RaboResearch - Economic Research

Asia-Pacific: many risks but no new Asian crisis in the making

Economic Report


To the Asia-Pacific overview page

  • A balance of payments crisis is unlikely in today’s Asia Pacific (APAC) region
  • Most countries are in better shape with positive current accounts, lower (external) debt, higher reserves and more flexible exchange rates.
  • Although debt nowadays has longer maturities and is mostly denominated in local currency, it has been rising in many countries which may yet pose problems
  • Going forward we expect lower growth due to the debt overhang in South-East Asia and APAC’s dependence on a slowing Chinese economy

The Asian crisis analysed

Now and again it is suggested that the ghost of the 1997 Asian crisis haunts the region once again. The Fed rate hike in the US loomed and sent currencies in the region depreciating against the dollar but the same currencies have also slid against the other main reserve currencies of the world (figure 1), a signal of capital outflows. Meanwhile CDS spreads have risen in most countries, with pronounced rises in Malaysia, Indonesia and Vietnam. Both could signal a decline in confidence. Should we worry? Given the rise of private debt and speculation in some real estate and equity markets we should certainly be cautious. However, this chapter will show that despite risks we see, the current situation is far less dramatic than in the 1990s.

Figure 1: Regional currencies on downward trajectory
Figure 1: Regional currencies on downward trajectorySource: Macrobond
Figure 2: CDS spreads on the rise
Figure 2: CDS spreads on the riseSource: Macrobond

The Asian crisis then

Briefly, the 1997/98 Asian crisis is a story of rapid, unsustainable growth followed by a hard landing. After many Asian countries began opening up their capital accounts after the mid-eighties and liberalised their financial systems, large capital inflows, used to finance current account deficits, ensued (figure 3). Rising Asian economies such as Indonesia, Malaysia, Philippines, South Korea and Thailand were perceived as having strong growth potential. Strong capital inflows and a pledge to keep exchange rates fixed led to an abundance of capital and attractive credit conditions, which in in turn led to a surge of investment by local companies amounting to over 40% of GDP in Malaysia and Thailand (figure 4).

Figure 3: Current accounts in crisis countries
Figure 3: Current accounts in crisis countriesSource: IMF
Figure 4: The Asian investment boom
Figure 4: The Asian investment boomSource: World Bank
Figure 5: The domestic credit build-up
Figure 5: The domestic credit build-upSource: World Bank

More often than not these investments went into real estate instead of export sectors. Banks acted as the main financiers of all this investment (figure 5), attracting foreign funding, often at short maturities and in foreign currency. The sharp increase in capital inflows, together with increasing growth and profit expectations, rising (fixed) asset prices and lending, reinforced the financial cycle and spurred growth for a good part of the early 1990s (figure 6).

In the making of this boom, there were a number of vulnerabilities increasing the risk of a bust (Agenor, 1999). Firstly, the banking sector became increasingly fragile as asset quality declined during the lending boom. Secondly, by now highly leveraged companies were vulnerable to changes in interest rates. Thirdly, large currency and maturity mismatches made banks and companies that had borrowed in foreign currency and at relatively short maturities vulnerable to a sudden confidence crisis.

That sudden confidence crisis materialised in 1997 when Thailand gave up its currency peg to the US dollar after running out of reserves to defend its currency. The ensuing financial crisis spread to Indonesia, Malaysia, South Korea and the Philippines and in many countries transposed into a full blown banking and economic crisis (figure 6). The fact that many of the capital inflows had financed assets that did not generate foreign currency would prove a major problem when capital flows reversed. This sparked new research, as the role of balance sheets and the effect of capital outflows had not previously been included in financial crisis models. A common interpretation now is that the rising (FX denominated) debt burden (figure 7) forced many companies out of business, reducing domestic consumption and investment, in order to accommodate the reversal of the earlier capital inflows (Krugman, 1999). With signs of a rising debt burden in many Asian countries, how does the current economic situation compare?

