This reality was starkly demonstrated during the Asian Financial Crisis in 1997/98, where the emerging Asian economies were at the mercy of “original sin”. With the relatively cheaper dollar being the vehicle currency of the world, these economies became reliant on the dollar for its borrowings, despite proceeds being largely in local currency. The corresponding currency mismatch, evident during the AFC, made these economies vulnerable to shifts in capital flows. The impact of sudden stops were amplified, causing the currencies to devalue and the cost of servicing the external debt to escalate, leading to a vicious cycle of default and instability. Capital flows to the region went from a USD93 billion inflow in 1996 to a USD12 billion outflow in 1997. As a consequence, growth of the economies in this region contracted between a range of 16% and 10%, a big contrast to the robust growth of 7% in the period before 1998. Since then, emerging Asian economies have learnt their lesson. The reliance on external financing was reduced. Sources of domestic financing were diversified through the development of the domestic bond market. Regional bond markets have expanded significantly. The region has replaced foreign currency borrowings with local currencies and addressed the inherent weaknesses in currency mis-matches in funding. However, there are unintended repercussions. An open and well-developed bond market attracts non-resident participation and the diversity of market players is said to enhance market liquidity. However, we have discovered that beyond a certain threshold the presence of non-residents participation is a source of instability.

The higher the participation of non-residents in the bond market, the more vulnerable the market is to volatile portfolio outflows. So it is said that with history, if we learn it well, will not repeat itself. Nevertheless, sometimes lessons in history are cloaked in apparent success. The 2008 Global Financial Crisis and corresponding policy responses by major central banks caused risks not seen before. In the periods after, unconventional monetary policy and a prolonged period of low interest rates had negative spillovers to emerging markets. This was notably evident through the waves of volatile capital flows in large magnitude. These flows were drawn by the search for yields, and ironically coincided with a significant expansion and development of our financial markets, a key reform measure following the AFC. The region was once again at the mercy of global easy money, flattered with an overvaluation of asset prices and domestic financial market exuberance. As these capital inflows mainly originated from the advanced economies, regional financial markets became increasingly exposed to their vagaries. Take the Taper Tantrum for example, which exemplifies how fragile the region’s fate is when just a hint of the US Fed possibly tapering its asset purchases was sufficient to trigger massive 2/5  BIS central bankers' speeches  capital outflows from the region. Time and again, a clear policy lesson has come to the fore – the importance of diversification and the need to reduce reliance on the de facto reserve currencies to manage negative spillover effects.