indeed, its report suggests that without the expansion in credit, real GDP growth in the period 2010-2015 would have averaged 5.3% rather than 7.3%.
The economy’s transition from investment-led growth to consumption-led growth continues, with consumption accounting for approximately 65% of GDP for 2016 (according to China’s statistics bureau). Whilst the continuation of this trend towards domestic-led growth is encouraging, more effort is required on structural reforms, especially regarding state-owned enterprises, many of which are inefficiently run.
The South Korean markets largely shrugged off the recent war of words between North Korea’s leader Kim Jong-Un and US President Donald Trump. Recorded growth in the second quarter was 0.6% versus the previous month and 2.7% higher than a year earlier. Double-digit export growth boosted the economy; however, this was offset to a degree by weaker consumption.
New President Moon Jae-in has some ambitious plans to return the economy to a 3% growth path and create additional jobs to boot. Despite some revisions, a budget for $9.8 billion of additional spending received approval from parliament. The President has also pledged to reduce the dominance of South Korea’s Chaebols (giant, family-controlled conglomerates that have huge power within the country) and encourage smaller businesses to flourish.
The Philippines remains one of the best performing economies in Asia despite the sometimes-controversial politics of the Duterte administration. Year-on-year growth in the second quarter was 6.5% and the economy is on track to meets its full year target of 6.5% to 7.5%.
According to The Economist, Mr Duterte is looking to revamp the country’s poor infrastructure by increasing spending from 5.2% of GDP last year to 7.4% of GDP in 2022. Much of these additional spending requirements will come from muted tax reforms and an increase in the budget deficit from 2% to 3% of GDP. This increase in the budget deficit - its first deficit for around 15 years - has caused its currency, the Peso, to depreciate (one of the few currencies in the region to have weakened this year). However, the governor of the central bank suggested that this would improve the productive capacity of the economy further and was something that could be readily financed.
Capital International Group