The Asian Development Bank (ADB) said Asian countries, including the Philippines, should not be complacent with its fiscal reforms two decades after the Asian Financial Crisis (AFC). In an ADB Brief, Asian countries were told to remain vigilant against threats, such as rising US-denominated debts, private sector debt and nonperforming loans (NPLs), among others.
“Asia should not be complacent and remain vigilant against a buildup of financial imbalances. It must be proactive and ready to act if risks materialize—to manage financial imbalances, strengthen macroeconomic fundamentals and continue to address structural weaknesses through broad-based reforms,” the ADB said. ADB said that despite the reforms instituted after the AFC of 1997, the region remains vulnerable to threats that could create shocks.
The Manila-based multilateral development bank said the rise of US dollar-denominated debt could harm Asian financial markets by ushering in sharp capital flow reversals. It added policy-makers in the region should also be vigilant against sharp exchange-rate movements that could lead to financial outflows in the domestic economy. The ADB also said another threat is the rise in private-sector debt from households and companies. Countries like China have seen sharp increases in corporate debt to 90 percent in March 2017, from 73 percent in March 2010.
In Korea, ADB said household-debt-to-GDP ratio increased to nearly 92 percent in the third quarter of 2016, from 74 percent in 2008. The ADB also said Thailand, where the AFC originated in 1997, and Malaysia have also recently seen significant increases in household debt. “Although the levels are not yet as alarming as these, the household-debt-to-GDP ratios have increased quickly in other economies; for instance, up from 19 percent in the first quarter of 2009 to 43 percent in the third quarter of 2016 in China and 43 percent to 62 percent in Singapore during the same period,” the ADB said.
Apart from these, the ADB said threats include rising NPLs in some economies in the region like China. The ADB said data from the China Banking Regulatory Commission showed NPL ratios increased to 1.74 percent, from 0.96 percent between March 2013 and December 2016. The bank said there are also new challenges, such as more pronounced financial cycles, and financial globalization which indicated deeper interconnectedness of markets.
“Going forward, Asia needs to pursue broad-based reforms to address new and remaining vulnerabilities and safeguard financial stability,” the ADB said. The ADB added the AFC began in Thailand in July 1997 and spread to other countries in the region, including Indonesia and Malaysia.
The crisis also affected Korea, which just became a member of the Organisation for Economic Co-operation and Development at the time. The bank said excessive short-term debt across East Asia, capital inflows slowed or reversed. Banks also saw high levels of NPLs and investment rates plunged.