Asian Financial Crisis From A to E by Andrew Sheng Chairman - PowerPoint PPT Presentation

The Foreign Correspondents Club Presentation Asian Financial Crisis From A to E by Andrew Sheng Chairman Securities and Futures Commission 12 March 1999 1

Keynes “..the ideas of economists and political  philosophers, both when they are right when they are wrong, are more powerful than is commonly understood… Practical men, who believe themselves to be  quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” 2

Global Perspective pre-Crisis 1996 OECD economies in great shape  Buoyant world trade, low inflation  Record capital flows into Asia  Record Asian foreign exchange reserves  No overall Asian current account deficit  No overall Asian fiscal deficit  3

A Asian Miracle to Asian Mess  Asset market exuberance  Architecture  Atoms & Bits (Negroponte)  4

The Network is the Market ♦ Financial market is derivatives of real economy ♦ Financial markets are networks, with network externality ♦ Network itself has value, but can bring contagion ♦ Networks need commoditization of information, hence standards 5

Accounting for Crises Bad accounts =  Bad statistics =  Bad risk management =  Bad decisions and policies =  Financial crisis  6

B Boom to Bubble to Bust  Bad Banking  Basic to Basics  Bell curve - reversion to mean  7

C Crisis, Complexity & Confusion  Credit - below the line credit boom  Cyberspace transcends geography  Convergence of standards & processes  Competition  Co-variance & Contagion  Corporate Governance  Capital markets & national risk management  8

D Disintermediation  Derivatives - the tail that wags the dog  Deflation?  9

E Early warning systems - global  transparency Elephant in pond problem  Euro  E-commerce  End  10

Effects - Huge Wealth Loss Asian equity markets alone lost US$1.7 trn or  35% of GDP Foreign losses in equity markets since June 97 -  US$80 - 100 bn, plus bond loss - US$10 bn and OECD bank debt provisions of US$10 bn IIF Hong Kong Burden Sharing - equity and  property wealth loss since July 1997 estimated at US$548 bn or 318% of GDP 11

Consequences I Sharply slowing Asian economies  Growth in unemployment  Declining current account deficit  Rising inflation  Deflation in asset prices  Massive restructuring in financial sector  12

Consequences II Asian currencies down as much as 77% (IDR)  Asian stock markets down to level of 10 years ago  Indonesia per capita income set back 30 years  Latin American stock markets down 40%  Europe stocks up 50%, now down 20%  Gold, commodity prices down to 10 year lows  Ruble, SA Rand, Colombian peso devalued  13

Surplus here - Deficit there Past Year Change in Trade Balance US$ billion US$ billion US$ billion Change Change Change in in Exports in Imports Trade Balance SE Asia Devaluation -2.2 -86.0 83.8 Japan -1.8 -31.8 30.0 Other Asia 24.6 6.3 18.3 Australia/New Zealand -3.7 -2.4 -1.3 N. America 63.9 76.9 -13.0 Europe -50.1 -32.3 -17.8 Latin America 22.1 41.1 -18.9 Oil Exporters (ext) -61.9 0.0 -61.9 World -9.2 -28.3 19.1 Source: David Hale, August 1998 14

Washington Consensus Good economic performance requires  liberalized trade, macroeconomic stability and getting the prices right. Once government got out of the way, private  markets would allocate resources efficiently and generate robust growth. Therefore, liberalization and opening capital  account the way to go. 15

It takes Two to Tango Global bubbles due to excessive global liquidity, but  no coordinated G10 monetary policy G10 banks overlent, then panic withdrawal  “F oreign investors injected an extraordinary amount  of capital into these flawed systems without due weighting of the risks involved? Robert Rubin Large G3 currency volatility created huge emerging  market volatility Hedging shifts risks, more than eliminating risks  Delayed funding to IMF created perception that no  one is in charge 16

Offshore Banking Outflows balance at change during (US$ bn) mid-98* H1 98 H2 97 Singapore 484.0 -73.2 -3.1 Inter-bank 341.3 -73.2 -15.5 Non-bank 142.7 0 12.4 Hong Kong 535.6 -91.6 -31.6 Inter-bank 382.5 -93.8 -36.4 Non-bank 153.2 2.3 4.8 * ACU data for Singapore and liabilities to banks outside HK for HK Sources: CEIC 17

Lessons of Asian crisis Open capital account means loss of monetary  sovereignty Capital account adjustment through exchange  rate depreciation creates contagion and deflation Flexible exchange rate regimes means passing  internal adjustment costs to trading partners Competitive devaluation not a solution  Bretton Woods structure outmoded  18

