A Changed Asia? 20 Years After The Asian Financial Crisis

Market Views And Insights | June 2, 2017

Geoff Lewis, Senior Strategist (Asia), Capital Markets & Strategy Team

Executive Summary

It has been 20 years since the Asian Financial Crisis (AFC) of 1997 – an event that continues to influence the way economists and investors view the continent. Talk of high levels of country debt or impending (rapid) interest rate increases continue to invite speculation as to whether the next AFC could be just over the horizon. To my mind, this demonstrates the need to better understand the causes of the AFC and how far Asia has come since then.

Our footprint in Asia dates to long before the AFC, and we have experienced firsthand how the continent has transformed in the last 20 years – chiefly, in the following ways:

  • China’s emergence as a global economic powerhouse, which has contributed to the region’s recovery;
  • Meaningful structural reforms, accompanied by liberalization, have led to improved competition, better corporate governance and greater transparency;
  • Improved fiscal and currency management, which translates into healthier current accounts;
  • All of which contributes to greater resilience from external economic shocks, thanks to improved economic fundamentals.

The following chart attests to the transformation that has taken place in the last two decades.

Chart 1: Asia's Improving Credit Profile

Source: Manulife Asset Management, Bloomberg, as of May 30, 2017

It is fair to say that the region’s deep economic and financial changes since 1997 augurs that it is much less vulnerable to another potential crisis similar in magnitude. To wit, the financial market in Asia barely reacted to Moody’s decision to cut China’s sovereign rating by a notch recently. Crucially, 20 years on, the event continues to provide a valuable benchmark for us to appreciate the progress gained and lessons learnt along the way that remain relevant to investors.

1997: The Beginning

The crisis can be traced to July 1997, when the Thai government took the difficult decision to unpeg the Baht from the US Dollar and float the currency – an act which unleashed an unexpected financial storm. Investors quickly sold off holdings in Asian markets as contagion spread throughout the region.

In hindsight, it is easy to theorize that the AFC was primarily caused by the headlong pursuit of what we now recognize as unsustainable economic development models. Perhaps the best way to understand the AFC is to inquire why certain Asian economies were devastated while others emerged from the crisis relatively unscathed. Indeed, most Asian countries had posted robust economic growth in the lead up to the crisis: Thailand averaged GDP growth of 9.0% from 1986-1996, while Singapore posted 8.6% average growth over the same period1. Back then, few paid attention to the fact that the quality of growth achieved by these countries and the way in which each country was managed were very different.

Export-driven economies such as Singapore and Taiwan were, and continue to be, exposed to the global economic cycle; however, they maintained current account surpluses, substantial foreign exchange reserves, and a more conservative financial sector. Thailand and other crisis-affected countries had initially relied mainly on export-led growth, but that ultimately transitioned to rapid domestic credit expansion and investment. Substantial capital inflows into the region during the early 1990s, coupled with financial liberalization, incentivized financial institutions in these countries to lend freely, without appropriate oversight and due diligence. Government guarantees and fixed exchange rates encouraged a growing number of local banks to borrow in the short-term foreign currency markets, introducing what ultimately proved to be fatally risky currency and liability mismatches.

Thailand’s floating of the Baht thus served as the canary in the coal mine to warn global investors and market analysts of the hidden dangers of seemingly strong economies propped up largely by external credit. After Thailand fell, other countries became targets and followed like dominoes: Malaysia, the Philippines, South Korea, and Indonesia each experienced severe currency volatility followed by economic contractions. This dynamic fed a vicious circle of capital outflows, fears of insolvency, and currency depreciation that swirled around the region until after huge selling and sharp falls in markets; the de facto stamp of approval of IMF bailouts first slowed, and later ended the crisis. The damage, however, was done. South Korea’s GDP declined by 7% in 19982. Indonesia’s economy contracted by 14% in 19982 – the Rupiah, at its lowest level, lost over 80% versus the US Dollar3. The longestserving government in Asia at the time4, led by President Suharto, was swept away in a matter of months, followed by an inter-regnum marked at first by political and social instability as Indonesia struggled to establish the post-Suharto order.

Asia’s Changing Regional Dynamics

  • China’s emergence as a key global player helped power Asia’s recovery, enabling the region to become more resilient against external shocks along the way

Asia’s recovery from the AFC was inevitably gradual rather than V-shaped. While credit must be given to the various governments that undertook painful structural reforms which laid the foundations for the region’s eventual recovery, China’s emergence as a regional and subsequently global economic powerhouse played a huge role in the process.

Although China’s economy was still finding its feet in 1997, the country went on to average 10% growth (between 1990 and 20023) in what was described as the greatest 'Asian Miracle' of all. Today, it is the world’s second-largest economy (on a Purchasing Power Parity basis) and the center of not just the regional economy but also the global manufacturing supply chain. The Middle Kingdom is currently the top trading partner of ASEAN, South Korea, and Japan. Only 8% of the region’s exports went to China in 1997; by 2015, 13% of all exports from the region were destined for the mainland5.

