I will start with a brief recap of the Asian crisis, drawing some lessons and comparison with the European debt crisis. I would briefly discuss the economic setting and policy reform that brought Asia out of the crisis and end with some thoughts and reflections on the post crisis recovery period. Ladies and gentlemen, As a well-known American author, Mark Twain puts it, “history doesn’t repeat itself, but it does rhyme”. So despite the differences in the context and details of both the Asian and the European crises, the underlying root causes are not dissimilar. First, both crises, like most others in the recent economic history of the world, are often associated with the mispricing of risk and distorted incentives structures. In the case of Asia, our problem was both a currency and a banking crisis. We had to abandon the pegged exchange rate system which led to massive devaluation of our currency. With the corporate sector largely overleveraged and loaded with foreign debt, the sharp depreciation of the currency technically bankrupted firms overnight. Banks NPLs shot up and brought on with it the banking crisis. It was clear that the region’s “original sin” was well beyond redemption. We borrowed in foreign currencies and used it to finance projects that did not generate foreign exchange earning to service such a debt. In the case of Thailand, the amount of private external debt was over three times the level of international reserves.
Let me name a few – 1) sovereign is no longer risk-free, 2) we are taught to value economies of scale but are now confronted with the too-big-to-exist problem and 3) banks should no longer be only international in life but also in death as crises are more and more systemic given the growing interconnectedness. Spillover and contagion were witnessed in 1997 where the turbulence spread from Thailand to South East Asia and to Russia, China and Brazil, as it was a decade later in 2007 where the crisis widened from US and EU to the rest of the world. Imagine the pace of the spread of crisis in the next 10 years in 2017 – where crises would grow in size and speed beyond the management capacity of a single nation, real collective action is called for. Most importantly, we have to be forward-looking and well prepared. As crises are prone to occur more frequently with larger spillover, reform must be continued during normal times. It is imperative that the public is on board and support the reform effort to raise the competitiveness of the country, and minimize vulnerabilities or imbalances that may be triggered by external factors through no fault of their own. Ladies and gentlemen, Let me conclude by offering an observation that in 2002, five years after 1997 crisis, Asian economies had fully recovered, in particular, Thailand was able to repay the IMF package some two years ahead of the schedule.