Mr. Stals asks whether the East Asian financial crisis can be repeated in South
Address by the Governor of the Reserve Bank of South Africa, Mr. C. Stals, at a breakfast
Africa
meeting organised by Life Line West Rand in Krugersdorp on 29/4/98.
1. Background to the East Asian crisis
It is now history that the economies of a number of East Asian countries collapsed in
the second half of 1997 and created disruptive turmoil in financial markets around the world. The
countries most affected were Indonesia, the Republic of Korea, Malaysia, the Philippines and
Thailand.
A number of reasons were provided for this collapse which shocked the world
economy, particularly because it occurred in those countries that were the most successful in
achieving their economic development objectives during the past thirty years. The main reasons
included:
• a substantial build-up of foreign liabilities -- particularly of a short-term nature
-took place over the protracted period of rapid economic growth;
• the financial sectors were not properly supervised and regulated, with the result
that banking institutions accumulated large amounts of non-performing loans, not
provided for in capital and reserves;
• there were unjustified governmental interventions in the normal working of the
financial markets. Financial institutions were, for example, instructed to make
loans to preferred clients at low interest rates;
• governance within private sector institutions, public corporations and government
departments was of low quality and, in the case of some countries, undermined by
corruption;
macroeconomic policies did not adjust to the changing environment; markets
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were liberalised without concurrent adjustment in internal economic structures;
money supply and bank credit extension increased almost unchecked; interest
rates were kept artificially low, and exchange rates were not allowed to adjust in
accordance with changes in the overall balance of payments situation.
The final collapse was triggered first in Thailand, when foreign investors lost
confidence in the economy and started to withdraw part of their more liquid investments from the
country. The authorities were very slow to react to the threatening crisis. As became evident at a later
stage, important information on the deteriorating economic situation was withheld from the markets
and vital statistics were, in some cases, deliberately not released.
In the end, the International Monetary Fund, the World Bank, a number of the
governments of industrial countries, and the international investment community, had to provide a
massive amount of financial support -- more than US $120 billion -- to assist these countries. The
countries themselves also had to implement painful corrective measures that will, over time, restore
equilibrium in their economies. These programmes inter alia provide for:
relatively restrictive monetary policies that must prevent further depreciation of
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the currencies to protect domestic institutions with outstanding foreign liabilities
from further losses, and must eventually reduce inflation;
• the restructuring of the financial sectors through predetermined reform agendas in
each country. Public sector rescue operations must be supported by cost sharing
sacrifices from the private sector, and prudential regulations for financial
institutions must be tightened;
• improvements in public and corporate governance and a strengthening of
transparency and accountability;
• a reduction in the dependence of public sector budgets on external funds, and
fiscal provision for the costs of restructuring and recapitalising banking systems.
The devastating effects of the crises can be illustrated by a few statistics from some of
the affected countries. According to a recent World Bank report, prices of key commodities, such as
rice, increased by 25 per cent or more in Indonesia, leading to food riots and major demonstrations
against the Government. Unemployment is rising sharply and will increase the number of people
living below the poverty line from 23 million to 40 million during the course of 1998.
In Korea, bankruptcies and unemployment are on the rise. Eight of the thirty biggest
conglomerates (chaebol) have filed for liquidation. Unemployment is expected to increase from
500,000 last year to 1.2 million workers soon.
In Thailand, the slump in industry is severe. Monthly sales of motor vehicles, steel,
consumer electronic goods and durable consumer goods are now running at levels of 35 to 75 per
cent down on last year. Industrial output growth is expected to decline by about 50 per cent.
In terms of the latest World Economic Outlook of the International Monetary Fund,
the global economic growth rate for 1998 will be reduced by the East Asian crisis from a previous
forecast of 31⁄2 per cent to not more than 3 per cent in 1998. This will have an adverse effect on world
trade, and also on the export prospects for countries such as South Africa. It further deteriorates the
outlook for an early economic recovery in Japan, and also holds adverse effects for many emerging
market economies.
2. The South African situation
The South African economy was so far relatively little affected by the East Asian
crisis. The foreign exchange market, and particularly the exchange rate of the rand, came under
pressure for only a few weeks in October last year. Prices on the Johannesburg Stock Exchange were
more directly affected, although the declines registered at that time were wiped out by a strong bull
run over the past three months.
Some other emerging markets, for example Brazil, were affected much more severely
than South Africa. The question is often asked why was South Africa left almost unimpaired by the
East Asian crisis? There are a number of reasons for this:
Firstly, it must be remembered that South Africa had its own mini-crisis in 1996
when sudden capital outflows from the country forced a depreciation of the rand of
more than 20 per cent, and the introduction of restrictive fiscal and monetary policies
that reduced the growth rate in total domestic expenditure from 5.0 per cent in 1995
to 2.7 per cent in 1996, and 1.4 per cent in 1997. At the time of the East Asian crisis,
South Africa had just gone through a very painful downward economic adjustment
period that satisfied foreign investors of our resolve to apply acceptable
macroeconomic disciplines.
Secondly, the South African problems of 1996 were created by a cyclical
disequilibrium, following from excessive rates of growth in total domestic
expenditure, and this situation could be corrected fairly easily with the right kind of
monetary and fiscal policies. In most of the East Asian countries, the fundamental
problems are more of a structural nature and will require longer and more painful
adjustments to restore growth to previous levels.
There are, nevertheless, a number of lessons to be learned by South Africa from the
East Asian crisis. Our country is also being integrated more and more into the global markets of the
world and, as in the case of those countries, developments in South Africa are also subject to the very
critical surveillance of the international investors' community. At this stage, their critical monitors
are being focused on:
• the health and soundness of the domestic financial sector;
• the openness and efficiency of the money and capital markets, and the market in
foreign exchange;
• the transparency, both of policies and of macroeconomic data made available by
the authorities;
• the quality of governance in both the public and the private sectors of the
economy;
the macroeconomic policies followed in the country by the monetary and fiscal
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authorities, and in respect of labour and commodity markets;
the overall balance of payments situation, including developments in the current
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and in the capital accounts; and
• the total outstanding foreign liabilities, with special reference to the vulnerability
of the country for sudden outflows of capital.
In recent months, foreign investors showed their satisfaction with the South African
situation by continuing to increase their investments in South Africa. Over the first four months of
this year, non-residents increased their holdings of South African equities and bonds by no less than
R34 billion. This enabled South Africa to continue with the programme of gradually relaxing
exchange controls, and also helped the Reserve Bank to increase its net foreign reserves by R4.9
billion during the first quarter of this year.
South Africa can continue to hold the confidence of foreign investors, provided we
are also prepared to continue to apply the sound monetary and fiscal policies of the past year. If not,
foreign market sentiment towards the country can change very quickly, and we can easily be forced
into a new financial market crisis of our own.
With his latest Budget, the Minister of Finance reconfirmed the Government's
determination to maintain the necessary disciplines in fiscal policy. The Reserve Bank is known for
its conservative approach towards monetary policy, and is equally determined to maintain strict
disciplines in the management of the money and banking systems of the country. In this way, South
Africa will continue to benefit from being part of the global financial system, and to make use of the
savings of other countries to help finance growth and development.
In summary, it depends on us and on the economic policies we apply, whether an East
Asian crisis will also develop in South Africa. Foreign investors nodded their approval of the policies
of the past year. We should therefore not deviate unnecessarily from the course of the existing
policies.