The Asian financial crisis in 1997 plunged many ASEAN countries into recession. The crisis dragged down the Indonesian rupiah, the Thai baht, the Malaysian ringgit and other currencies.
Even the Hong Kong dollar came under enormous pressure, though the city managed to prevent a devaluation because it had more than US$80 billion in foreign reserves. Phenomenal economic growth was put to a halt, banks went bankrupt and foreign investors fled with their capital.
Economically, Southeast Asia contracted by 30 percent in 1998. Indonesia, Malaysia, Thailand and Singapore were hard-hit by the crisis. Jingdong Hua, IFC vice president and treasurer, shared his thoughts with the Myanmar Times on how Myanmar can learn from its ASEAN neighbours.
What can Myanmar learn from other ASEAN countries?
There is a lot that Myanmar can learn from other ASEAN countries.
The 1997 Asian financial crisis taught ASEAN countries that we must develop a robust, open liquid domestic and regional capital market instead of relying on US dollar or foreign currencies as a major currency of investment.
Because when you denominate your economy much more in your local currency, you develop the resilience when there are foreign exchange volatilities.
Just imagine that you are a private sector entrepreneur in Myanmar who receives revenue in kyat, the local currency. We should create conditions so that we can invest in that enterprise in local currency rather than lending the entrepreneur US dollars because of the volatility. For that to happen, Myanmar needs to develop a functioning financial system and a capital market.
How can a vibrant capital market create access for long-term finance in local currency?
In a typical middle income country, let’s take Malaysia, Thailand or even the Philippines as an example: if a private company needs money to finance their expansion, they can either go to a bank to borrow money or they can issue a bond in their capital market or sell their stock. Here in Myanmar, you don’t have the bond market yet. So the only way for the private business to access finance is through the banks.
The capacity of the banks is also very small. And banks cannot really lend the long term financing to private companies because that could be risky. So if Myanmar develops a functioning capital market, the access to finance of private sector companies will dramatically expand.
I would give you one example. Normally in a middle income country, you measure the degree of corporate bond market development by measuring the outstanding volume of corporate bond as a percentage of the country’s total GDP.
In ASEAN countries, in the Philippines, in Malaysia and in Thailand, corporate bond market is about 30 percent or 50 percent of GDP. With a GDP of US$65 billion for Myanmar, if Myanmar has a corporate bond which is 10pc of GDP, that would be US$6.5 billion that private firms can raise to finance their investments. Right now it is zero.
Hence, by developing this market, you can actually expand the possibility of financing for those companies, and as the economy grows, you will also develop a much bigger savings industry.
I am talking about pension funds, insurance companies, asset managers and private wealth.
With a corporate bond market, people and institutions can buy corporate bond and therefore you connect their savings directly to the development of private sector. That’s why having a bond market and having a capital market expands the private sector’s access to finance.
But this is not our only focus. We are very much focused on financial inclusions because most Myanmar citizens don’t even have access to basic banking. Capital market and financial inclusion of the banking sector are equally important.
Local capital markets are more resilient to economic crises. Are there any lessons Myanmar can learn from?
I think the 1997 Asian financial crisis is a good example.
Let’s look at what happened just before the crisis in the four tigers and the rising Asian ASEAN countries. In those territories, their private sector decided to borrow heavily on US dollar instead of their local currency. Even if they wanted to borrow in the local currency, their capital markets were not developed enough for them to have access to finance. So when Thai baht overnight devalued dramatically, a lot of the private companies went bankrupt. For example, I remember that Indonesian rupiah dropped by over 70 percent in value. When you borrow in dollars, you only have local currency. When your currency drops so much, you cannot repay the dollar loans. So that is the big, big lesson to learn from.
After the Asian financial crisis, the ten ASEAN countries plus Japan, Korea and China decided to really focus on developing their domestic and regional capital markets. They initiated the Asian bond market initiatives. That’s why since 1997 to now, when you look at the capital markets of ASEAN countries, they are much more developed.
When the global financial crisis happened in 2008, the Asian economy and ASEAN economy had become much more resilient than before. I think that is a good lesson that Myanmar can learn.