Chart 2: Asia's Rising Trade Exposure To China
(Domestic value added embodied in Chinese demand; percent of GDP)
Source: IMF, OECD, as of December 2015

The influence is also financial: A recent IMF paper has shown that China is exerting greater influence on Asian financial markets than ever before (see Chart)6. A larger and more integrated Asian economy with China at the center has arguably decreased the region’s reliance on developed markets and increased its resilience against economic shocks coming from outside the region.

  • Meaningful reforms have led to enhanced competition, creating a deeper and more liquid market place

Crucially, we believe changes in Asia since the AFC have opened up investment opportunities. In the immediate aftermath of the crisis, many Asian markets were understandably difficult to invest in: some lacked the macroeconomic fundamentals to be attractive; others lacked the deep capital markets needed for market liquidity. Both of these factors have gradually improved. Besides the economic rise of China, countries such as India, the Philippines, and Indonesia have strengthened their domestic economic base, with better fiscal balance position and debt-to-GDP ratio compared to developed markets7.

The region’s capital markets have grown notably since the AFC – specifically, local currency debt. The total regional bond market now totals around US$10.7 trillion, with a 12.9%-5-year-CAGR (Compound Annual Growth Rate)8. Foreign investors also are playing a greater role in many of the region’s fixed income markets. Indeed, investment opportunities span the spectrum from higher-yielding local currency debt to dollar-issued debt by local firms. Thus, although Asia still has room for further economic and financial reforms, we feel it has the macroeconomic fundamentals and investment opportunities to attract long-term investors to this rapidly progressing region.

Chart 3: Median Age - A Geographical Perspective
Source: UN, Dept of Econ & Social Affairs, Population Div, December 2015
  • All about demographics

Consumption has often been cited as an important reason why global investors should pay more attention to Asia. However, it must be said that the shift towards consumption and investment in Asia is not only due to economic development, but also demographics. Although China and Japan’s demographic challenges have been well documented, at an aggregate level, the continent’s population is still much younger relative to Europe and North America (see Chart 3). For instance, India is set to become the world’s most populous country by 2022. It is also young: the country’s economy has not yet experienced its domestic demographic dividend. The Philippines boasts a median age of roughly 23 (according to its 2010 census), and demographic projections suggest it will become Asia’s youngest country 30-40 years from now. The region’s favorable demographics, coupled with strong economic growth prospects mark a contrast to developed markets.

Better Fundamentals, Improved Resilience

In our view, this evolving regional structure, including structural reforms adopted after the crisis, means that another AFC is much less likely today. The closest the region has come to a repeat of the crisis was arguably during the ‘Taper Tantrum’ of 2013, when Fed Chairman Ben Bernanke announced that the Fed was considering a halt to bond purchases. Bond yields surged amid concerns that Asian markets were vulnerable to rising interest rates and capital outflows. By then, the region, with perhaps the exception of Indonesia which ran a significant current account deficit, was already in good economic shape: current account surpluses (or manageable deficits), lower debt levels (aggregate and corporate), and more active hedging by corporations with foreign debt. While the ‘Taper Tantrum’ did cause some markets in Asia to correct sharply at first, fears soon peaked and dissipated after a few months without triggering a major crisis.

Chart 4: Asia’s Changing Current Account Profile
(Trade Surplus/Deficit as % of GDP), Then & Now
Source: World Bank, as of December 2016

There may be more to learn from the events of 20 years ago. While an exact repeat of the AFC is unlikely, other key risks remain. Debt levels in China, the main economic engine, have approached concerning levels: according to Bloomberg, China’s total debtto- GDP was 264% at the end of 20169. This was cited as one of the key reasons behind Moody’s decision to cut China’s credit rating by a notch recently. A debt-induced economic slowdown in China, even without a full-blown “hard landing”, could have serious implications for global and regional markets.

Asian countries are still notably reliant on exports for economic growth with China as their largest market; slower growth in China would likely necessitate credit expansion policies region wide. The political mandate to maintain growth at all costs may also lead to propping up insolvent firms. That said, this scenario is far from the carnage of the AFC. The government is undertaking a reform program aimed at improving the quality of growth while reducing the economy’s reliance on debt. There is little reason to doubt its commitment to addressing the issue. The effectiveness of the prescribed policies, however, remains to be seen. Arguably, the seeds of another regional crisis have thus been planted.


Overall, the enduring legacy of the AFC may be the tenacious grip it still holds on the minds of economists and investors alike. But Asia today is a very different region than it was 20 years ago; the rise of China has increased regional interconnectedness and shifted the economic focus. In our view, it is time for global investors to appraise the region again and view it through a different prism. The region has come a long way, and we feel opportunities abound.

1 World Bank, April 2017.
2 IMF: Recovery From The Asian Crisis And The Role Of The IMF, June 2000
3 Bloomberg, as of April 2017
4 New York Times: Betrayal By Suharto’s Friends Quickly Ended His Reign, May 24, 1998
5 Wells Fargo Securities: How Important Is China To Other Asian Economies, August 25, 2015
6 IMF: Working Paper – China’s Growing Influence On Asian Financial Markets, August 2016
7 Bloomberg: Economic Survey, 31 December 2016
8 Bank for International Settlements (BIS), Asian Development Bank, European Central Bank, Bloomberg. All amounts outstanding by residence of issuer. Manulife Asset Management, 30 June, 2016
9 Bloomberg: China’s Debt Bomb, April 3, 2017

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