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

1

The Foreign Correspondents Club

Presentation

Asian Financial Crisis

From A to E

by Andrew Sheng Chairman Securities and Futures Commission 12 March 1999

2

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.”

3

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

4



Asian Miracle to Asian Mess



Asset market exuberance



Architecture



Atoms & Bits (Negroponte)

A

5

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

6

Accounting for Crises



Bad accounts =



Bad statistics =



Bad risk management =



Bad decisions and policies =



Financial crisis

7



Boom to Bubble to Bust



Bad Banking



Basic to Basics



Bell curve - reversion to mean

B

8



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

C

9



Disintermediation



Derivatives - the tail that wags the dog



Deflation?

D

10



Early warning systems - global transparency



Elephant in pond problem



Euro



E-commerce



End

E

11



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

Effects - Huge Wealth Loss

12

Consequences I



Sharply slowing Asian economies



Growth in unemployment



Declining current account deficit



Rising inflation



Deflation in asset prices



Massive restructuring in financial sector

13

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

14

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

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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.

16

It takes Two to Tango



Global bubbles due to excessive global liquidity, but no coordinated G10 monetary policy



G10 banks overlent, then panic withdrawal



“Foreign investors injected an extraordinary amount

• f 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

• ne is in charge

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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 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

18

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

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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 “an attack on a fixed exchange rate...as an assault

• n

the central bank’s accumulated international reserve stock..?IMF 1993

20

Global Gain - Local Pain



“Speculation 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

• f

globalization



Large gaps in income, wealth, knowledge and ability to adjust - real markets do not adjust as fast as financial markets

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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

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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

• n

breaches

• f

securities legislation and defaults in settlement



Studies on regulation over custodians and registrars



Full investor participation in CCASS and scripless securities market

23

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

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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

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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

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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

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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

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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

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Painful for HK, but Least Painful

Index %change in USD P/E ratio (5 Mar 99) (1 Jan 97 - 5 Mar 99) (5 Mar 99) Hang Seng 10241

• 22.7

14.2 Nikkei 225 14894

• 27.2

224 Singapore STI 1449

• 27.5

18.3 Korea Comp 538

• 44.2

16.5

• Phil. Comp

2013

• 57.4

15.8 KL Comp 516

• 72.1

51.7 Jakarta Comp 388

• 84.1

9.7

Source: Bloomberg

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Inflation Rates in Asia

1997 1998 Latest Hong Kong 5.7 2.8 (1.1) (Jan 99) Singapore 2.0 (0.3) (0.5) (Jan 99) Indonesia 6.6 58.4 59.4 (Feb 99) Korea 4.5 7.5 0.2 (Feb 99) Malaysia 2.7 5.3 5.2 (Jan 99) Philippines 5.1 9.7 10.5 (Dec 98) Thailand 5.6 8.1 2.8 (Feb 99)

Source: CEIC, Bloomberg

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Exports Growth in Asia

(y-o-y in US$ terms)

1997 1998 Hong Kong 4.1

• 7.4

Singapore

• 12

Indonesia 7.3

• 8.5

Korea 5

• 2.2

Malaysia 0.9

• 6.2

Philippines 22.7 16.9 Thailand 2.4

• 6.8

Source: CEIC

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Real Interest Rates (3 months)

Before Crisis After Crisis 1 Jan 1997 5 Mar 1999 Hong Kong (HIBOR)

• 1.40

6.97 Korea 8.92 6.38 Singapore 1.08 2.56 Malaysia 4.10 1.25 Thailand 7.29 2.20 Philippines 6.68 1.99 Indonesia 4.89

• 19.50

Japan

• 0.04

0.09 US (LIBOR) 2.49 3.33

Note : 3-m interbank rate for HK, Singapore, Malaysia, Thailand, Indonesia, and Japan; 3-month CD rate for Korea; 3-month T-bill rate for the Philippines; 3-month Euro-$ rate for the US.

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Banking Sector robust



Operating profits before tax of local banks declined by 25% in the first half of 1998



Bad debt charged rose in the third quarter of 1998, at an annualised rate of 0.37% of total assets, up from 0.15% in 1997



Capital adequacy ratios of local AIs is 18.6%



Loan-to-value ratio for property lending is 70% (actual LTV ratio around 52%)



Most transparent banking system in Asia

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Real Effective Exchange Rate Index

• f Hong Kong Dollar

Unit Labour Cost-based CPI-based Export Price-based

35

External Trade Balance

• 4
• 3
• 2
• 1

• 4
• 3
• 2
• 1

• h

• r

• h

• r

• h

• u

• h

• v

• H

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China’s exports are as robust

1997 1H98 Total YoY% 20.9 7.6 Japan YoY% 3.0

• 4.3

as % total 17.4 15.7 Asia (ex. HK and Japan) YoY% 21.3

• 8.2

as % total 18.3 15.8 USA YoY% 22.5 18.4 as % total 17.9 19.2 Europe YoY% 21.3 24.5 as % total 15.9 18.0 Trade Surplus (US$ bn) 40.5 22.6

37

Will RMB Devalue?



Non-convertible capital account



Export growth 20.9% in 1997 and 1.0% in 1998



Total trade surplus US$40 bn in 1997 and $45 bn in 1998



RMB steady



Current account surplus at 3.3% of GDP



FX reserves $144 bn > external debt $131 bn

38

Will RMB Devalue?



GDP growing at 8.8% in 1997 and 7.8% in 1998



Fiscal deficit at 1.2% of GDP



Total domestic debt at 15% of GDP



Inflation at -0.8% in 1998



China meets Maastricht criteria!



No denial - SOE & Bank reform continuing



Chinese leaders confirm no devaluation