A Rough Ride, but the Ship is still Intact

A decade after the Asian financial crisis, the reforms and progress achieved in ASEAN's economies and financial sectors have been severely tested by the global economic and financial turmoil originating from the developed world. The collapse in investor risk appetite and economic activity globally threatened to wreak financial havoc on ASEAN once again. More than six months after the collapse of Lehman Brothers, the key turning point in the current global crisis, ASEAN financial and banking systems remain structurally solid, according to available data. Yet while the region's financial institutions have survived the first wave of the global financial storm, considerable challenges lie ahead in the months, quarters, and possibly years ahead. The aftermath of the storm is likely to put the region's financial system to new tests, both from cyclical and a structural perspective.

This report shares our observations of how ASEAN's financial and banking sectors have coped with the global financial and economic turmoil, and provide our thoughts on what can be expected in the medium term. The first part examines the impact of the global financial and economic crisis on ASEAN's financial and banking sectors between September 2008 and May 2009 via a number of channels, including foreign-exchange movements and trends, equities, fixed income, and credit. We look at the effects of risk aversion and the U.S. dollar liquidity squeeze on the region's banking sectors and lending behaviour.

The second part discusses the outlook for ASEAN's financial and banking sectors as the crisis continues to unfold. There are some early signs of economic stabilization in developed economies, and Asian exports appear to have bottomed. Global investor risk appetite also seems to have begun a steady recovery. The return of international capital should provide some relief to the region — but too much of a good thing can also create challenges in the future, such as overvaluation of financial assets. Meanwhile, the negative effects of the economic down-cycle on ASEAN's banking industry and financial markets, such as a rise in non-performing assets, may persist for some time. And the global regulatory landscape is also likely to change, which will impact the region's banking sectors both directly and indirectly.

In summary, while ASEAN's financial markets and banks have suffered considerable negative impact from the global financial crisis, the damage has been manageable.