JUST 13 years after the Asian Contagion, Eric Ellis questions whether the region’s reforms would prevent another crisis
A few weeks before the Rabbit replaces the Tiger on Asian lunar calendars, the region’s investors must wish the zodiacal bunny’s more rational attributes – sagacity, shrewdness and tranquillity – will mark the upcoming year rather than its more discordant – pessimism and insecurity.
That’s because just 13 years after the crippling Asian financial crisis, the spectre of hot money – the rush to make big and fast returns in the world’s most dynamic economies – again looms to threaten the region’s boom.
It was hot money, mostly from the West, that precipitated Asia’s undoing back in 1997-98. When markets wobbled then, speculators exited the region faster than a dash to the bathroom after a dodgy laksa. Asian Contagion rippled around the region, leaving chaos. Indonesia collapsed, its banks taken over by a state bailed out by Western lenders. South Korea came perilously close to going under, as did Thailand. Singapore was led into an asset funk that took years to correct. Some of Japan’s biggest names in business bit the dust.
The speculative exodus may have briefly boosted another emerging market – the nascent Silicon Valley boom until that too imploded under the weight of hot, dumb money in 2000 – but the 1990s crisis also brutally exposed Asia’s structural frailties; sloppy governance, badly managed banks, corrupt and crony governments.
But as hot money looms again, looking for a quick and lucrative hit as Western economies languish for opportunities and bumping up inflation, investors ponder if Asia’s economies have fundamentally reformed since the crippling 1990s crises. Do policymakers have the right stuff to stay afloat this time around, if it comes to that? What happens when the US and Europe recover? Will that hot money suddenly cool, and create havoc when it exits?
A decade on, Asia is moving to better manage the excesses boosting the region’s asset bubbles, alert to the chaos they can create. This time around, the countries most effected by the 1990s crisis – Indonesia, South Korea, Thailand – have more competent financial managers at their helm. And the wounds of 1997-98 remain raw enough among policymakers so as to foster more conservative decisions.
Though Asia hasn’t got around to actually installing the supranational regional backstop institution – an Asian IMF – that was proposed after the ’90s train wreck, early warning systems on hot money seem to be kicking in.
In Jakarta, where the economy collapsed in 1998 to force the end of the Suharto kleptocracy, Bank Indonesia this week moved to soak up excess liquidity in its financial system by requiring local lenders to increase their level of foreign exchange reserves parked at the central bank. Healthier Indonesian banks were required to set aside just 1 per cent of their holdings at BI. But by March, BI wants that at 5 per cent, rising to 8 per cent by June. The central bank said these were designed to offset the impact of “a sudden reversal in capital inflows” – to soak up the hot money that tumbled into the country in recent years as it started its run up the G20 ladder.
Taiwan has instituted similar measures, requiring local banks to set aside 90 per cent of new foreign investor deposits as reserves, a sharp jump from the current 10 per cent. Seoul too has moved to mop up excess liquidity drawn to South Korea after its remarkable effort – for one of the world’s leading exporters – to stay in the black through 2008-09 when its principal markets in the US and Europe went into freefall. The central bank dampens the won in currency markets, as the Finance Ministry mulls taxes on bonds to rein in foreign demand. In the 1990s that would be resisted as fatal for a foreign investment profile; this time it’s seen as prudent.
In Kuala Lumpur, Malaysia’s long-time central bank governor, Zeti Akhtar Aziz, recently told me she has had to grapple with a new reality for emerging economies: a sharp rebound in growth and unprecedented capital flows to the region. And with them, renewed fears of inflation and asset bubbles. “It’s easy to be wise after the event, but we have tried very hard to be wise before and during the event,” she says. Where Malaysia cocked a snook at Western institutions in 1998, now Zeti advises them.
None of which is to say that a more robust Asia is invulnerable to sharp economic shocks. In many investment quarters, the region is still seen as a lottery, decisions based on who one knows rather than how one manages. Thailand, one of the countries hit hardest in 1997-98, is in a parlous political state 13 years on as red shirts again vow to disrupt and topple the unelected yellow-hued government. Bangkok has the advantage it didn’t have in 1997-98, a young and bright Finance Minister, Korn Chatikavanij, the former boss of JP Morgan in Thailand. But political turmoil lurks ominously over a realm where Thais fear what will happen when their frail octogenarian king dies.
And while financial technocracy has generally improved across the region – putting necessary distance between politicians and central bankers is one lesson that has taken root – it has done so in patches. Systemic corruption still hampers places such as Thailand and Indonesia, where cronyism again threatens to trump technocracy. Malaysia’s long-ruling government is today tired and arrogant, the country fizzing with barely concealed tensions.
Another game-changing difference from 1998 is China, and its massive levels of foreign exchange reserves, now almost $3 trillion. By way of comparison, Chinese reserves were boosted by $200 billion in the last quarter of 2010 alone. That’s $60 billion more in one quarter than Beijing held in its entire reserve in 1998, when it wasn’t much of a player regionally, and about what the world’s bill amounted to in 1998 for rescuing Asia’s stricken economies. If Asia bubbles over again, it will be China standing ready to assist, and possibly reshape the region as it goes.