20 years after financial crisis, Asian economies prepared to withstand shocks

Asian economies are better equipped to weather external shocks and financial pressures owing to buffers and reforms undertaken in the wake of the Asian financial crisis, which began 20 years ago this week, says Fitch Ratings.
According to Fitch Ratings, the shift from fixed to more flexible exchange rates is one of the key differences from 1997. 
The four hardest-hit countries – Korea, Indonesia, Malaysia and Thailand – had fixed or heavily managed currencies at the time. This allowed exchange-rate misalignments to build and exposed the countries to speculative attacks, such as the one that triggered the sharp devaluation of the Thai baht that set off the crisis.
Most Asian economies are also less reliant on net capital inflows, with current-account surpluses rather than deficits now the norm. 
Of the affected countries, only Indonesia runs a current-account deficit, which at 1.8 per cent of GDP is smaller than the deficits in the lead-up to 1997. Thailand, for example, ran a deficit of 8.0 per cent of GDP in 1996, Malaysia and Korea around 4.0 per cent and Indonesia 2.8 per cent.
Meanwhile, most central banks have built foreign-exchange reserves to levels allowing for significant scope to service external debts and, if they see a need, support currencies. 
Exchange-rate depreciation is no longer the threat it once was to the health of Asian economies due to generally lower external-debt ratios and more widespread use of foreign-exchange hedging. 
The cost of servicing foreign-currency debt soared when currencies collapsed in 1997, causing a sharp rise in defaults with serious consequences for banking systems.
Banking sector supervision has also improved significantly. Lending standards and buffers against losses are stronger and balance sheets are more transparent. 
As well, Asian banks tend to fund their lending out of deposits – rather than relying on wholesale funding – making them more resilient to tighter market liquidity. 
Close relationships between banks and companies, which were at the core of the financial crisis, still exist to varying degrees, but in most countries they are not as cosy or pervasive as 20 years ago.