Corporate sectors similarly remain fragile: recent debt restructurings have involved a high degree of debt rescheduling, and firms across the region remain burdened with significant amounts of debt. The relatively limited restructuring of corporate operations to date across the region raises questions about the medium-term sustainability of recent improvements in bank asset quality. The relative lack of breadth in the region’s recovery also creates vulnerabilities. Asia’s export orientation has long been a key focal point of strength, to which the recent recovery attests. However, too great a dependence on export-driven growth brings increased vulnerability to external shocks. While current account surpluses have been substantial, this potential engine of growth could be slowed over the medium term through pressures on domestic currencies to appreciate, and through the ongoing reversal of the dramatic import compression witnessed following the crisis. The recent pickup in domestic demand is a positive sign of more balanced growth - sustained by notable monetary and fiscal stimulus - which will need to be steadily unwound as recoveries take firmer root. Regional central banks will be particularly tested as they seek to implement new monetary policy anchors, in some cases with new-found independence. BIS Review 57/2000  2  Unfinished business Events of the recent past have amply illustrated that weak financial systems are an expensive and dangerous vulnerability, particularly for countries that rely on foreign capital to help support their investment and growth.

Under these conditions, it is human nature to overemphasize positive information, tire of reform, declare victory and move on. These impulses might be expected to be particularly powerful against the backdrop of years of strong and unbroken Asian economic growth. It is no wonder therefore that governments the world over initially tend to underestimate the size of problems, underfund solutions and postpone loss recognition. It also is not surprising that, given the many obstacles involved, authorities may be tempted to prematurely mark a case closed, particularly with the advent of economic recovery. In the new international financial landscape, a government’s perceived ability to deliver on the policy front is crucial, preferably based on coherent, comprehensive and achievable objectives. Confidence in a government’s ability to deliver is nurtured both by actions and by communication. Complacency and reform backsliding, however, create the dangerous potential for a shift in expectations. Vulnerabilities Indeed, while the recovery in the region has been impressive, vulnerabilities remain, both at the micro- and macroeconomic levels. On a microeconomic level, the still fragile condition of regional financial and corporate sector institutions remains a vulnerability, and a real threat to medium-term stability. Notwithstanding significant official rescue efforts, regional financial sectors remain burdened by a high level of problem loans, and require further substantive bolstering of capital and reserves. Authorities, by and large, have yet to articulate a program for reprivatizing banks and liquidating purchased assets. Improvements in the financial system infrastructure depend critically on follow-through on these issues, a long-term process.