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Analysis: Asian economies better prepared for crisis compared to 1997, but risks remain

In the aftermath of the 1997 Asian financial crisis, countries in the region have put efforts into beefing up preparations for possible financial meltdown by expanding multilateral cooperation. Risks of crises remain in the region, however, as these countries are still likely to be affected by the monetary and financial policies of major economies such as the United States.

    Japanese Finance Minister Taro Aso told a news conference this past May after a meeting of finance ministers and central bank governors from the Association of Southeast Asian Nations (ASEAN) and three other Asian countries that the effect of the 2008 global financial crisis was much smaller in Asia than in Europe because the Asian countries utilized empirical rules learned from the 1997 crisis, indicating that measures taken in the aftermath of the Asian financial crisis had borne fruit in the 2008 market meltdown.

    The Asian financial crisis 20 years ago was triggered by a sudden fall of the Thai baht in July 1997 as a result of selling pressure by speculators. The crisis spread to other Asian countries, hitting the economies in the region hard. Countries including South Korea ended up receiving aid from the International Monetary Fund. The Asian economy, which had been growing since the 1980s, stagnated after the regional crisis.

    Based on the lessons learned from the bitter experience, the establishment of risk management systems accelerated in Asia.

    In 2000, the ASEAN members and Japan, China and South Korea agreed to the "Chiang Mai Initiative" currency swap accord, under which signatory counties would supply U.S. dollars in the event of a financial crisis. The fund pooled in the initiative doubled to $240 billion in 2014.

    In 2011, the ASEAN+3 Macroeconomic Research Office was established to analyze the economic situations in each of the member countries, while each nation has beefed up preparations for financial crises. Thailand, for example, has increased the size of its foreign currency reserves by four times over the past 20 years.

    At the same time, the structure of Asia's economy, which is vulnerable to external factors, has not changed much.

    When Donald Trump was elected U.S. president in November 2016, the value of the Malaysian ringgit dropped by about 6 percent due to a spike in U.S. long-term interest rates. Malaysian authorities subsequently took measures to protect the country's currency, such as requiring 75 percent of the foreign currency that export-oriented companies received to be exchanged for ringgit.

    However, risks remain. In South Korea, the balance of debts in households, mainly mortgages, has more than doubled over the past decade, triggering concerns over a series of defaults as a result of interest rate hikes prompted by the U.S. Fed raising interest rates.

    Kota Hirayama, senior economist at SMBC Nikko Securities, points out that since the current account balances of Asian countries have moved into the black, they are unlikely to see an outflow of cash as serious as that recorded 20 years ago. At the same time, Hirayama also says Asian economies need to increase their growth potential and transform into strong economies that are less likely to be affected by external factors. (By Kazuya Nakajima, Business News Department)

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