Beware the new irrational exuberance

It may sound like rubbing it in to write three stories on one subject in a single publication, but then the issues raised by the International Monetary Fund (IMF) during a recent visit to Thailand by its senior staff are worrisome.

Naoyuki Shinohara, the IMF’s deputy managing director, took the lead in warning various government and central bank officials at meetings in Bangkok last week about the possibilities of inflows of “hot money”.

The IMF warned that there were countries in the region that were especially vulnerable to impact from outflows of funds. Accordingly, it recommended they consider short-term measures to halt the inflow of volatile funds that could just as easily leave their countries days later.

No countries were named, and whether Asia will heed the warnings remains to be seen. The IMF is not the most popular international organisation in this part of the world, where it’s still blamed for imposing unworkable solutions on the likes of Thailand following the meltdown of 1997.

If they remember the events of 1997 so keenly, have Thais and other Asians forgotten how they got into that mess in the first place? Or are they too busy dancing with joy because lately they’ve been the centre of attraction for global economic growth. If they’re starting to believe their own publicity too fervently, then they should beware of falling prey to complacency.

Although central bankers, including Thailand’s, say they are very much aware of current dangers and are taking steps to ensure there will be no repeats of past crises, the private sector seems to be in its usual mode of being blind to the possible outcome of excessive lending and investment.

Looking back in time, hot money was partially to blame for the financial crisis we experienced during the late 1990s. Volatile flows of speculative cash rushed into countries that were proudly showing off their “Asian Tiger” credentials. The tigers lost their teeth as the hot money flowed out, leaving behind a scorched-earth trail of abandoned homes and shuttered businesses as financial institutions collapsed beneath a mountain of bad loans.

Fast-forward 16 years, and international agencies are once again warning the region that it should be studying its own recent history.

The Asian financial sector, despite strong balance sheets and record earnings, is still vulnerable if conditions turn really grim, the IMF believes. As well, there is evidence of some irrational exuberance in lending practices visible again from Singapore to Bangkok.

That’s not to say that these institutions cannot withstand the shocks of any new crisis, but who would have thought that that likes of Citibank would one day be a penny stock? Those huge US and European institutions too were considered invulnerable up until 2008, and the resulting loss of confidence prompted major fallout.

More worrisome than the banks, though, are the capital markets. Asian equity markets have been attracting huge inflows of funds — Bangkok and Manila were the fifth and sixth best performers in the world in 2012.

The bond markets of the six major Asean economies — Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam — have also grown substantially. According to the Asian Development Bank (ADB), the Asean bond market last year expanded by 18% to US$1.04 trillion. Thailand’s bond market grew 20.6% to 8.4 trillion baht. The Stock Exchange of Thailand had a market capitalisation of 11.8 trillion baht as of Dec 31, and was up 6% to 12.5 trillion as of Jan 31. Daily turnover in January averaged over 50 billion baht, against 32 billion in 2012.

To top off the irrational exuberance, moves by governments to boost domestic consumption have created a credit bubble, which the IMF has said could lead to problems in the near future. Central banks also have been issuing warnings about excessive consumer lending and the dangers of rising household indebtedness.

These factors are already setting off alarm bells, and it’s up to both governments and the private sector to agree that any excesses must be brought under control. If they fail to act responsibly and things get out of hand, there’s no turning back. The tigers could quickly be declawed again.

Asia has learned its lessons from the past. Current events suggest we can never let down our guard no matter how rosy things appear to be. Instead we should take the opportunity to strengthen our regulatory and financial systems so that when the rainy day does arrive, we will be sheltered from the storm.