Hard-earned lessons from the 1997 Asian financial crisis are helping insulate the region from the banking stress being experienced in the US and Europe.
(Bloomberg) — Hard-earned lessons from the 1997 Asian financial crisis are helping insulate the region from the banking stress being experienced in the US and Europe.
That was the takeaway from a meeting of finance ministers and central bank governors of the Association of Southeast Asian Nations in Bali this week. And they took heart from the fact that the region’s lenders are strong and healthy, despite the steep increase in interest rates.
Authorities have borrowed lessons from the turmoil in 1997 and even the 2008 global financial crisis that wiped out Southeast Asia’s markets and sent their currencies diving, according to Indonesian Finance Minister Sri Mulyani Indrawati, who co-chaired the bloc’s meeting.
Prudential regulations for banks, non-banks and capital markets are stringent to ensure ample capital and liquidity, she said. Robust stress tests are also conducted in anticipation of various risks, such as difficulties for refinancing, sharp currency swings and a sudden slowdown in economic growth.
In the Philippines, lenders and conglomerates are now led by people who were there in 1997 and recall how quickly liquidity dried up when so-called “hot money” fled the country, central bank Governor Felipe Medalla said.
“It’s good to have reserves because a lot of money is not available during hard times. That’s what Asia learned during 1997,” he said, adding that Philippine banks have long cut back on their bond holdings and set aside provisions for losses on their remaining debt papers.
That gives the Bangko Sentral ng Pilipinas room to keep raising its key rate as needed to combat soaring inflation, unlike central banks in advanced economies that now have to juggle monetary tightening with stabilizing their financial systems. “We’re in a good place,” Medalla said.
Despite the relative calm in Southeast Asia, work continues on building buffers. On the Asean’s agenda this week is expanding the use of local-currency settlement for trade, investment and other financial transactions, reducing the need for US dollars that may prove scarce during sell-offs.
Indonesia’s Indrawati said it’s too early to be complacent.
“When the sun shines, fix your roof,” she said. “Don’t fix your roof when there’s a thunderstorm.”
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