Lessons from Southeast Asia -- Remarks by Michel Camdessus
IMF News, November 13, 1997
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- Published: November 13, 1997
I. How could it happen?
- Macroeconomic indicators and vulnerabilities identified in Thailand:
- substantial real exchange rate appreciation
- a marked slowdown in export growth
- a persistently large current account deficit financed increasingly by portfolio inflows, including a substantial amount of short-term capital
- rising external debt
- Domestic sector weaknesses exposed:
- substantial, unhedged foreign currency-denominated borrowing by the private sector
- an inflated domestic property market
- a weak and over-exposed banking system
- Market signals and policy response:
- declining equity prices and mounting exchange rate pressure signaled doubts about sustainability of policies
- IMF stressed problems and pressed for urgent measures in continuous dialogue with Thai authorities
- delay in corrective action—partly due to difficulty in recognizing underlying deficiencies after prolonged strong performance—contributed to the crisis
- Channels of regional spread:
- expectation of baht depreciation eroding competitors’ trade competitiveness led neighboring currencies to weaken
- currency slides increased debt service costs for domestic private sectors, prompting rushes to hedge external liabilities and intensifying exchange rate and interest rate pressures
- markets reassessed risks in other countries and found similar problems to varying degrees: overvalued real estate markets, weak banking sectors, poor prudential supervision, substantial private short-term foreign currency borrowing
- lack of transparency about government and central bank operations and threat of controls on market activity heightened uncertainty and accelerated capital flight
II. What lessons should we draw?
- Primary lesson:
- necessity of taking early action to correct macroeconomic imbalances before they precipitate a crisis
- Observed policy missteps:
- attacking the symptom (pressure on the baht) led to large reserve losses and forward foreign exchange liabilities
- delays in addressing financial sector problems and political uncertainties deepened the crisis and helped its spread
- Preemptive policy actions recommended:
- one, maintaining an appropriate exchange rate and exchange rate regime; more flexible exchange rates can provide early signals and reduce reckless borrower/lender behavior, but appropriate macroeconomic policies are essential regardless of regime
- two, maintaining a proper policy mix to avoid high domestic interest rates that damage the domestic economy, attract excessive short-term capital, or preclude further monetary tightening; keep the option of using the interest rate instrument open
- three, strengthening structural policies and institutions—especially better prudential supervision—to underpin a sound financial system
- four, carrying out "second generation" reforms to promote domestic competition, increase transparency and accountability, improve governance, ensure broader sharing of growth benefits, and strengthen foundations for future growth
III. Restoring confidence
- Requirements for restoring confidence:
- strong commitment to economic adjustment and reform, implemented through often painful measures
- free flow of timely, accurate, and comprehensive information to reduce uncertainty and allow markets to assess underlying problems and corrective efforts
- time: confidence, once lost, is hard to regain
- Regional program and country actions:
- Thailand: launched a comprehensive program addressing large external deficits and troubled financial institutions; budget moving back into surplus; comprehensive restructuring of the financial sector under way
- Philippines: extended its program with the IMF after significant prior adjustment and reform
- Malaysia: scaling back investment plans, tightening fiscal stance, strengthening prudential banking regulations
- Indonesia: strengthened policy stance and reached agreement with the Fund on a major program including:
- strong monetary and fiscal policies for orderly adjustment and restored market confidence
- a major restructuring of the financial sector and measures to ensure future soundness
- significant deregulation measures and trade reforms to improve economic efficiency immediately and over the longer term
- IMF support for Indonesia:
- Fund agreed to support the program with a loan of $10 billion in a total package of $23 billion, of which $18 billion will consist of multilateral financing
- a contingency safety net is being established with a group of countries ready to complement the package if needed
- Outlook and longer-term fundamentals:
- region’s longer term fundamentals remain favorable, including high domestic saving rates, strong fiscal positions, dynamic private sectors, and recent gains in competitiveness
- with sound policies, these countries should be able to sustain high rates of growth for another two decades or more
