INTERVIEW: Asian crisis halted investment froth

19 June 2007 23:42  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS news)--The Asian economic crisis of 1997-1998 put an end to the investment froth in southeast Asia and prompted much-needed reforms, industry sources, including one top chief executive, said on Tuesday.

"Corrections will happen, and markets correct for reasons - excessive liquidity, lack of capital controls and risky, frothy investments," said Dow Chemical chief executive Andrew Liveris in an interview with ICIS news.

"One big thing we can take away is that if the correction leads to better fundamentals, better discipline and better management of risk/reward profiles to encourage long-term investment, then that's a correction you needed to have," he added.

"I think people are now more sensible about how they invest," said Fred Petersen, president of Probe Economics, based in New London, New Hampshire. "They were throwing money at the place like crazy back then. These markets all had great potential, but the amount of money that was being thrown at them by the US and Europe was ridiculously high."

Countries have since made reforms to strengthen their financial systems, according to the World Bank.

"Progress in this area has been significant," according to the World Bank's East Asia & Pacific Update - 10 Years After the Crisis. "Banks in the previously crisis-affected east Asian countries have improved capital adequacy, asset quality and profitability. Financial systems have become more diversified as equity and bond markets have grown."

In addition, countries have built up huge foreign currency reserves as an insurance policy against a run on their local currencies. Emerging east Asian countries (excluding Japan) have built up $2trn (€1.5trn) in foreign currency reserves, according to the World Bank.

However, the building up of such huge reserves poses risks of its own, "by fueling excessive expansion of credit, economic overheating, higher inflation or speculative bubbles in asset markets, potentially compromising the central bank's ability to pursue an independent monetary policy," said the World Bank report.

Look for the full story and Global Report on the Asian economic crisis in the 2 July issue of ICIS Chemical Business Americas.

($1 = €0.75)

By: Joseph Chang
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