Asian Financial Crisis: Ten Years On

Next week marks the tenth anniversary of the devalutation of the Thai baht, widely cited as the trigger that initiated the Asian financial crisis. But the seeds of the catastrophic collapse of the “Asian miracle” (as Asia’s years of stellar growth performance was dubbed pre‑1997) were sown well beforehand, in the rapid buildup of short-term foreign currency debt in weak banking systems which left the countries vulnerable to a sudden change in sentiment.That sudden change came about when, on 2 July 1997, Thailand abandoned its costly policy of pegging the baht to the U.S. dollar, allowing the currency to depreciate in an effort to shore up its faltering economy. Shaking confidence in the region's stability, that set off a chain reaction that turned Asia’s investment boom into a bust, sent bad debts soaring and sparked a stampede by foreign investors rushing to pull money out.The crisis worsened as foreign-exchange reserves proved insufficient to maintain other regional currencies, which had been propped up through fixed exchange-rate regimes. Thailand, South Korea, Malaysia, Indonesia and the Philippines each saw half or more of their respective currencies’ value wiped off. Companies collapsed under ballooning foreign debt obligations, stock markets crashed and economies imploded. Other regional economies such as Hong Kong, China, Singapore and Taiwan also suffered, and the crisis eventually spread to South America and Russia.While the economies have slowly regained their footing and many improvements have been achieved, the effects of the crisis linger. The affected countries have improved their regulatory transparency and supervisory oversight, corporate governance, risk management and the quality of economic data. Central banks are more independent, government debt has declined and financial systems are stronger.Current-account balances are generally in surplus, foreign currency reserves are at record highs, and external debt levels are significantly lower and have improved maturity profiles. Inflation has generally been contained, despite recent higher oil prices. More flexible exchange rate regimes are also in place, creating the potential for more efficient adjustments to external shocksBut rectifying the problems that precipitated the crisis has generated another set of potential threats.Trade and foreign reserves