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A Commentary
By Hubert Neiss
Director of the International Monetary Fund’s (IMF’s)
Asia and Pacific Department
South China Morning Post
December 28, 1998
Financial market collapse and loss of confidence have spread through countries that once appeared to have left hard times behind for good. Asia, perhaps more than any other part of the world, has experienced the full depth of the downturn; the human cost has been enormous.
Even though the world continues to face serious uncertainties, as the New Year approaches, there is reason for hope.
The global economy and world financial markets have recovered a measure of stability after the scares of August through October, when Russia defaulted on its debt obligations.
Worry about the world economic outlook has eased since then. The International Monetary Fund has trimmed its global growth forecast for next year - to 2.25 per cent from 2.5 per cent - but this is not a recession.
The worries about contagion from the emerging markets no longer dominate investor behaviour as they did right after the Russian default. Asian economies appear to have bottomed after unprecedented declines in domestic demand, and there is reason to expect growth to resume next year.
Policy-makers throughout the world have responded to the challenge of the crisis. Significant steps have been taken to restore calm and set in motion a train of policy initiatives aimed at avoiding future crises.
Efforts by leading economies to boost confidence have been especially critical. In North America and Europe, that has meant reductions in interest rates.
The United States Federal Reserve's rate cuts since September sent an important message to financial markets, and these were followed by European reductions in advance of January's launch of economic and monetary union.
Taken together, the central bankers passed the message that they recognised the threat to global economic growth and dangers posed by the collapse of the market for emerging economies' debt.
As a result, the risk of a substantial slowdown in the US and Europe has been successfully contained. Moreover, the debt market has begun to rebound; some companies and countries have gained easier access to the bond markets and the worries about credit availability in the US that loomed so large in October have diminished significantly.
The Japanese authorities have contributed to the renewal of confidence by undertaking major initiatives to deal with their country's recession and banking crisis.
The effort to restructure and refinance struggling banks is welcome, especially now the government is taking concrete action against some of the weakest institutions.
The Japanese Government is right to continue with more expansive budget policies to help support domestic demand. The yen has rebounded and that, in turn, has given a lift to market confidence in the rest of Asia.
In addition, Japan has made US$30 billion available to its neighbours under the Miyazawa Initiative, a generous programme to address the effects of the Asian crisis.
Of course, there is a need for caution in discussing the turnaround in Asia, especially in light of the deep recessions that still affect several countries.
Nonetheless, the progress with stabilisation and reform should become more evident in the New Year.
Thailand and South Korea now have large current account surpluses, strengthening currencies and subdued inflation. Interest rates have fallen below pre-crisis levels, although lending rates have been slower to decline due to the burden of problem loans in the banking systems.
Both countries are expected to return to positive growth by late next year and both are making progress restructuring their debt-stricken financial and corporate sectors.
Indonesia continues to face more severe problems, but it is also showing signs of progress. Interest rates have begun to come down as the rupiah strengthens and inflation eases.
Assuming implementation of the IMF-supported reform programme remains on track, further gradual easing of interest rates should be possible.
The most heavily affected crisis countries have adopted budget policies aimed at supporting domestic demand and promoting recovery; they will be running fiscal deficits that are unlikely to have any adverse financial market repercussions, reflecting the comfortable initial public-debt positions in most of the countries.
It is a similar story in several other Asian countries - including the Philippines and the mainland - where government spending is expected to spur growth next year.
These budget policies will contribute to meeting the challenge of easing the burden of the economic downturn for the region's most vulnerable citizens. The IMF is deeply aware of the suffering that has accompanied the crisis, and it is encouraging governments to increase their spending on social safety-net programmes.
In Indonesia, those programmes account for 6.5 per cent of gross domestic product in the present fiscal year, and that is in addition to the usual spending on education and health.
The worst may be over, but there are still many worries hanging over the world financial system. The supply of funds to most emerging market economies is still sharply down, and financial market conditions remain fragile.
Thus, the world community's continued commitment to joint action is essential. That was clearly demonstrated by last month's decision to assist Brazil as it initiated a strong policy programme to address underlying economic and fiscal weaknesses.
The strategy of front-loading the international effort to provide maximum, immediate support is an important element in the battle against contagion.
By moving quickly before crisis could strike, the IMF, other organisations and governments helped sustain the improvement in global market sentiment. It also boosted the outlook for the Latin American region.
The concerted action represents progress in the effort to develop strategies to fend off future financial-market crises. It goes hand in hand with the agenda of international financial and monetary reform aimed at correcting the fundamental weaknesses that the past 18 months have revealed.
That reform agenda grew out of the October annual meeting of the IMF. It then was endorsed by the Group of Seven leading industrialised nations in statements by heads of state, finance ministers and central bank governors.
The bottom line is to harness benefits of integrated global financial markets while reducing risks of instability.
Countries must pursue the goals of stable economic policies, sound national financial systems, orderly opening of capital accounts, transparent behaviour by market participants and equitable socio-economic policies.
These are lofty goals but the steps required to meet them are down to earth - ranging from adoption of internationally recognised codes of good business practice to generalising the standards for transparent economic and market data to the reform of banking systems, and involving the private sector in resolving and forestalling crises.
As abstract as some of these notions may appear at first glance, they actually are essential building blocks as the world attempts to erect firm foundations under the global financial system. Without them, there can be no firm guarantees of future economic stability.