mr. macfarlane discusses australia ’ s position in light of recent events in asia speech delivered by the governor of the reserve bank of australia, mr. i. j. macfarlane, before the australian stock exchange, the australian institute of company directors and the securities institute of australia in brisbane on 26 / 3 / 98. it is a pleasure to be here in brisbane addressing the australian stock exchange, the australian institute of company directors and the securities institute of australia at their combined bull and bear luncheon. i do not know whether i should nominate myself as a bull or a bear. members of this audience will be able to make up their own minds after they have heard my story today. 1. introduction in the period since the collapse of asian currencies - roughly since the floating of the thai baht on 2 july 1997 - i have spent a fair amount of time, as have many others, trying to understand the reasons for that collapse. it has been a salutary experience, and it has caused many of us to re - examine some cherished views. i have already spoken twice on this subject, so i do not intend to cover the same material today. what i hope to do, however, is to draw some lessons from it, and to apply them to australia. in a previous speech1, i tried to identify the list of economic characteristics that would make a country vulnerable to a currency crisis or, worse, to a full - blown economic crisis. as you probably know, there is no definitive list that enables us to forecast these events with any precision, but there are about a dozen factors that seem to increase a country ’ s vulnerability. if a country scores a very low mark on all of these factors, or at least most of these factors, there is a good chance that it would be subject to an international loss of confidence and ensuing economic problems. you will not be surprised to hear that australia is not in this category ; indeed, australia scores a very high mark on most of these factors and thus should be in a very secure position. but we can never be complacent. like all countries, we do not achieve a perfect score, and therefore it is worthwhile to go through a systematic examination of our strengths and weaknesses in light of the recent events. 2. criteria for vulnerability the list of factors identified from our research2 on the asian crisis that pointed to the likelihood of a currency crisis or a wider economic crisis was as follows : 1. does the

is recognised internationally as having had one of the best growth records among oecd countries this decade. ( only ireland and norway - two very small economies - have done better. ) i will delay discussion of the current account, the balance of payments and foreign debt until after i have completed the list of positive factors for the australian economy. the next factor on my list was whether the country was in the midst of an asset price boom. the problem with asset price booms is that they are usually followed by asset price busts, which can give rise to company insolvencies and banking problems. clearly, this is not the case in australia at present, although we do have fresh in our memories the events of the late eighties and so cannot be too censorious of recent asian events. while the australian share market has risen over recent years, it has done so by a smaller amount than the united states or most of europe. commercial property prices have also been relatively restrained, and while house prices are rising, the large rises have been confined mainly to inner sydney and melbourne. i think we can be confident that our system of bank supervision is at world best practice, and the ratio of bad debts to total loans, at 0. 9 per cent, is at its lowest level since statistics have been collected ( admittedly, the collection only dates back to 1991 ). of course, what currently seems to be a good loan can become a bad debt if circumstances change. even so, i have a lot of confidence that our figures are a good guide to the health of our banking system. 4 i think it is true to say that there has not been a lot of unhedged foreign currency borrowing occurring among australian corporates since the days of the " swiss franc loans " of the mid - eighties, but i will postpone discussion of that topic until i deal with foreign debt in the second half of this talk. accounting standards, disclosure requirements and bankruptcy procedures are what might be termed financial infrastructure. so is the existence of a large group of equity analysts and financial journalists, the asc and stock market listing 4 in many developing countries, official statistics on bad loans are thought to greatly under - estimate the true figure. even so, mexico and thailand reported ratios of 10. 5 per cent and 7. 7 per cent in the year before their economic crises. requirements. we tend to take a lot of this for granted, but it is very important that they be up to best international practice.