ASEAN Roundtable Series: What Lessons Learned from Financial Crises of Recent Times
Published on 20 August 2018
David Marsh
Chairman and Co-Founder,OMFIF
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Marsh is a Board Member of Henderson Eurotrust and the British Chamber of Commerce in Germany, and visiting Professor at Sheffield University and King’s College London. He is former co-founder, chairman and deputy chairman of the German-British Forum. He was made Commander of the British Empire in 2000 and was awarded the German Order of Merit (Bundesverdienstkreuz) in 2003.
He started his career at Reuters in 1973 having graduated with a BA in chemistry from The Queen’s College Oxford. Between 1978 and 1995 he worked for the Financial Times in France and Germany, latterly as European Editor in London. Marsh has written six books: Six Days in in September – Black Wednesday, Brexit and the Making of Europe (2017, with William Keegan and Richard Roberts); Europe’s Deadlock: How the Crisis Could Be Solved – And Why It Won’t Happen (2013); The Euro – The Politics of the New Global Currency (2009 – re-released in 2011 as The Battle for the New Global Currency); Germany and Europe – The Crisis of Unity (1994); ‘The Bundesbank – The Bank that Rules Europe’ (1992); and Germany – Rich, Bothered and Divided (1989 – re-released in 1990 as The New Germany.
He is a frequent media commentator in Europe and the US.
Tan Sri Andrew Sheng
Honorary Advisor,CIMB ASEAN Research Institute
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Previously, he was a Chairman of the Securities and Futures Commission of Hong Kong and a central banker with Hong Kong Monetary Authority and Bank Negara Malaysia.
He writes regularly on international finance and monetary economics, financial regulation and global governance for Project Syndicate, AsiaNewsNet and leading economic magazines and newspapers in China and Asia. His latest book is “Shadow Banking in China: An Opportunity for Financial Reform,” with Ng Chow Soon (2016, John Wiley).
Dr. Ho Ee Khor
Chief Economist, ASEAN+3 Macroeconomic Research Office (AMRO)
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Prior to joining AMRO, Dr. Khor was a Deputy Director of the Asia and Pacific Department (APD) at the International Monetary Fund (IMF), responsible for overseeing the surveillance work on six ASEAN and twelve Pacific Island countries. Dr Khor started his career as an economist at the IMF in 1981 and had worked on a wide range of economies in the Western Hemisphere and Asia and Pacific departments. He was the IMF Deputy Resident Representative in China from 1991- 1993.
From 2009-2010, Dr. Khor was Head of Economic Development and Chief Economist at the Abu Dhabi Council for Economic Development (ADCED).
Dr. Khor joined the Monetary Authority of Singapore (MAS) in July 1996 and was Assistant Managing Director from 2001 to 2009 where he was responsible for economic research, monetary policy, macro-financial surveillance, and international relations.
Dr. Khor obtained his Bachelor’s Degree in Economics/Mathematics from the University of Rochester and a Ph.D. in Economics from Princeton University.
Frank Scheidig
Global Head of Senior Executive Banking, DZ BANK
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Previously, Scheidig was Head of Fixed Income International Sales at DZBANK and a member of the Board of Managing Directors at Deutsche Asset Management International, following posts as Managing Director and Global Head of Central Bank Sales at Deutsche Bank.
Prior to this, he worked as a trader for German government bonds at Suedwest-LB and Bayerische Vereinsbank, in Frankfurt.
Between 1993 and 2000, Scheidig worked in fixed income sales at Bayerische Landesbank and held several senior sales positions in global market divisions at Dresdner Bank.
Dr. Hans Genberg
Executive Director of the South East Asian Central Banks (SEACEN) Research and Training Centre
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Prior to joining SEACEN, Dr. Genberg was Assistant Director at the Independent Evaluation Office of the International Monetary Fund where he led evaluations of International Reserves: IMF Concerns and Country Perspectives and IMF Forecasts: Process, Quality, and Country Perspectives. Between 2005 and 2009 he was Executive Director, Research at the Hong Kong Monetary Authority and Director of the Hong Kong Institute for Monetary Research after which he spent one year as Visiting Advisor at the Representative office for Asia and the Pacific of the Bank for International Settlements. Before joining the HKMA he was Professor of international economics at the Graduate Institute of International Studies in Geneva, Switzerland. A Swedish national, Dr. Genberg holds a Ph.D. degree in Economics from the University of Chicago.
