Language Switcher

v2025 (2)


Are you ready for Asia's next financial crisis?

"Brighter prospects, optimistic markets, challenges ahead." That was the title of the IMF's World Economic Outlook update in January this year.

How quickly things have changed.

Since that report was published, turbulence, volatility and crises have dominated the economic landscape. Argentina is in crisis. Turkey is not far off. Markets have been rattled in Indonesia, Myanmar, Italy and Spain as financial conditions tighten.

The fallout from Brexit is more uncertain than ever. Populist politicians continue their rise. The trade war between the United States and China has escalated at an alarming rate.

The clock is ticking before the World Trade Organisation dispute settlement appellate body shuts down. China's financial system remains problematic. The United States faces bitterly-contested Congressional and Presidential elections with a possible 2020 recession thrown into the mix. Geopolitical tensions remain high with Iran, North Korea and Russia.

With all these risks, it's an important time to review Asia's capacity to respond to economic crises. It is 10 years since the collapse of Lehman Brothers, and just last year was the 20th anniversary of the Asian financial crisis. Should Asia plunge into another crisis, would we be ready?
The East Asian Bureau of Economic Research at the Australian National University this week released a report to be discussed at a forum of experts around the International Monetary Fund and World Bank meetings in Bali. The report assesses the capacity of global institutions such as the IMF to respond in different crisis scenarios. The news is not good.

The resources of the IMF have been increased substantially since the crisis. But with more countries calling on those resources, have they been increased by enough? Are the IMF's lending facilities flexible enough? Will countries go to the IMF if they get into trouble? Or does the IMF's reputation since the Asian financial crisis haunt it still?

Since the Asian financial crisis, a plethora of regional financing mechanisms have been developed, particularly in Asia. The authors explore what role these institutions, such as the Chiang Mai Initiative Multilateralisation, must play in supporting stability. Do these regional financing mechanisms compete with or complement the IMF? How would they work together in a crisis, given they are untested?

One line of defence is bilateral currency swap lines. Swap lines with the US Federal Reserve, some of which are still in place today, were integral during the global financial crisis. China has since created its own swap lines worth almost half a trillion dollars. It's not clear that these swap lines should be considered part of the safety net. Do central banks agree on whether they be available in times of crisis? How should they relate to the IMF, regional mechanisms and development banks?

Much can be done domestically to strengthen the resilience of Asia's economies and financial systems. This is what economies can do to prevent themselves from having to access the safety net in the first place. Regional forums like APEC may also be able to play a role in this process.

In the report, Edwin Truman issues a blunt warning: "Neither Asia nor the global financial safety net is ready for the next crisis." Truman suggests three reasons for this.

There is a lack of consensus about the purpose of the safety net and the place of the regional mechanisms within it. US Treasury Secretary Steve Mnuchin recently stated that the IMF's resources were adequate. The problem with his statement, warns Truman, is that the adequacy of the IMF cannot be assessed outside of a crisis.

Threats to the size of the resources of the IMF are emerging. In 2020, the bilateral loans to the IMF will begin to expire. In 2022, the IMF's New Arrangements to Borrow will begin to expire as well. The worst-case scenario is that the IMF loses half of its funding, greatly threatening its ability to respond to crises.

Truman finally warns that the mechanisms to manage the safety net are not agreed. Even if adequate IMF financial resources were assured, a consensus on how to manage them in support of the safety net as a liquidity support mechanism has not been established. Moral hazard concerns prevent the IMF from providing resources at the necessary scale while central banks require, at a minimum, that the IMF has both sufficient resources and the policy clout for them to get involved.

In short, neither Asia nor the global financial safety net is prepared for the next crisis. The message to policymakers is clear: now is the time to strengthen the global financial safety net. The old saying goes: "The best time to plant a tree is 20 years ago. The second-best time is now." The same is true when it comes to preparing for Asia's next economic crises.

Adam Trigg is Research Fellow in the East Asian Bureau of Economic Research and on the Editorial Board of East Asia Forum ( in the Crawford School of Public Policy at the Australian National University.

Leave your comments

Post comment as a guest

Your comments are subjected to administrator's moderation.
terms and condition.
  • No comments found