Figure 6: Plummeting GDP growth
Figure 6: Plummeting GDP growthSource: IMF
Figure 7: Ballooning debt service (to GNI)
Figure 7: Ballooning debt service (to GNI)Source: World Bank

Balance sheets and capital inflows today

The current situation for most Asian countries is very different from that on the eve of the Asian crisis. Most Asian countries now have current accounts (figure 8) and balance sheets (figure 9) that are in much better shape than they were before the Asian crisis. We see that a large group of countries is the green area, with low levels of domestic and FX debt. However, some of the major economies in the region have high levels of domestic indebtedness including China, Japan and Australia. The pace of credit growth in China has been extremely rapid (China’s total social financing data show that forms of lending other than traditional bank lending accounted for a sizeable part of this increase in leverage). Mckinsey, 2015 estimates that total debt in China had risen to 282% of GDP in 2014. What we learned from the Asian crisis is that external indebtedness in particular poses risks, especially when coupled with a real estate boom. In recent years, real estate investment in China has been very high. China’s housing market started to adjust in 2014, but oversupply could still pose risks, especially outside the major cities.

Figure 8: Current accounts in the APAC
Figure 8: Current accounts in the APACSource: IMF
Figure 9: Domestic and external debt
Figure 9: Domestic and external debtSource: World Bank, IMF, Rabobank

Meanwhile, the country has little external debt and large (albeit declining) foreign exchange reserves (table 1). The reason for this is that China (and many other countries in the region), boasted positive current account balances over the past decade (figure 8). Only Australia, New Zealand and Sri Lanka, and a number of smaller countries, have had significant current account deficits requiring external financing, making them vulnerable to a sudden stop. This has contributed to a comparatively high level of external debt for Australia (97% of GDP) and New Zealand (95% of GDP) while Japan, Malaysia and Sri Lanka boast moderate external debt ratios of around 60% of GDP (figure 9)[1]. This is in sharp contrast to China, which has financed almost all of its investment internally and has external debt of only 9% of GDP.

Table 1: External vulnerability APAC region
Table 1: External vulnerability APAC regionSource: IMF, EIU, Rabobank

With improved fundamentals and increased flexibility of exchange rate regimes (IMF, 2014), the region looks in much better shape than at the outset of the Asian crisis. However high indebtedness in some countries or sectors could still create financial crises in countries or lead to an extended period of low growth, exacerbated by the recent Chinese slowdown.

[1] Note that New Zealand, Singapore and Mongolia are not included in figure 9. For New Zealand, there is no data on domestic credit, while Mongolia publishes no external debt data. As a major financial centre, Singapore has such a high external (and domestic) indebtedness, 431% of GDP and 131% of GDP respectively, that it falls outside the graph.

How loose monetary policy worldwide created an indebted Asia-Pacific

After the Global Financial Crisis, during which the US and other advanced economies implemented unprecedented loose monetary policies, debt increased significantly in most of the APAC countries (figure 10). Household debt increased in all countries of the region, by as much as 14 percentage points on average between 2009 and 2015, with the exception of India and Japan. Non-financial corporate debt increased especially sharply in Hong Kong, China and Singapore. Albeit from a low level, Indonesian firms also used the opportunity to borrow against the lower rates. The level of financial sector debt remains high in Hong Kong, Japan and Singapore, which can be explained by their status as financial centres of the region. However, the surge in financial corporation debt in Hong Kong is remarkable (from 116% of GDP in 2009 to 194% of GDP in 2015).

In general, governments have been more prudent than their private counterparts, especially in emerging Asia. There are some exceptions. Gross public debt in Japan increased rapidly as a result of the fiscal stimulus that was part of Abenomics. Government debt levels worsened to a lesser extent in Australia, Malaysia and South Korea.

Figure 10: APAC countries have become more indebted
Figure 10: APAC countries have become more indebtedSource: IIF
Figure 11: Asian housing markets are bubbling along
Figure 11: Asian housing markets are bubbling along Source: BIS Residential Property Price database 

House prices on the rise

The expansionary monetary policy in the US led to loose monetary policy almost everywhere in the APAC region and especially in Hong Kong and Singapore, where the currency (and monetary policy) is linked to the US dollar. The resulting low interest rates resulted in a surge in house prices in most countries (figure 11). In the last five years, prices have doubled in nominal terms in India and Hong Kong. Residential property also became much more expensive (even adjusted for inflation) in Malaysia, the Philippines and New Zealand. With such a surge in real estate prices, it is not overly bearish to suspect a housing price bubble is in the making in these countries. 

Non-financial corporate debt

With the upcoming normalisation of US monetary policy, the large increase in the debt load of many Asian corporates could become problematic if the debt is denominated in foreign currency or has a short maturity and needs to be refinanced at a higher rate. In the last year, almost all Asian currencies depreciated significantly against the US dollar. The exchange rates of commodity exporting countries were particularly under pressure (figure 12).