Dr. Genberg has written widely on issues dealing with international finance, monetary economics and macroeconomics. His publications include Asset Prices and Central Bank Policy; Official Reserves and Currency Management in Asia: Myth, reality and the Future; and The Banking Sector in Hong Kong as well as numerous articles in major professional journals such as Econometrica, the Journal of Monetary Economics, Journal of Money Credit and Banking, and the Journal of International Economics.
Tan Sri Dr. Munir Majid
Chairman, CIMB ASEAN Research InstitutePresident, ASEAN Business Club
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He has an extensive experience and is well known in the Malaysian corporate world. He had been the Group Editor of the New Straits Times, first executive chairman of CIMB and founding chairman of the Malaysian Securities Commission. After stepping down from the Securities Commission, he became Independent Non-Executive Director of Telekom Malaysia Berhad, Chairman of Celcom (Malaysia) Berhad and Non-Executive Chairman of Malaysian Airline System Berhad. He was Founder President of the Kuala Lumpur Business Club, established in 2003 and is a member of the Court of Fellows of the Malaysian Institute of Management.
Tan Sri Dr. Munir obtained a B.Sc (Econ) and Ph.D in International Relations from the London School of Economic and Political Science (LSE) in 1971 and 1978. He is an Honorary Fellow of LSE and continues the long association with his alma mater as Visiting Senior Fellow at the Centre of International Affairs, Diplomacy and Strategy. Tan Sri Dr. Munir is an associate of Southeast Asia Centre (SEAC) at LSE.
INTRODUCTION
CARI’S ASEAN Roundtable series on the 18th July 2018 brought together a panel of eminent speakers who dissected the probability of a new financial crisis in Asia, as well as the direct and indirect effects of any fallout.
Titled “What Lessons Learned from Financial Crises of Recent Times”, the panel speakers considered very carefully the parallels with past upheavals such as the Asian Financial Crisis (AFC) and the Global Financial Crisis (GFC) within their contextual applicability to the current scenario. Globalisation, which was in its nascent stages when the first crisis hit, has matured rapidly in the intervening period. The result is that the world has moved from a unipolar to a multipolar environment.
The evolving global landscape means that global trade and economic development does not just center around two biggest world economies such as the United States and China, but involves a whole belt of countries like Indonesia, moving through to India and incorporating the African continent.
These nations are expanding a swathe of population into middle income status, and are keen for most part for the presence of free markets to grow wealth and opportunities.
Tan Sri Dr. Munir Majid, who chaired the panel, led the speakers in addressing questions over whether the world is facing a perfect storm of factors that would trigger a global recession, or even a depression. Some of the headwinds can already be seen. For example, public debt in European countries such as Italy and Greece are increasing and the political will to address the problem of being highly leveraged has been diverted by partisan politics.
Most importantly, they postulated the measures that could be taken by ASEAN nations through domestic policies and their sovereign regulatory institutions, such as Central Banks, to mitigate the worse effects of the storm and weather it. In addition, they highlighted the silver lining in this dark cloud, that there may short term opportunities arising from this disruption to institute fundamental structural changes that could ensure long term prosperity.
However, burning questions remained over the future of the openness of global trade, as well the roadmap to regional economic integration. The effects on current account balances and domestic demand form two crucial points of concern
THE ASIAN FINANCIAL CRISIS: A SERIES OF MISMATCHES
The Asian Financial Crisis of 1997-98 could be largely attributed to a series of mismatches leading to a perfect storm that culminated in a series of precipitous events for the region.
The first was a maturity mismatch, in which the majority of borrowing was on a short-term tenor, but used to invest in assets with a longer repayment schedule, such as real estate. This created a gapping issue which increased short term interest costs for borrowers, particularly when creditors became nervous.
Secondly, there were significant instances of foreign currency mismatches, involving ASEAN countries borrowing in US Dollars to finance loans in local currency, by means of a currency swap generally.
When local currencies started depreciating under heavy speculative selloffs, these loans resulted in heavy foreign exchange losses, as well as increased interest repayment costs as defaults spiraled.
POST AFC: ASEAN RISES FROM THE ASHES
In the last two decades, ASEAN has resurrected itself remarkably from the depths of the Asian Financial Crisis (AFC) in the 90’s to become a significant economic trade and power bloc in regional Asia.
It has benefited greatly from regulatory policies which favored an open trade environment with minimum barriers, most notably from the World Trade Organisation (WTO) and intra-regional Free Trade Agreements.
