The Next Asian Crisis: Self-inflicted?

Many Asian economies are plagued by internal structural faults, which could trigger, or act as a catalyst for igniting, a financial crisis in the medium-term. One big worry is Asia’s fiscal problems, which are similar to almost all emerging market crises in recent history. Another concern is the massive foreign exchange reserves that Asian central banks have built up since the 1997–1998 regional crisis. Far from being a sign of economic strength, the Asian Development Bank (ADB) warned in 2004 that Asia’s foreign reserves accumulation had reached unhealthy levels that could trigger another financial crisis. If and when significant capital outflow happens, that resultant loss of foreign reserves will erode public confidence in the country’s ability to repay its debts. This will, in turn, worsen the inherent fiscal woes, deepening and prolonging the crisis.