Asia Economic Outlook: Ten Years After the Crisis

1
Asia Economic Outlook Ten Years After the Crisis

• Olaf Unteroberdoerster
• Resident Representative
• International Monetary Fund
• Hong Kong SAR
• December 2007

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Motivation

• 10 years after the crisis, Asias recovery
  impressive
• But new skepticism about growth model
• need for exchange rate flexibility
• addressing financial sector and governance
  weaknesses
• Over-reliance on exports, as well as credit booms
  and asset price bubbles, thought to leave Asia
  vulnerable to a fresh crisis

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Key Lessons from the Asian Crisis

• Common theme across crisis economies
• Tightly managed exchange rates
• encouraged run-up in unhedged foreign currency
  liabilities
• to support excessively leveraged positions
• also fueled by implicit state guarantees and lax
  supervision, with general lack of transparency
  feeding uncertainty in crisis

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Key Lessons from the Asian Crisis

• Hence, key lessons include need to
• (1) Allow greater exchange rate flexibility
• (2) Reduce unhedged foreign currency borrowing
• (3) Reduce excessive leverage
• (4) Improve transparency and governance

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First, exchange rates are much more flexible
6
Second, the share of foreign currency borrowing
has declined significantly
7
as has the share of non-performing loans
8
Third, once over-geared companies have cut their
debt
9
Fourth, transparency and governance have also
shown some improvement
10
although more remains to be done, particularly
in the public sector
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How vulnerable is Asia to a new Crisis?

• Some claim
• Asia is overly-reliant on exports and vulnerable
  to external shocks?
• Asia in in the throes of dangerous imbalances
  fueled by intervention keeping exchange rates low
  that could easily bust
• credit booms and
• asset price bubbles
• What is the evidence?

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It is true that the region remains dependent on
external demand
13
but Asia has weathered external storms before
14
Moreover, little sign of a credit boom, with
exception of China, India and Vietnam
15
Similarly, Asian housing markets do not seem
overvalued
16
but stock markets, particularly in China and
India, have risen sharply
17
While China, India display signs of credit and
asset booms, near-term vulnerabilities appear low
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Conclusions

• On balance, remarkable progress in tackling
  financial and structural imbalances
• While new vulnerabilities have emerged, they are
  mostly manageable
• Improvements mitigate systemic risks in the
  short-term
• However, important longer-term challenges
• rebalancing growth
• further financial sector development to cope with
  capital flows