The permissive environment has been very conducive for ASEAN, so much so that intermediate goods now account for one-third of exports in the region, and three-fifths of imports. ASEAN Goods are now very much an integral part of the global supply chain process.
However, recent escalations in trade and geopolitical tensions between the U.S and the rest of the world, notably China and the EU have threatened to disrupt this narrative of free and open trade among developed and developing nations.
The resumption of protectionist policies, as demonstrated by punitive tariffs levied primarily by the United States and China has caused its fair share of uneasiness among those who fear a new financial crisis in Asia.
The latter, to a degree, was fairly well insulated from the effects of the Global Financial Crisis that hit the U.S and Europe in 2008. In fact, the region benefited greatly from enhanced liquidity flows as a result of the U.S Federal Reserve and European Central Bank’s (ECB) Quantitative Easing (QE).
This time around, tariffs under the Trump administration targeting the world’s second largest economy, China, as well as major players like Japan and South Korea means that ASEAN will be less shielded from the shocks of these weapons of open trade destruction.
GLOBAL FINANCIAL CRISIS: THE AFC ON STEROIDS
While ASEAN was the main focus, there were comparative lessons that were learnt from the later GFC that followed in 2008, as well as being aware of the differences between the two. In leading this discussion, Tan Sri Andrew Sheng believes that the GFC contained the same maturity and FX mismatches that characterized the AFC, with an additional Debt/Equity mismatch thrown in for good measure.
The added involvement of exotic financial derivatives that were not around at the time of the AFC, such as Credit Default Swaps (CDS), was another distinction. Lastly, the term ‘Global’ may have turned out to be a slight misnomer, as the detrimental effects were mainly confined to the U.S and Europe.
As a result, Europe was divided into winners and losers. The latter consisted of mainly the Southern European countries that went by the less salubrious acronym; PIGS (Portugal, Ireland, Greece and Spain).
The events that followed the GFC have been described as a ‘transition game’ from the richer Northern European nations to rescue their less well off Southern cousins. However, credit flows to the PIGS were eventually stopped and the ECB refused to print more Euros. The compounded detrimental effects on these overleveraged countries were severe, and are still felt to this day.
The Net foreign liabilities incurred by the PIGS such as Spain, Portugal and Greece back in 2008-10 exceeded 100% of their GDP. In contrast, during the AFC, the negative net foreign liabilities borne by a number of Asian economies never went past 50% of GDP.
In conclusion, the viewpoint of Andrew Sheng was that we needed to keep an eye on the net foreign liabilities and be cognisant of the fact that the current high debt levels of those European nations that took a hit in 2008 are still in the danger zone.
1. ASEAN IS BETTER PLACED TO WEATHER POTENTIAL CRISIS BUT VIGILANCE IS CRUCIAL
Dr. Ho Ee Khor from ASEAN+3 Macroeconomic Research Office (AMRO) discussed a recent simulation that his organisation ran with regards to the effects of a large scale global tariff war on the ASEAN region. The results were cautiously optimistic, indicating that such an event would shave off only 0.1% to 0.4% of regional GDP growth.
In contrast, the AFC had longer and larger scale effects. Growth in general for ASEAN nations ranged between 8 to 10% before that crisis. Since then, normative GDP growth has been lower overall, and now ranges between 5 to 6%.
On the whole, Asian nations have demonstrated greater resiliency than where they were in 1997 by taking initiatives to strengthen their macroeconomic fundamentals over that intervening period.
They are now wary of the pitfalls of being over leveraged and their Central Banks have become more proactive in smoothing out fluctuations. Dr. Khor maintained that ASEAN is on a whole, better placed to handle a new crisis due to the Chiang Mai Initiative Multilateralisation (CMIM) Facility.
The establishment of the CMIM in 2010 meant that countries such as Malaysia and other ASEAN nations could draw on funds up to US$23 billion each from this currency swap agreement.
By building on the Chiang Mai initiative back in 2000, the established pool now stands at US$240 billion and allows countries facing a short-term liquidity shortage to borrow from a reservoir of foreign-exchange reserves.
One of the questions asked by some of the panel speakers was whether the quantum of the CMIM was sufficient.
Fortunately, in addition to the swap line above, ASEAN countries have relatively large Foreign Exchange reserves to draw on if another financial crisis hit the region (Table 1 below).
Apart from ASEAN, Frank Scheidig highlighted that China has an immensely large amount of Foreign Exchange reserves but needed to liberalise their legal system and open their currency to a free float without needing an offshore mechanism.
