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14 3月 2019

Learning the lessons of the past

Sean Ellison

Sean Ellison

Senior Economist, Asia Pacific

Singapore

RICS

20 years on from the Asian financial crisis, are we due another? With the Indonesian rupiah falling to its weakest level in 20 years in September, and currencies from the Argentinian peso through the Turkish lira to the Chinese yuan under pressure, you can hear some old Asia hands muttering: "It feels like 1997 again".

The Asian financial crisis started in Thailand, but quickly spread through Asia. Next it hit Brazil and Russia. Those original "black swans" prompted the default of hedge fund Long-Term Capital Management. That took the crisis to Wall Street, with the US Federal Reserve supervising the bailout.

Ten years since the global financial crisis. Twenty years since the Asian edition. Are we due another instalment?

Prior to the Asian financial crisis, easy global credit and rapid growth led to a sharp increase in overseas borrowing by banks in Thailand, Indonesia and Malaysia. This debt binge fuelled an increase in domestic credit issued in Thailand, Malaysia and Indonesia, at a pace substantially above the rate of interest: a classic credit bubble. Much of the money was then pumped into real estate, since emerging financial markets have fewer other assets in which to invest.

Things began to turn in early 1997. Amid mounting bad loans, a pair of large Thai developers defaulted on their debt. This prompted foreign investors to start withdrawing funds from Asian emerging markets. International speculators began betting against the Thai baht, Malaysian ringgit and Indonesian rupiah. By the end of 1997, these three currencies were in free fall, losing 50% of their value in six months. The International Monetary Fund stepped in, and was able to stabilise the baht and ringgit. But the rupiah continued to fall, at one point having lost 85% of its value.

Economists have stressed the "quick" recovery from this crisis – Thailand, Indonesia and Malaysia all saw GDP growth in 1999 – but the costs were immense.

Thailand and Malaysia's real GDP declined by more than 7% in 1998, causing great short-term pain. Indonesia was hit even worse, with the economy shrinking more than 13% in 1998. Food shortages and mass unemployment sparked riots across the country, and led to the resignation of President Suharto, in power for more than three decades.

The good news is that the governments involved, and the companies that survived, have largely learned from their mistakes.

There may be pockets of weakness in the Thai, Malaysian, and Indonesian economies. But these three countries have done a much better job in balancing external liabilities with assets.

South-east Asian companies have shifted from offshore borrowing via bank loans to offshore bond issuance. It's a small change but an important one. Bonds have longer durations than bank loans, needing less frequent refinancing. They also spread risks among a range of bondholders, rather than concentrating exposure at a few banks.

This buffers against the current upswing in interest rates. But it is not a bulletproof shield. Total emerging-market debt has doubled since the global financial crisis. It sits on a much larger and more diversified economic base than previous cycles, but it still represents a fundamental risk to the financial stability of emerging markets.

If these markets became more risk averse, it could trigger another wave of financial stress. But that would require a major recalibration of downside risks by investors. Recent data from RICS' Global Commercial Property Monitor, published quarterly, suggests that markets are headed towards a soft landing rather than a sharp decline.

We are not at crisis level yet. But the events of 20 years ago serve as useful touchstones if markets move in disconcertingly familiar ways.

This article originally appeared in the APAC Q4 2018 edition of Modus

Sean Ellison

Sean Ellison

Senior Economist, Asia Pacific

Singapore

RICS

Sean is responsible for the RICS Economics team’s research into the Asia-Pacific property sector, identifying market risks to the sector and analysing economic events and their effects on real estate.

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