Asia risks repeat of 1997 crisis: World Bank

Huge capital inflows boost regions' stock, property markets, fuel new bubble


By ANTHONY ROWLEY

IN TOKYO

THE World Bank yesterday warned of the dangers of a repeat of the 1997 Asian financial crisis if countries fail to respond to challenges posed by massive capital inflows into some of the emerging economies of the region.

East Asian economies are enjoying a 'robust recovery' which promises to continue throughout this year and beyond but there are 'rising risks', the World Bank said in its latest East Asia and Pacific Economic Update.

In an unusually blunt warning, it said that the heavy capital inflows 'combined with ample domestic liquidity and rising confidence have boosted stock markets, real estate prices and other asset values in some (East Asian) countries - precipitating fears of a new bubble'.

All this 'presents an emerging policy challenge and a growing risk to macroeconomic stability'.

Japan's Finance Minister, Yoshihiko Noda also flagged his concern yesterday over excessive capital flows to emerging economies which, he said, are boosting currencies. He called on G-20 finance ministers meeting in South Korea this week to find ways of stabilising currencies.

The bank also noted that 'memories remain fresh of the Asian financial crisis that ended with well known and unfortunate consequences'. Yet the recent run up in Asian equity prices has been twice as large as that which preceded the 1997 crisis, it said.

'Authorities in East Asia need to take adequate precautions to ensure that they do not repeat the same mistake twice in (the space of) slightly over a decade,' the World Bank said.

Short-term borrowing from banks overseas - a major factor behind the 1997 crisis - is again on the rise and loan maturities have been shortening of late, noted World Bank chief economist for the East Asia and Pacific region Vikram Nehru at a briefing in Tokyo yesterday.

Authorities in East Asia have been progressively withdrawing monetary and fiscal stimulus from their economies but this process might have to be accelerated in line with demand pressures generated by inflows of foreign capital fleeing low yields overseas, he suggested.

Exchange rate interventions have led to currency appreciation in places such as Indonesia, Malaysia and Thailand but other measures such as capital controls (which have not been employed since the Asian financial crisis) are being contemplated now, the World Bank noted.

On the positive side, output throughout East Asia has recovered to above pre-crisis levels, the World Bank reported. Real GDP across the region is expected to rise to 8.9 per cent in 2010 (or 6.7 per cent if China is excluded), which is well ahead of the regionwide expansion of 7.3 per cent in 2009.

'Economic expansion is projected to slow to about 7.8 per cent in 2011 as spare capacity become scarce, fiscal and monetary stimulus measures are gradually unwound and economic growth in the advanced economies remains relatively flat.'

For all the continuing recovery in East Asia, it remains, as in the case of advanced economies, a relatively 'jobless recovery', Mr Nehru noted. Although output initially fell faster than employment after the global financial crisis, employers are now seeking to maximise productivity by minimising new employment.

Certain 'middle income' economies in East Asia are meanwhile 'losing competitiveness', he noted as they relinquish their lead in labour intensive manufacturing without yet succeeding in breaking into more sophisticated and higher value-added areas of economic activity.

The world Bank report suggested that middle income countries (excluding China) need to increase investment, raise skills and encourage innovation if they are to eventually attain high income status.

In Malaysia, the Philippines and Thailand, fixed investment is still well below levels reached before the Asian financial crisis and below levels that Japan, Korea and Singapore achieved during their economic take-offs.

The stock of capital per capita (in these countries) remains very low, the World Bank noted. 'More human and physical capital accumulation will help boost growth, support innovation and technical progress and help firms move up the value chain,' it added.