- near-term expectation: growth can be expected to rebound strongly after a relatively short but sharp weakening of economic activity and a rapid narrowing of external deficits; improvements in exports are already being seen
IV. Perspectives for stronger regional cooperation
- Rationale:
- spillover and contagion effects can be rapid and costly; every country has an obligation to keep its own house in order
- Regional actions encouraged:
- voluntary mutual surveillance among neighboring countries to complement IMF surveillance and develop a "club spirit" to encourage sound policies and exert peer pressure
- regional surveillance must be based on sound economic analysis
- IMF management and staff ready to contribute to regional surveillance, as they do in Europe, the G-7, and other fora
- the IMF’s new regional office in Tokyo could help promote more intensive regional surveillance
V. The response of the Fund
- Four broad areas of the Fund’s response:
- First — strengthened Fund surveillance:
- seek more continuous and probing dialogue with members
- place more emphasis on continuous and timely provision of accurate data
- concentrate more on regional-level policy decisions, regional implications of national policies, banking and financial sector soundness, and requisite policies and institutions
- Second — helping markets function more smoothly and fostering orderly liberalization of capital account transactions:
- IMF members agreed the Fund’s charter should be amended to make liberalization of capital movements one of the purposes of the Fund and to extend the Fund’s jurisdiction to capital movements, with appropriate safeguards and transitional arrangements
- IMF actively encourages greater transparency in dissemination of economic and financial data; Fund has developed a set of standards on data quality, coverage, frequency, and timeliness and established a Dissemination Standards Bulletin Board on the Internet to which 43 economies have now subscribed, including Hong Kong, Indonesia, Korea, Malaysia, the Philippines, Singapore, and Thailand
- procedures established for countries to make known the Fund’s views on their economic policies and situation
- Fund working with World Bank, regional development banks, and others to promote "second generation" reforms: institutional frameworks for an efficient, professional justice system; limits on arbitrary and corrupt government practices; clear regulatory and supervisory standards; improved quality of public expenditure, including allocations for education and health; and social protection for those adversely affected by economic change
- Third — strengthening resource base and adapting procedures and financing:
- membership agreed to an increase of 45 percent, equivalent to about $90 billion, in IMF quotas, raising the capital base of the institution to some $290 billion
- steps taken to augment financial resources through agreement on the New Arrangements to Borrow; participants would be prepared to lend up to the equivalent of some $47 billion when additional resources are needed
- agreement reached on a proposal to amend the Fund’s Articles of Agreement to authorize a special one-time allocation of of about $30 billion that would equalize all members’ ratios of SDR allocations to quotas and would double the amount of SDRs allocated to date
- these resources will supplement members’ reserves, giving them more flexibility in economic policies and a cushion against adverse developments
- Fourth — emergency financing and expedited assistance:
- early warnings cannot always prevent crises; international community must strengthen the Fund’s financial capacity to assist countries in crisis
- Fund established an emergency financing mechanism to allow financial assistance to be provided more speedily when countries facing external crises are willing to take strong corrective action
- mechanism used effectively to expedite recent programs for the Philippines, Thailand, and Indonesia
- confidence that once programs have produced full effects in the next months, these economies will be in a much better position to start growing again at a strong, but more sustainable, rate
- Broader perspective on global markets:
- capital from global markets has been a key factor in southeast Asia’s exceptional growth and poverty reduction
- markets present risks (slow then sharp reactions, herd instinct) and opportunities (accelerating growth and development)
- lesson: approach markets responsibly with strong macroeconomic fundamentals, sound structural policies, respect for market signals, and transparent, market-friendly policies
- Closing outlook:
- mechanisms are in place at national and multilateral levels—and potentially regional—to enable countries to pull through the crisis and emerge stronger
- success depends on the resolve to put current problems behind them; expectation of continued determination in southeast Asia
Remarks at a Press Briefing, Singapore, November 13, 1997.