Asian economies hit by the financial crisis of a decade ago have now recovered, thanks in part to reforms and strengthened banking systems. As Ron Corben reports from Bangkok, one outcome has that banks remain conservative, wary of over-lending and re-living the financial collapse of the late 1990s.
A decade after much of Asia was swept into a deep recession triggered by financial crisis, the region's cities are booming again. Markets have recovered, and economic growth is back on track.
The crisis was kicked off on July 2, 1997, when the Thailand's central bank floated the baht in an effort to stop a massive flow of capital out of the country. Instead, it began a recession that left bitter memories throughout the region.
In the early 1990s, Southeast Asia's so-called Tiger economies were favorites of international bankers and investors, who poured money into Asian stock markets and corporate loans.
But the region's financial markets had weaknesses. Debt was often short-term, and central banks kept exchange rates essentially fixed to the U.S. dollar. Many banks lent recklessly and businesses expanded too far.
When capital began to flow out of Thailand in 1996 over fears that some borrowers could not pay their debts, the central bank spent foreign currency reserves to keep the baht from weakening. Supavud Saicheua, an economist with Phatra Securities in Bangkok, says the conditions were ripe for a downturn.
"Looking back, yes, Thailand had a current account deficit of seven to eight percent - that was not sustainable," Supavud said.
Thailand's foreign exchange reserves fell from $37 billion in January 1997 to less than $1 billion by June. Finally, the government caved in and floated the baht.
Panicked investors raced to move their money out of other Asian markets - Indonesia and South Korea were particularly hard hit. Huh Chan-Guk is director and senior research fellow at the Korea Economic Research Institute in Seoul.
"When the crisis hit in 1997, at the end of 1997, Korean foreign exchange holdings were down to about $3 billion. And that was the immediate cause of the crisis, namely the shortage of foreign exchange," Huh said.
Some economies in the region contracted 10 percent or more in 1998. Across Asia, tens of thousands of companies were shut, and millions of people lost their jobs.
Governments sought help from the International Monetary Fund, which lent billions of dollars to stabilize currencies. But it required governments to raise interest rates and to balance their budgets. Many economists, including Supavud in Thailand, say that made the suffering worse.
"We had too tight a monetary policy causing interest rates to be 20 percent or more," Supavud said. "That policy alone contributed too much in terms of deflation. That could have been avoided. I think the IMF itself realizes that it did go overboard with restrictive policies"
But other policies helped the region recover. Weak banks were shut. New bankruptcy laws were passed. And sectors closed to foreign investment before the crisis, were now opened to it.
Ifzal Ali, the chief economist for the Asian Development Bank, says the region did not take long to bounce back.
"Asia recovered very quickly from the crisis. Within two years it was back on its feet, and that basically shows that, while it was traumatic, countries basically, I think, internalized these tensions very quickly and have come out reasonably well," Ali said.
There have been lasting effects. Korean analyst Huh says businesses are more cautious than before the crisis.
"Before the crisis one could count on official assistance or favorable influence by the government, but that atmosphere has changed quite a lot. So large businesses in general have become more conservative," Huh said.
Richard Gibbs, chief economist of Sydney-based Macquarie Bank, says the crisis led central banks to more closely monitor foreign exchange flows.
"Regional central banks are now playing a much larger role in monitoring and managing the flow of capital through the region which was not the case prior to the financial crisis," Gibbs said.
But economists warn that banks are too conservative about lending, which hampers growth, especially when high unemployment and poverty still afflict countries like Indonesia.
Bob Widyahartono, an economist at Jakarta's Tarumanagara University, says conservative lending restricts credit to many Indonesian businesses.
"The system makes the banks very, very careful or too careful. They wait, they doubt and cannot make a firm decision on the small and medium enterprises," Widyahartono said.
The financial crisis left deep financial scars and memories and hard-learned lessons. But analysts say the region's financial system is more transparent and easier to monitor, raising hopes the region will avoid any repeats of the crisis of the 1990s.