What Asia has learnt from the Asian Financial Crisis? Can Asia weather another crisis? These are the questions that local political and financial leaders keep asking themselves and being asked by media exactly 10 years after the worst financial disaster to hit the region on July 2, 1997.
The answer is mixed. Some analysts believe Asia is much better off now and the likelihood of another crisis is minimal as the economies are doing well and the region has continued to reform banking and broaden capital markets.
But others warn of "something is coming." As Singapore's Second Financial Minister Tharman Shanmugaratnam told the World Economic Forum on East Asia meeting last Sunday there is a big build-up in global finances and risks which is fueling fears of a big shock to come, "Although everything seems fine now, there are bubbles everywhere -- in commodities and even in property markets."
On July 2, 1997, the Thai government, after months of struggling against international speculative capital, was forced to announce the abandonment of its U.S.-dollar-pegged foreign exchange system. The ensuing daily slump of the Thai baht by some 20 percent sparked the Asian Financial Crisis, which quickly enveloped most of the Asian economies, including Malaysia, Indonesia, the Philippines, South Korea and Hong Kong of China, as well as incurred huge losses.
Today, Asia's economies are once again experiencing robust growth, at a rate much faster than the rest of the world. Asia's combined gross domestic product (GDP) grew by over 5 percent last year, at its strongest since the crisis.
One important lesson Asia has learned, Singapore's Minister of State for Finance Lim Hwee Hua said recently, is the need to maintain high standards of institutional quality, governance and transparency of the financial system.
"These are critical prerequisites of establishing sound macroeconomic frameworks and building robust and stable financial sectors. This would in turn enable countries to reap the potential gains from financial globalization whilst mitigating the risks of capital volatility," she said.
Joseph Stiglitz echoed this point of view, telling Monday's The Straits Times, a local English daily, that government matters, regulatory oversight is essential, and the rule of law is crucial.
He cited Singapore as the country that weathered the storm best, because it has the best-developed regulatory systems.
After paying costly tuition fee, Asian countries now routinely publish information concerning their external debt positions. Regional central banks have also moved on to more clearly-defined monetary policy frameworks, and have undertaken to publish regular monetary policy statements.
"There have also been material initiatives to reform financial sectors and improve corporate governance," Minister of State for Finance Lim said, adding that "at the regional level, we have also seen a number of regional initiatives aimed at enhancing financial integration and resilience through increased policy dialogue and capital market development."
She also noted that another development is to strengthen bond market, once the weakness area in the financial system.
Following the crisis, individual countries started to build more liquid and efficient local currency bond markets. As at 2006, the capitalization of Asian local bond markets was 2.7 trillion U. S. dollars, 4.5 times higher than that before the crisis. In addition, only 15 percent of private sector financing was raised through the bond market in 1997 while it is almost a quarter now.
In a word, analysts agreed that weaknesses of 10 years ago have been fixed. Bankruptcy laws have been tightened, regulators now exercise much greater oversight over the banking sector, current account deficits have been turned into surpluses, and foreign exchange reserves are at all-time highs.
However, they warned that the region faces new threats, such as the mounting global imbalance, the surges of capital flows.
Gerard Walsh, regional director of Asia for the Economist Intelligence Unit in London, told local English daily TODAY, "You have to wonder how big trade imbalances can remain without causing a backlash. Asia would be intimately involved in risks in world trade emanating from that."
Lim also pointed out that one challenge that many Asian countries face is surges in capital flow. "Surges in inflows can exert strong upward pressure on currencies, and potentially contribute to asset price bubbles."
Economist Joseph Stiglitz agreed that unusual flows of capital can produce virulent boom-bust cycles.
Manu Bhaskaran, head of economic research at the Centennial Group, told TODAY: "The price of risky assets has soared, suggesting investors are generally too sanguine on risk. A small change in sentiments could lead to massive reversals of capital flows."
Furthermore, Stiglitz, also a Nobel laureate in economics, said in an article published by Monday's The Straits Times that there are two most important lessons of the crisis that have not been learnt.
The first is that capital market liberalization -- opening up developing countries' financial markets to surges in short-term " hot" money -- is dangerous.
The second lesson is that in a highly integrated world, there is a need for a credible international financial institution to design the rules of the road in ways that enhance global stability and promote economic growth in developing countries, he added.
So, reforms are still needed.
Lim Hwee Hua urged that regulators and market players must remain committed to banking reforms and seek to further broaden and deepen capital markets. Creating a more integrated regional market to increase attractiveness to investors is also pivotal, she added.
While MasterCard, the world's second-biggest credit card, in its latest insights report released here on Monday, entitled Asia- Pacific 10 Years After the Crisis, suggests a paradigm shift from the region's successful export-led approach to globalize services, in order to build a robust, resilient and efficient financial sector that can withstand new risks to economic stability.