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What are the implications of the crisis for the financial systems in East Asia?

James Seward's picture

I apologize for the lack of recent posts, but I have been traveling in the region and then getting over a cold, so I’m finally back in action.  One of the stops during the trip last month was to Jakarta to participate in our internal Economist’s Forum.  This forum was very interesting and included sessions with the Indonesian Minister of Finance, as well as the Minister of Trade.  The session that I participated in was focused on the implications of the current global economic crisis and the impacts on East Asian financial sectors.  This was a good opportunity to consolidate our own thoughts on the subject and to lay out the basic issues as we see them today (I’ve attached the presentation, which comes with the required caveat that these are not official World Bank views, but instead my personal views). 

This presentation starts by running through what we know, what we can expect to know and how we know what we know, and why it is so hard to know anything in the area of corporate and financial sectors.  We then move into how we see the crisis coming to Asia, the impact on corporations, the spillover to the financial sector, the policy responses to the crisis to date, and finally what the World Bank is doing.  We begin by admitting that it is difficult to do accurate corporate and financial sector analysis for a wide range of reasons, ranging from problems with reporting and disclosure to weaknesses in regulatory standards and financial supervision practices.  Despite this constraint, we can see some general regional trends... 

East Asia appears to be affected by the crisis largely via the export channel, whereby exports have declined precipitously.  This decline has hit corporate profits and although there are not yet widespread business failures, signs of stress are emerging.  The spillover into the financial systems has been via volatility in equity markets and closure of the markets to new capital raising (although this is now changing quickly), widening bond spreads for corporates, and some deterioration of bank performance and asset quality.  It is expected that there will be a time-lag before the corporate problems hit the banks, as was the case in the United States, but the corporate and financial sectors entered this global crisis relatively well-prepared (as compared to before the Asian crisis a decade ago). 

Governments in the region have responded proactively to the crisis, largely by reducing interest rates and bank reserve requirements, increasing deposit insurance coverage, and developing guarantee programs for commercial credit.  The crisis has ignited a number of policy debates in the region and the larger emerging markets in East Asia are participants in the global financial sector reform agenda (via the G20), but there remain some actions that could be taken within the region to respond to the crisis.  Finally, we conclude by looking at what we are doing and the World Bank is indeed involved in the region, but mainly on a case-by-case basis and through the Financial Sector Assessment Programs.

There are some emerging signs around the world and in Asia of recovery, but new warnings have come out on the rise of corporate defaults and bank losses in emerging Asia.  This crisis is evolving by the day and it’s difficult to predict what the ultimate impacts will be, but it is clear that the ramifications will be with us for quite some time.