Asia Can Power Through Another Financial Crisis

The Asian nations hit hardest 20 years ago by a crisis that sent currencies and stock markets tumbling, saw governments fall and pushed millions back into poverty, now have some of the strongest buffers in the world.

But that resilience faces a fresh test. The world’s biggest central banks are either removing monetary stimulus or mulling ways to do so—the same backdrop that helped unravel the Asian miracle a generation ago. That could suck liquidity out of emerging markets, pressure currencies and raise the cost of dollar debt repayments. The following charts assess the region’s changing fortunes:

Asia’s currency reserves at well over $6 trillion make up more than half of the world’s holdings, led by China’s $3 trillion hoard. In 1996, Asia’s reserves were less than $1 trillion, leaving central banks short handed when their fixed and managed currencies came under speculative attack from investors including George Soros. Most of the countries now have floating exchange rate systems, reducing pressure on central banks to defend a particular level of the currency.

Asia’s current-account positions are much stronger, with most in surplus for several years now. The current account, which measures trade and financial flows including interest and dividend payments, is used by investors to gauge a nation’s resilience to a crisis.

Asian economies are again among the fastest-growing in the world, with countries such as the Philippines, India and China expanding more than 6 percent annually.

Most countries have taken steps to reduce foreign debt, making their economies less exposed should a sharp appreciation in the U.S. dollar inflate the cost of repaying loans. Twenty years ago, companies went bankrupt and governments from Thailand to South Korea were forced to seek bailouts from the International Monetary Fund when their tumbling currencies made servicing U.S. dollar loans impossible.

Many of Asia’s economies have also gradually reduced their dependence on exports and become more reliant on rising consumption. Youthful populations in countries such as the Philippines and Indonesia are setting up what could be a demographic dividend if enough work can be found to swell the ranks of the middle classes there.

So today, 20 years after the crisis that erupted on July 2, 1997, when Thailand abandoned its currency peg, the region is again a favorite among investors, with global funds pouring about $45 billion into stocks and bonds in Indonesia, Malaysia, the Philippines, South Korea and Thailand this year. Analysts predict that the Indonesian rupiah, Philippine peso, and Malaysian ringgit will be the top-performing currencies, including interest income, in Asia by the end of 2018.

“Asia has come a long way because of the lessons they learned,” said Tsutomu Soma, general manager of the fixed-income department in Tokyo at SBI Securities Co. “The region paid a huge price for those lessons but has moved on to improve drastically.”

Correction: A previous version of this graphic incorrectly indicated Thailand's GDP in 1996 as $138B; in fact it was $183B.