No repeat of 1997 crisis in a stronger Asia, says Dominguez

Efforts by regional economies to improve corporate governance and develop mechanisms to ensure financial stability over in recent years have prevented a repeat of the 1997 East Asian financial crisis, Finance Secretary Carlos Dominguez III said on Friday.

In a press statement, the head of the Duterte administration’s economic team said that a repeat of the market turmoil that swept across Asia and into the rest of the world two decades ago was unlikely due to better cooperation and coordination in the region.

“That does not mean, however, that our regulatory authorities should let down their guard,” Dominguez said in a speech delivered in Yokohama, Japan, during the annual meeting of the Asian Development Bank.

“The 1997 crisis tells us that lax regulation and poor policies could cause a quickly spreading crisis,” he said. “I trust we will always be in constant conversation, such as this one, to spare our economies the trauma of financial uncertainty.”

Dominguez said that old fiscal and corporate practices contributed to plunge Asia into a crisis 20 years ago, but added that subsequent changes were made to build up the region’s resilience against financial market volatilities.

While the region’s major economies maintained fixed foreign exchange rates back then, nearly all countries in Asia have flexible rate regimes today that allow market conditions to define currency values to prevent borrowers and lenders from underestimating forex risks.

Dominguez noted that before the Asian crisis struck, corporations were highly leveraged, with balance sheets that had high currency mismatches.

“Today, our economies are better governed, having introduced corporate and financial restructuring measures,” he said. “Our corporations understand the importance of good governance procedures. They appreciate prudent regulations.”

The Finance chief said the massive capital outflows during the crisis made it necessary for Asia’s economies to gather fiscal resources to shore up productivity and spur growth, which, in the process,  made them fully appreciate   the importance of maintaining fiscal deficit ceilings, limits to their respective debt-to-GDP ratios and a diversified tax base.

The crisis also made Asia more prudent in regulating banks and supervising corporations.

“We introduced risk-based approaches to regulation and supervision,” he said. “Our banks have learned to be efficient under a more stringent regulatory regime that raises loan-to-value ratios, increased risk weights, reserve and capital requirements.”

“The crisis was a misfortune. But from it we drew strength,” he said. In the twenty years that followed, the economies of this part of the world instituted important reforms that built up resiliency against financial market volatilities,” he added.

On top of adopting more prudent practices, Dominguez said countries in Southeast Asia have also come up with mechanisms for improved cooperation to assure financial stability. Among these mechanisms is the establishment of the Asean + 3 Macroeconomic Research Office to enable regional surveillance and the close monitoring of regional trends.

He also cited the Chiang Mai Initiative Multilaterization (CMIM), which established a network of bilateral swap agreements to help limit currency volatility, and the introduction of the CMIM-Precautionary Line, which serves as a crisis prevention facility.

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