ISAS Insights

A decade after the Asian financial crisis of 1997-98, Asia has once again been hurt by the global financial crisis that emanated in the financial sectors of the United States and Western Europe. The high degree of openness of Asia to trade, investment and capital flows inevitably meant that the regional economies would be impacted, although they had coped admirably until September 2008, even leading many analysts to talk about the possible 'decoupling' of the region from the West. Such talk quickly vanished with the bankruptcy of Lehman Brothers, which led to the skyrocketing of emerging market spreads and extreme tightening of credit markets worldwide. The sharp curtailment in export demand, freezing of credit markets, including trade financing and wholesale funding, as well as the abrupt reversal in capital flows to emerging markets, worked in tandem to curtail near-term growth in Asia quite heavily (Rajan, 2009 and Figure 1). While the spillovers from the global financial crisis to Asia were sudden and rather dramatic, once credit markets started thawing by March 2009, Asia looked poised to emerge most rapidly from the global economic contraction compared to many other regions.