Globalization - free market without level playing field? Tax and regulatory arbitrage moves funds offshore,  with no reporting or supervision requirements Hence, global FX market largest, most liquid but  concentrated market Fund managers can take large positions in smaller  emerging markets, with unequal market power Collusion and collusive behaviour possible, with no  global regulatory oversight Authorities seek to maintain exchange rate stability, but  some funds treat “a n attack on a fixed exchange rate...as an assault on the central bank ’s accumulated international reserve stock..?IMF 1993 19

Global Gain - Local Pain “S peculation on exchange rates has serious and  frequently painful real internal economic consequences.? - James Tobin Capital flows and trade are global, but laws,  regulations and politics are local Gaps in information, but also gaps in  understanding the risks and benefits of globalization Large gaps in income, wealth, knowledge and  ability to adjust - real markets do not adjust as fast as financial markets 20

One Global Market Markets are now continuum of cash, currency, fx,  equity, bonds, futures and options markets, which move sympathetically Hence, need for harmonised regulatory framework,  unified clearing systems and consistent margins across market places Information systems for monitoring purposes -  transparency and disclosure of both public and private sectors to prevent crises Level playing field, to prevent collusive behaviour  21

Measures to tighten securities markets Strengthen regulation & enforcement on short-  selling Enhance risk management across financial markets  Enforcement of T+2 settlement rules  Heavier penalties on breaches of securities  legislation and defaults in settlement Studies on regulation over custodians and registrars  Full investor participation in CCASS and scripless  securities market 22

Hong Kong Fundamentals: US and HK compared, 1997 HK US GDP per capita (US$) 24,715 30,276 Real GDP growth (% p.a. 90-97) 3.9 2.3 Inflation (cpi % change) 2.8 2.3 Fiscal balance (% of GDP) -2.6 -0.03 Gross public debt (% of GDP) 7.6 61.5 Current account balance (% of GDP) -1.2 -1.9 Foreign reserves (US$ bn) 89.6 83.6 (months of goods imports) 5.9 0.4 (M3 cover, in %) 22.4 0.6 P/E ratio (times) 10.6 30 Bank capital adequacy ratio (%) 18.6 n.a. Credit rating (S&Ps) A AAA Sources: CEIC, S&P 23

Hong Kong Latest Economic Indicators (% change over a year ago, unless otherwise specified ) 1997 1998 Real GDP 5.3 -5.1 Volume of retail sales 1.1 -16.4 Trade Balance (HK$bn) -159.1 -81.4 Exports 4.2 -7.4 Imports 5.2 -11.5 Visitor arrivals -11.1 -8.0 Property prices 16.3 -43.2 Hang Seng Index -20.3 -5.9 3M HIBOR (% p.a.) 9.1 5.06 Unemployment Rate 2.5 5.7 Inflation 5.8 2.8 24

Floating is no panacea Immediate losses in the value of currency and  asset prices Higher domestic interest rates (1983: 16%BLR)  Higher inflation rates (1983: 12%)  No obvious improvement in exports  Higher import costs  25

Total Imports to GDP Ratio 1997 % Hong Kong 110.9 Indonesia 28.3 Korea 32.7* Malaysia 82.1 Philippines 45.4 Singapore 120.3 Taiwan 40.3* Thailand 39.1* * 1997 figures 26

HK$ - steady as she goes ! 1 Jul 97 9 Mar 99 (per US$) (per US$) Fixed HK$ 7.747 7.749 (-0.03%) Peg/Float THB 24.40 37.25 (-34.5%) MYR 2.53 3.80 (-33.5%) IDR 2432 9050 (-73.1%) PHP 26.36 38.90 (-32.2%) SGD 1.430 1.731 (-17.4%) KRW 887.8 1235.5 (-28.1%) Source: Bloomberg 27

Foreign Exchange Ranking US$ billion (1) Japan 221.5 (2) China 145 (3) Taiwan 91.9 (4) Hong Kong 89.8 (5) US 83.6 (6) Germany 80.3 (7) Singapore 74.1 (8) Spain 60.8 (9) Korea 55.5 (10) France 49.4 End Dec 98 figures for China, US, Germany, Spain and France End Jan 99 figures for Taiwan and Singapore End Feb 99 figures for Japan, HK and Korea Source: HKMA, IMF, Reuters, Singapore Department of Statistics 28