Following the crisis, the Asian governments strengthened the macroeconomic fundamentals and put in place structural and fiscal reforms. The strong economic development in China and, then, India also helped to propel the region ahead. Today, the Asian economies growth rate averages around 8%. Businesses have repaired their balance sheets and have started to invest again after purging out the excesses of the 1990s. This is reflected in the Asia (ex-Japan) domestic bond markets, with a significant increase of almost five times in size from $ billion to more than $ trillion; far exceeding the global growth rate, which has doubled since 1997. Having said that, the global financial markets today are facing yet another crisis. Ten years ago, Asia was at the centre of the storm. However, this time round, the financial market turbulence started in the US and Europe and then spread throughout the world. The challenges facing the capital markets show that the banking system is intertwined with the capital markets more intricately than was previously believed. While the characteristics of the two financial crises are different, let me share 3 common themes that run through both crises. The first has to do with the tendency of the market to assume that current market conditions can be extrapolated into the long term. Before the Asian financial crisis, most investors extrapolated the rapid growth in Asia and the currency pegs maintained by some countries without factoring in the sustainability of such trends.
The real long-term interest rate is, of course, determined by structural features of the economy, not by central banks. Enduring changes in the level of real interest rates and in the cost of credit intermediation by lenders alter the sustainable level of debt service of borrowers. And changes in the interest rate also affect the net present value, and hence the price, of housing assets. All else equal, lower rates will increase both the price borrowers can afford to pay and the net present value of houses. There has been a substantial fall in the long-term real interest rates of around 4.5 percentage points over the past 30 years (Chart 4); this trend has occurred across countries. The structural decline in real rates pushed up on house prices in particular given the inelastic supply. It has also made a larger debt stock easier to service. This fall in real rates was clearly an important factor over the period in driving the high rate of credit growth relative to GDP and the consequent increase in the level of household debt to income. Looking forward, to the extent that the fall in interest rates was the result of structural factors that are likely to last for a long time, the increase in the level of household debt is more likely to be sustainable.