Figure 12: Asian currencies under pressure
Figure 12: Asian currencies under pressureSource: Macrobond
Figure 13: Asian corporates have relatively low FX debt levels
Figure 13: Asian corporates have relatively low FX debt levelsSource: IMF (2015)

Luckily, in general, Asian corporates seem to have low levels of FX denominated debt, which is a very different situation compared with 1997. The high debt load and large increase in corporate debt in China however remains a risk. Although Chinese companies have just a small amount of debt denominated in foreign currency (figure 13), the rise and the large volume of overall debt remains risky. The level of FX corporate debt in South Asia, Malaysia and Thailand is also relatively limited, although estimates vary significantly. The situation looks more fragile in the Philippines and Vietnam (figure 14). Indonesian corporates are the worst positioned within the APAC region: they have high levels of FX borrowing compared to their FX revenues (figures 13 and 14). The Asian Development Bank however notes that most FX debt exposure in Asia is restricted to large corporates, since smaller companies often have no access to financing in foreign currencies. The short average maturity of Indonesia’s FX corporate debt is a cause for concern. Corporates in Pakistan, and to a lesser extent in the Philippines and Malaysia, also have relatively high amounts of short-term debt.

Figure 14: Corporates in ID, PH and VN have high FX exposure
Figure 14: Corporates in ID, PH and VN have high FX exposureSource: Asian Development Bank (2015)
Figure 15: Financial fundamentals in Indonesia the weakest in the region
Figure 15: Financial fundamentals in Indonesia the weakest in the regionSource: Garcia-Herrero (2015)

Looking at the balance sheets of individual corporates, Garcia-Herrero (2015) concludes that the financial position of Indonesian companies is the worst among their ASEAN peers, based on liquidity and solvency indicators. Of the ten worst companies, seven are headquartered in Indonesia and three in Thailand (figure 15). Sector-wise, the energy and capital goods sectors have the weakest fundamentals and are also very exposed to a Chinese slowdown. All in all, Indonesian companies are among the most exposed to a normalisation of US monetary policy: they have relatively large levels of foreign currency denominated debt and the weakest fundamentals.

Dependence on China and commodities

Besides the normalisation of US monetary policy, a second major risk to countries in Asia and the Pacific consists of the rebalancing of the Chinese economy accompanied by sharply lower commodity prices. With growth in China slowing and becoming based more on consumption than on investment, this affects the whole region.Moreover, this process has just started and therefore entails a risk of a hard landing. In particular, the high domestic debt level in China poses a downside risk. Besides China’s direct neighbours, Australia, New Zealand and most South-east Asian economies have become more reliant on China for their (commodity) exports during the past years (see Asia-Pacific: the rise of China in a (geo)politically diverse continent) as China grew into a major commodity importer and consumer.

Figure 16: Dependence on commodity exports high in some APAC countries
Figure 16: Dependence on commodity exports high in some APAC countriesSource: UN Comtrade database

In the medium term, producers of food and consumer goods (e.g. New Zealand) will likely profit from rising consumption by the Chinese middle class (see Asia-Pacific: agricultural perspectives). For now, however, weak Chinese investment growth could have a further negative effect on commodity prices. We note that Mongolia, Australia and Indonesia, all major hard commodity exporters (metals and fuels), face a decline in commodity receipts, which could increase the burden of debt that these countries and their companies have to bear.


Agenor, P. R., Miller, M., Vines, D., & Weber, A. (2006). The Asian financial crisis: causes, contagion and consequences (Vol. 2). Cambridge University Press.

Asian Development Bank (2015). Corporate debt and the strengthening dollar. In Asian Development Outlook Update 2015 (pp.18-22), Asian Development Bank

Garcia-Herrero, A. (2015). Indebted ASEAN companies will feel Fed’s rate rise. Bruegel Blog, 22 December 2015.

International Monetary Fund (IMF) (Ed.). (2014). Annual Report on Exchange Arrangements and Exchange Restrictions, 2014. International Monetary Fund.

International Monetary Fund (IMF) (2015). Three scenarios for financial stability. In Global Financial Stability Report (Oct 2015). International Monetary Fund.

Krugman, P. (1999). Balance sheets, the transfer problem, and financial crises. In International finance and financial crises (pp. 31-55). Springer Netherlands.


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