The likelihood of another Asia Financial Crisis (AFC) in the future has been reduced by the efforts of all economies in the region to work together to install mechanisms for financial support, Philippine Finance Secretary Carlos Dominguez 3rd said.
Dominguez made the remark at the opening of the Host Country Seminar in Yokohama organized by the Japanese government, the Philippine Department of Finance (DoF) said in a statement released in Manila on Friday.
The seminar is part of a series of events organized by Japan as host country of the 50th Annual Meeting of the Asian Development Bank (ADB). This year’s meeting held May 4 to 7 focuses on the region’s increasing need for infrastructure as a critical element toward achieving sustainable and inclusive growth.
Dominguez cited the Asian economies’ successful efforts over the past two decades to improve corporate governance and develop regional mechanisms to ensure financial stability and avoid a repeat of the economic crisis that buffeted the region in 1997, the DoF said.
“That does not mean, however, that our regulatory authorities should let down their guard,” Dominguez was quoted as saying.
“The 1997 crisis tells us that lax regulation and poor policies could cause a quickly spreading crisis. I trust we will always be in constant conversation, such as this one, to spare our economies the trauma of financial uncertainty,” he said.
In his remarks at the seminar, Dominguez noted the old fiscal and corporate practices that plunged Asia into a crisis 20 years ago and the subsequent changes that were made to build up the region’s resilience against financial market volatilities:
The region’s major economies used to maintain fixed foreign exchange (forex) rates, but today nearly all countries in Asia have flexible rate regimes that allow market conditions to define currency values to prevent borrowers and lenders from underestimating forex risks.
Before the 1997 Asian financial flu 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.
Our corporations understand the importance of good governance procedures. They appreciate prudent regulations,” he said.
Dominguez recalled the massive capital outflows triggered by the 1997 crisis:
The outflows 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-gross domestic product ratios and a diversified tax base.
The crisis also made Asia more prudent in regulating banks and supervising corporations, and Dominguez recalled the measures taken by the governments:
“We introduced risk-based approaches to regulation and supervision. 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,” he said.
“Before the crisis broke out, we were all complacent in the way we did things. We were all surprised when the financial meltdown happened. It hit our economies like a wayward typhoon, punishing companies that underestimated exchange risks and penalizing governments that mistook stable currencies as a measure of the economy’s strength,” Dominguez pointed out.
“The crisis was a misfortune. But from it we drew strength. 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 pointed out that countries in Southeast Asia have also come up with mechanisms for improved cooperation to assure financial stability.
Among these mechanisms was the establishment of the Asean + 3 (Association of Southeast Asian Nations and China, Japan, South Korea) Macroeconomic Research Office to enable regional surveillance and the close monitoring of regional trends.
Dominguez 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.
The CMIM evolved from the Chiang Mai Initiative, the first regional currency swap arrangement launched by the Asean + 3 countries in May 2000.