The recent credit crisis highlights the crucial link between economic progress and robust capital markets. When the Asian financial crisis hit in 1997-98, the absence of strong local capital markets meant that countries in the region were more exposed to the effects of the meltdown than industrialised market economies. The crisis pushed Asian nations into recession, led to a sharp rise in unemployment, and dragged millions of people back into poverty.
More than a decade later, as we watched the global financial crisis spread into the real economy and witnessed the destructive impact of a financial and economic catastrophe, Asian nations managed to avoid the worst effects of the turmoil. The reason: since the Asian crisis, economies in the region have sought to fund their capital requirements through well-developed highly liquid local-currency markets, which reduced their vulnerability to external withdrawals of capital.
The currency crisis of 1997 was a catalyst for the development of capital markets in the region. The oft-repeated crisis-is-opportunity story was no clichéd expression of wishful thinking -- it actually played out. As a result of the enormous growth in its economies, Asia shifted from being funded by the West to funding the West.
Asian corporates seeking to expand their business through offshore acquisitions or through organic growth in the region know that their funding needs can no longer be adequately met by banks. They can now list on local stock exchanges. Bourses such as those in China, Hong Kong, and Korea are now mature enough to source funding for the very largest companies.
During the decade, the growth of the Asian markets has been tremendous. While temporarily interrupted by the global financial crisis, the Asian liquidity pool has risen appreciably and, with it, the overall importance of Asia in the global market. Today, with issuers looking to widen their investor base, Asia's pool of liquidity is too significant to ignore.
The distinguishing characteristic of Asian markets prior to the 1997-8 crisis was an excessive reliance on bank loans for financing, with many corporates relying entirely on bank liquidity, either in the form of bilateral loans or club loans. When the banking system fell unto functional disorder, credit risk increased, sources of fund raising dried up and capital investment collapsed.
Under these circumstances, spurred on by an increased issuance of government debt, Asian capital markets have had to make significant progress, becoming deeper, broader and more open. The development of strong capital markets, particularly local currency markets with deep investor bases, has helped to facilitate secure long-term and large-scale fund raising.
During the past decade, governments also sought to bolster the strength of the regional capital markets. They implemented measures to develop and supervise these markets, making them more attractive to large institutional foreign investors. The establishment of benchmark yield curves, risk management systems and critical infrastructure such as market makers, the strengthening of shareholder rights, and liquid secondary trading markets, substantially increased the diversity of the region's investor base, which in turn led to significant improvement in the scope of and access to capital.
Ten years ago, investors looking to gain exposure to Asia were buying debt or equity in Western companies that had operations in or exposure to the region. Today, investors are buying regional debt or equity directly, providing portfolio diversification and higher yield opportunities. Local firms no longer need to sell dollar bonds to tap offshore funds. In addition, the local investor community has grown, whether it be local investors, propelled by rising national income levels, managing local currency or dollar liquidity, or offshore investment managers setting up offices in the region and managing mainly dollar liquidity that want to invest in the region.
As a consequence of these powerful dynamics, the depth of the local capital markets now provides new opportunities for both foreign and domestic companies. Foreign companies operating in Asia can diversify their investor base by issuing local currency bonds or listing on local exchanges, as with L'Occitane's IPO in May 2010.
Let this tale of redemption and reform be a lesson for the developed economies that have been so severely damaged by the global recession. Don't waste a crisis; learn from it. Do the hard work necessary to strengthen markets and the financial system so that next time -- and there will be a next time -- the impact will not be as great.
Robert Morrice is chairman and CEO for Asia-Pacific at Barclays.