Table 1: Foreign Exchange Reserves of China and ASEAN: 2017
|
Name |
FX Reserves (USD Billions) |
FX Reserves as a % of GDP |
|
|---|---|---|---|
|
4,000.0 |
33% |
|
|
August 2014 |
August 2017 |
|
|
273.0 |
273.0 |
83% |
|
167.5 |
196.9 |
62% |
|
137.5 |
100.2 |
35% |
|
111.2 |
128.8 |
12% |
|
80.9 |
81.5 |
47% |
|
34.6 |
28.6 |
21% |
|
5.6 |
10.0 |
41% |
|
3.9 |
5.2 |
8% |
|
0.7 |
0.9 |
7% |
Source(s): Trading Economics, Aseantoday; taken from here
As such, AMRO’s recommendation was that policymakers needed to continue the process of being vigilant through surveillance, thereby negating the need to draw on the facilities provided by the measures above.
It is hoped that by utilising policies drawn from the fiscal, monetary and macroprudential spheres, maintaining a balance between growth and stability can be achieved.
2. USE OTHER POLICY TOOLS BESIDES MONETARY POLICY
Governments and policy makers should not over rely on monetary policy at the expense of the many other policy tools available.
According to Tan Sri Dr. Andrew Sheng, there are essentially six (6) policy tools available to governments to deal with disruptions:
- Monetary Policies
- Regulatory Policies
- Fiscal Policies
- Structural Policies
- Bureaucratic/ Governance Policies
- Trade/ Foreign Policies
The over reliance on monetary policy tools, such as reducing interest rates and QE is due to the reluctance on the part of governments to use fiscal policies as it transfers the risk from the savers to the borrowers, according to one panel speaker.
Governments generally prefer using monetary policy as it has less severe political repercussions as opposed to direct fiscal policies. The problem with this approach is that it negates the occasional approach of more effective solutions to solving the issues at hand.
The fear of the cascading effect of mass defaults and the possible plunge into a painful and prolonged period of recession has resulted in an overuse of monetary policy. While this has generated a surge of prosperity in the ASEAN region, an assertion is made that this consists of asset bubbles that may burst when the next crisis hits.
3. CENTRAL BANK’S OVERSTRETCHED MANDATE POSES CHALLENGES IN DEALING WITH THE NEXT FINANCIAL CRISIS
Dr. Hans Gensberg touched on the expanding mandates of Central Banks (CB) in the ASEAN region. He believes that CBs should be tasked with what they are good at, and that governments need to exercise some measure of fiscal policy in order to address systemic and non-systemic economic and financial shocks.
The expanded role of CB’s beyond governance comes with two main risks, in his opinion.
- Risk Shifting
- Targeting Individual Sectors
By directing macroprudential policies at regulatory institutions, the latter can be overly restricted in terms of their operations and effectiveness. In contrast, the institutions that are not regulated are more prone to being affected by financial shocks.
CBs can be used to target individual sectors, which means they play a major role in directing credit – something they are not traditionally tasked with. What this does is hampering efficiencies and involvement in regulatory agencies.
During the Asian Financial Crisis, the role and activities of Central Banks entered the public consciousness through their willingness to use their country’s foreign exchange reserves to defend currency values by smoothing out fluctuations.
As a result of that experience, three outcomes have emerged with regards to how CB’s operate:
- CB’s are now more likely to intervene in the open markets to smooth out what they see as misalignments in exchange rates
- CB’s in the Asian region are quite clear about their objective in engendering price stability. They are single minded about targeting inflationary expectations. To that end, CB’s are making greater usage of capital account measures to attain this.
- Lastly, CB’s and regulatory authorities have improved their surveillance systems with regards to financial disruptions and are more willing to use policies of macro intervention.
Presently, CB’s need to address not just issues of money supply and price stability, but in addition, areas such a financial inclusion, regulation, income inequalities and exchange rate management policies.
In summary, Dr. Gensberg believes that culmination of expanded roles will mean CB’s have entered into territories that lack democratic accountability by co-opting mandates that should be within the scope of political authorities instead.
Two other points of note that came up during the roundtable session:
- THE NEXT GFC MIGHT BEGIN IN EUROPE
- MULTILATERAL TRADE DEALS SAN THE U.S. LIKELY TO THRIVE DUE TO TRADE FLOWS REALIGNMENT DESPITE RISING PROTECTIONISM
David Marsh expressed concern over a number of Southern European nations which still had very high levels of negative liabilities, and this was expected to the one of the triggers for a future economic crisis and the fulcrum for larger imbalances in Europe.
