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It's Asian dynamo, not domino theory
By Karen Fawcett |
May 13, 2010, Thursday
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Print Edition
Print Edition
MANY predicted that Asia would topple as the contagion spread from the West.
However, rather than behaving like dominoes, this crisis has shown Asia's emerging market economies to more closely resemble dynamos - able to generate self-sustained, domestically driven demand.
Given this, Asia is now seen as the growth center of the world.
When asked why Asia has fared so well, we feel compelled to provide a lesson in history. A financial crisis of this magnitude is not completely new to this region, and the Asian crisis of 1997-98 stands out as a watershed.
At that time, Asia had experienced two decades of very strong economic growth that had fueled lax lending and careless investment practices.
When foreign investments (which until then were huge) slowed and governments became unable to support their currencies, the region began to witness a major meltdown.
Asia's success in riding out the storm this time is no accident. It is clear that Asia learned a number of crucial lessons from the depth and severity of the 1990s crisis.
Since then, Asia has been preparing itself to withstand future crises.
So while other regions were caught woefully unprepared, Asia was leaner, meaner, and more ready for the shocks. Foreign exchange reserves, for instance, have surged across the region since 1997 and there is a far greater emphasis on fiscal discipline, as well as on the credibility of monetary policy.
Most important, the previous crisis reduced the level of indebtedness built up within Asian economies. This proved key to ensuring that the debt-induced crisis in the West did not spread eastwards.
Another lesson from the 1997-98 crisis was that countries need to deregulate their financial sector at speeds best suited to domestic needs.
Prior to 1997, some Asian economies had deregulated too quickly, allowing bubbles to build up. Without the appropriate institutional infrastructure, this was disastrous.
But the onset of the more recent crisis demonstrated that Asian economies had emerged from the 1997-98 crisis with more robust regulatory environments.
Perhaps the most overlooked, but no less important, feature of the strong Asian response to the crisis, was the position of local banks compared to their counterparts in the West.
In Asia, we have simply not witnessed the expected deterioration in banking profitability.
In 2008, for example, total Asian banking profit was 27 percent higher than the total of global banking profit (many banks worldwide made losses, which lowered this total).
By contrast, Europe - which boasts the majority of banking assets - experienced losses that were the equivalent of 14 percent of global banking profits.
In the US, the banking sector has been the worst hit, with losses equivalent to 80 percent of global profits, despite having 20 percent of equity in the global market.
These figures, while representing a mere snapshot of what occurred in the recent crisis, are a key piece of the puzzle when you consider what happened in the 1990s versus what has happened in the developed world this time around.
During the 1997-98 crisis, we saw many foreign banks pull out, leaving local companies short of credit as local banks failed to step up and meet local demand.
This time around, an entirely different picture has emerged in Asia. Local banks have had stronger balance sheets and have shown stronger support for local companies.
They now dominate their domestic markets. China's banking sector has been particularly successful in moving onwards and upwards - stock market listings, strategic stakes taken by international banks and stellar growth. Indeed, Chinese banks have emerged as among the most profitable in the world.
While opportunities abound, there are also huge implications for banks. As soon as companies start producing for the local market, their banking needs change dramatically.
Initially, when corporate operations are limited to factories producing for export, they are often satisfied with basic lending and, in general, cross-border transactional services with a focus on basic cash, trade finance and foreign exchange.
But as we have seen at Standard Chartered, across our 17,000 branches in not just Asia but in Africa and the Middle East, as corporate operations become more local, domestic transactional services are required with full local currency capabilities plus more value added services.
From Standard Chartered's experience from having operated in Asia for over 150 years, we believe that to be successful, banks must tailor their approach to local needs while simultaneously providing consistency across multiple small markets.
(The author is Group Head, Transaction Banking, Standard Chartered Bank.)
However, rather than behaving like dominoes, this crisis has shown Asia's emerging market economies to more closely resemble dynamos - able to generate self-sustained, domestically driven demand.
Given this, Asia is now seen as the growth center of the world.
When asked why Asia has fared so well, we feel compelled to provide a lesson in history. A financial crisis of this magnitude is not completely new to this region, and the Asian crisis of 1997-98 stands out as a watershed.
At that time, Asia had experienced two decades of very strong economic growth that had fueled lax lending and careless investment practices.
When foreign investments (which until then were huge) slowed and governments became unable to support their currencies, the region began to witness a major meltdown.
Asia's success in riding out the storm this time is no accident. It is clear that Asia learned a number of crucial lessons from the depth and severity of the 1990s crisis.
Since then, Asia has been preparing itself to withstand future crises.
So while other regions were caught woefully unprepared, Asia was leaner, meaner, and more ready for the shocks. Foreign exchange reserves, for instance, have surged across the region since 1997 and there is a far greater emphasis on fiscal discipline, as well as on the credibility of monetary policy.
Most important, the previous crisis reduced the level of indebtedness built up within Asian economies. This proved key to ensuring that the debt-induced crisis in the West did not spread eastwards.
Another lesson from the 1997-98 crisis was that countries need to deregulate their financial sector at speeds best suited to domestic needs.
Prior to 1997, some Asian economies had deregulated too quickly, allowing bubbles to build up. Without the appropriate institutional infrastructure, this was disastrous.
But the onset of the more recent crisis demonstrated that Asian economies had emerged from the 1997-98 crisis with more robust regulatory environments.
Perhaps the most overlooked, but no less important, feature of the strong Asian response to the crisis, was the position of local banks compared to their counterparts in the West.
In Asia, we have simply not witnessed the expected deterioration in banking profitability.
In 2008, for example, total Asian banking profit was 27 percent higher than the total of global banking profit (many banks worldwide made losses, which lowered this total).
By contrast, Europe - which boasts the majority of banking assets - experienced losses that were the equivalent of 14 percent of global banking profits.
In the US, the banking sector has been the worst hit, with losses equivalent to 80 percent of global profits, despite having 20 percent of equity in the global market.
These figures, while representing a mere snapshot of what occurred in the recent crisis, are a key piece of the puzzle when you consider what happened in the 1990s versus what has happened in the developed world this time around.
During the 1997-98 crisis, we saw many foreign banks pull out, leaving local companies short of credit as local banks failed to step up and meet local demand.
This time around, an entirely different picture has emerged in Asia. Local banks have had stronger balance sheets and have shown stronger support for local companies.
They now dominate their domestic markets. China's banking sector has been particularly successful in moving onwards and upwards - stock market listings, strategic stakes taken by international banks and stellar growth. Indeed, Chinese banks have emerged as among the most profitable in the world.
While opportunities abound, there are also huge implications for banks. As soon as companies start producing for the local market, their banking needs change dramatically.
Initially, when corporate operations are limited to factories producing for export, they are often satisfied with basic lending and, in general, cross-border transactional services with a focus on basic cash, trade finance and foreign exchange.
But as we have seen at Standard Chartered, across our 17,000 branches in not just Asia but in Africa and the Middle East, as corporate operations become more local, domestic transactional services are required with full local currency capabilities plus more value added services.
From Standard Chartered's experience from having operated in Asia for over 150 years, we believe that to be successful, banks must tailor their approach to local needs while simultaneously providing consistency across multiple small markets.
(The author is Group Head, Transaction Banking, Standard Chartered Bank.)
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