Two decades on from crisis, Asia is roaring


Twenty years ago this month, the government of Indonesia signed the first of several agreements with the International Monetary Fund (IMF) that threw a financial lifeline to a country struggling to stay afloat amid the Asian crisis.

Deep-pocketed speculators, spotting structural weaknesses in selected regional economies, had forced catastrophic currency devaluations which triggered economic and financial market contagion. Indonesia was the worst-hit, even more so than Thailand and South Korea – the other countries most closely associated with the crisis.

Indonesia’s currency, the rupiah, lost more than two-thirds of its value against the dollar over the second half of 1997, and during a five-day period the following January, lost a further half. Inflation would hit some 65% in 1998 and gross domestic product contracted by more than 13% that year.

The economic chaos led to deadly riots around the country and, eventually, the end of the 31-year rule of former President Suharto. Elsewhere in the region, different but equally traumatic scenes were playing out. Panic selling saw financial markets tumble as foreign investors fled. After years of rapid uninterrupted growth, the ‘Asian economic miracle’ had ground to an abrupt halt.

Asia did recover and is now, arguably, the region with one of the brightest outlooks.

We know, of course, that wasn’t the end. Asia did recover and is now, arguably, the region with one of the brightest outlooks. This is a region of unprecedented wealth creation, a place that produces most of the things the world needs to buy, but where the scope of economic activity still isn’t fully reflected in stock market capitalisation.

A lot of time and effort has gone into examining what happened two decades ago and speculating on the likelihood of those events reoccurring. Many commentators have correctly identified how Asian countries have patched up vulnerabilities exposed by the crisis: these countries have since accumulated substantial foreign exchange reserves; regional currencies, on the whole, are no longer fixed at arbitrary levels; governments have avoided borrowing too much in foreign currencies.

That’s not to say Asia isn’t susceptible to shocks these days. However, if there were to be a new Asian crisis, the catalysts would be very different.

That’s because the region itself has changed. For example, Indonesia is now a young democracy in the midst of adopting far-reaching market reforms. South Korean companies have eclipsed their Japanese rivals, while the ubiquity of Korean popular culture is helping firms sell everything from cosmetics to fancy smartphones. Unfortunately, Thailand seems to have regressed, with no end in sight for military rule and a stubbornly sluggish economy.

No discussion of Asia today is complete without mentioning China and India – countries that barely registered with foreign investors two decades ago.

China represents the biggest opportunity, and potentially the biggest threat, for the region. Its massive economy has created new markets and supply chains that benefit others in the region. This has boosted intra-regional trade and reduced reliance on consumption in the US and elsewhere. China is leading the world in the adoption of fintech, with its vibrant private sector at the vanguard.

That said, when China’s economy slows, everyone suffers. Assurances from Chinese policymakers they have excessive local government debt under control aren’t completely convincing and the state sector remains bloated and inefficient. Meanwhile, China’s economic muscle is increasingly accompanied by a geopolitical assertiveness that could escalate into conflict.

There is a sense that Asia need no longer look to the West for all the answers.

India has failed to live up to its potential over the years, even though some of Asia’s best companies are based there. However, that’s changing as the country embraces reforms that are even more ambitious than those in Indonesia. For the first time in decades the country has a leader with a mandate to push through unpopular but necessary measures. Although there have been setbacks, reforms are making progress and investor sentiment towards India has rarely been better.

There is a sense that Asia need no longer look to the West for all the answers. Events such as the global financial crisis (GFC), the peculiar circumstances under which the UK voted to leave the European Union and the election of President Donald Trump in the US, have dented the developed world’s reputation for competence and reason.

China-led initiatives such as the Asian Infrastructure Investment Bank and the Regional Comprehensive Economic Partnership, a free trade agreement, mean decisions that affect the region may soon be made closer to home. They also show that, in a post-GFC world, Asia is where much of the money resides.

Twenty years ago, the Washington-based IMF linked its emergency loans to a list of conditions that supported free-market economic principles dubbed the ‘Washington Consensus’. But Asia has since proved it could do rather well with a kind of hybrid state capitalism as embodied by the likes of China and Singapore. Nobody knows when Asia’s next financial crisis will hit, but when it does, you can bet nobody will be calling Washington for help.


The article above was previously published on Aberdeen Asset Management’s ‘Thinking Aloud’ blog on 19th October 2017