Arguably, European banks are in a more vulnerable position this time around and are less likely to be a buffer between the government and the real economy. Mr. Scheidig described those financial institutions are more like ‘melting ice in the sun’ as the buffer now has significantly thinned compared to previous times.
Germany’s role will be crucial in mitigating such adverse effects but the prevailing question was whether they would be willing to do so in order keep the debtor countries operating.
As a result of the last GFC, they have already chalked up high levels of net foreign assets and will insist on some debt restructuring on behalf of those delinquent nations in its role as prime creditor.
Given that the Germans have reduced their own debt to GDP ratio to less than 60% as per the requirements of the Maastricht treaty, they would justifiably hold the high moral ground in this scenario.
David Marsh’s prevailing fear is that there are two main trigger points that will trip a new GFC, that will have its genesis in Europe this time around:
The first are rising Target2 balances, which are the claims and liabilities of euro area National European Central Banks (NCBs) against the ECB that arise from cross border payment flows. The euro crisis of 2011-2012 saw sharply rising Target balances and were thought to be a sign of stress in the system, as well as an indication of the risks creditor countries were running.
Another round of ECB Quantitative Easing (QE) could spike their figure up even higher for Germany, propelling it to around EUR 1 trillion, or a third of its GDP.
Default events will bring up another potential wave of systemic shocks as the events of non-payment reverberate. Hence, Germany will be watching this metric with great concern.
The second trigger could be the failure of the ECB to elect a German national as the next head of the ECB. A majority of Germans hope to see the current President of the Bundesbank, Jens Weidmann, as the future President of the ECB.
David Marsh felt that the next president of the ECB is likely to be a French national, and the resulting political backlash could influence the degree of assistance that Germany might be willing to offer to struggling countries in the next Eurocentric crisis.
A working definition of ‘America First’ mean that the U.S will actively cease to subsidise Global Public Goods (GBG) by transferring risk to other parties instead of sharing it. This was the view of Andrew Sheng. These are goods with benefits and/or costs that potentially extend to all countries, people, and generations.
While this is a rude awakening for all other nations, it might spur them to negotiate free trade agreements on a bilateral or multilateral basis apart from the U.S. One such example is the continued interest in the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) even though the Trump administration has renounced it.
This means that even with rising protectionism, ASEAN can insulate itself by realigning trade flows and increasing intra-bloc transfers regardless of what the U.S may decide to do in the future. It is a win-win scenario as even if the U.S reverts back to an open trade policy, ASEANs intra-trade links are an additional buffer to future shocks. This means that ASEAN nations have to be proactively, and urgently negotiating these multilateral deals now.
Another interesting recent event was the signing of an FTA between the EU and Japan in 2018, called the EU-Japan Economic Partnership Agreement. This deal, would reduce $1.2 billion worth of tariffs for EU based exporters and approximately double that amount for their Japanese counterparts.
This is significant as the EU and Japan together account for one-third of the world’s GDP.
If the new normal is a continual resumption of ‘America first’ policies, then the positive silver lining might be a realignment of trade flows and growth areas. More importantly, it would continue the practice of reducing barriers to trade in other regions as an antagonist to U.S protectionism.
The default paradigm throughout recent history in which American trade policy was a stabilizer is seriously being challenged. Rather, it has become a disruptor, rudely rattling the rest of the world which has accepted Neo-Liberal open trade policies as the status quo.
Andrew Sheng suggested that new paradigms needed to be embraced in this multipolar world; one that wasn’t beholden to the U.S and its policies.
This involves other countries and blocs, like ASEAN, undertaking a long-term commitment to support the multilateral global system. Of course, this is easier said than done as the U.S remains the world’s largest economy and premier consumer of exports.
However, the general consensus among the panel speakers was that they were not expecting external demand to collapse again. In the interim, there might a series of intermediate shocks to the financial system, such as global interest rates rising rapidly, or heavy selloffs in asset markets.
There are grounds to be optimistic. Asia and ASEAN have enough capacity to rewrite the narrative of intra-regional trade according to their dictated. Because of these disruptions, a more united market might emerge, focusing on breadth and depth that shifts the loci of trade focus to the EU and Asia.
For the moment, the trend now is to enact trade policies from a solely national viewpoint, to operate in SILOs. The irony is that the longer the U.S chooses this path, they may irrevocably transform from being the one ton gorilla in the room to becoming a lightweight among the primates in the jungle of global trade.
