A decade of reform in East Asia has witnessed successful progress in financial restructuring, which has enabled the recent robust growth. However, the real reform needed to achieve a disciplined financial system will require much more time and more intensive efforts, sustained by both mature market functions and efficient banking intermediaries. The East Asian experience so far has proved that a mere shift from bank lending to a corporate finance market did not automatically improve the governance of family-owned and -controlled firms. More stringent rules for empowering minority equity-holders and open access to information may add inconsistent disincentives to list firms, while bond issuance may not be able to offer appropriate financial support for certain types of businesses, if the information costs are included. The banking sector needs more sophistication, especially for supporting small and medium-sized enterprises. Meanwhile, enhancement of financial supervision has become an additional urgent agenda, along with the soaring number of cross-border transactions, often supported by foreign financial institutes with their advanced technologies. After the first round for financial restructuring, the reform in East Asia has entered a new phase: this needs to consist of a more comprehensive approach and speedy implementation of the policy agenda, without indulging in complacency.
This paper critically reviews the conventional discussion on the financial system in Southeast Asia. Discussion of the financial crisis in 1997 has usually stressed, as a way forward, the enhancement of corporate governance, overcoming excess debt finance, and a shift to market based financial methods such as equity and bond markets. By showing numerical evidence for the cases of Thailand and Malaysia, this paper challenges these conventional views from the perspective of the relationship in the region between the financial and industrial sectors. Considering the early emergence of the financial sector in Southeast Asia and the relatively delayed industrialization of the region, bank lending to the manufacturing sector is a relatively recent practice. The foreign-capital-led industrialization after the mid-1985s created a further serious cleavage between these sectors. Examination of recent micro-financial data for firms since the early 1990s shows that the debt ratio and the bank borrowing ratio in the major firms in Thailand and Malaysia was surprisingly low, and that these figures neither increased during the early 1990s when crisis was creeping, nor changed after the crisis. Ten years on from the crisis, the economy of the region has recovered, a process led mainly by the growth of the manufacturing sector, whilst the financial sector remains stagnated. In spite of the efforts of governments and international organizations, careful empirical observation indicates that the shift in the financial systems towards a market-based approach, such as equity or bond markets, is still in progress. The financial system and the corporate finance structure are generally prescribed by the structure of the manufacturing sectors that constitute the demand side of the fund. The unexpectedly slow development of the market-based financial system, in spite of the efforts of the authorities, could mean that the demand for funds through the organized market is still scare in major industries such as export manufacturing. In the long run, a change in the financial system and in corporate finance would be brought about by a change in the manufacturing sector, while policy reform in the financial system should remain circumspect. Considering the still inactive financial intermediation of the commercial banks, it is necessary to pursue a balanced recovery of the financial system, instead of a one-sided emphasis on a market-based shift.
This article deals with financial reform in Thailand between 1997 and 2007, focusing on how the regulatory authorities have coped with the financial crisis and rebuilt a sound banking sector. The results of the analysis show that the regulatory authorities in Thailand have not yet succeeded in making a healthy and competitive financial industry as anticipated during the early stages of reform. First, it has taken longer for Thailand’s financial authorities to dispose of the non-performing loan (NPL) problem compared to other crisis-hit East Asian economies. The NPL ratio at the end of 2006 was much higher in Thailand than in South Korea, Indonesia and Malaysia. Second, the size of Thailand’s banking sector has shrunk in terms of total assets, tier-1 capital, outstanding loans and so on. This means that the banking sector has not contributed enough to economic recovery since the crisis. Third, institutional arrangements for ensuring financial stability have been insufficient and have taken a long time to implement. It took about ten years to establish the Deposit Insurance Agency, to reform the Bank of Thailand Act and the Financial Institutions Act, and to establish a consolidated supervisory regime. One of the important features of reform in the Thai banking sector is that the top three local banks have not experienced a dramatic change of ownership and capital structure. The family owners of these banks refused an injection of public money from the government and this partly explains why the capital bases of these banks are still small compared to those of South Korea’s banks, into which huge amounts of public money were injected. Thailand’s top banks have hesitated to merge with each other and to conclude strategic partnerships with foreign financial institutions, because the family owners do not want to lose their management power. As a consequence of this behavior, top banks have failed to build up enough capital for future investment and this has led to a lack of competitiveness. Thai regulatory authorities should put pressure on Thai banks to comply with Basel II as required by the Bank for International Settlements in order to minimize financial risks. Other than that, more attention should be paid to the stability of non-banking sectors because these are expected to increase their holdings of financial products and overseas investments. Thai financial authorities are expected to announce the second Financial Sector Master Plan in the near future. This should open up the Thai financial sector to foreign financial institutions in order to create a more competitive environment in domestic financial markets.
In the aftermath of the Asian financial crisis and post-Soeharto reform, the Indonesian banking and corporate sectors underwent extensive restructuring. While bank restructuring resulted in dramatic changes in the institutions and ownership of this sector, the consequences of corporate restructuring remain obscure due to the prolonged debt disposal process. This study explores how corporate ownership and behavior have changed through corporate restructuring. A notable change in the ownership structure is a shift from domestic private to foreign ownership. Among the domestic private sphere, companies affiliated with business groups reduced their presence. Most of the business group affiliated banks were closed or transformed into foreign-affiliated banks. Highly indebted business groups sold their assets to foreign investors. Foreign ownership has thus emerged. Among the business groups, the most heavily damaged were “rapid growth groups” under the Soeharto regime. “Established groups” survived relatively well, and “other groups” showed a wide range of performance. Along with bank restructuring and debt disposal, proximity to the Soeharto government was a crucial factor affecting the survival of groups. Of the listed companies in 2004, almost half are new since 1996 — either new listings or by virtue of a change in ownership. Closer examination reveals, however, that the major part of this turnover was due to reshuffling of assets among the existing business groups. The performance of listed companies was almost normalized by 2004, but the profit ratios are lower than those in the pre-crisis period. However, business group affiliated companies, especially “established groups”, show high profitability, with low current ratios and high debt ratios. This feature was also observed in the pre-crisis period. One marked change in the post-crisis corporate fund-raising behavior, which can be observed particularly in business group affiliated companies, is a fall of short-term bank borrowing. A split of banks and business groups lies behind this change in behavior. As a substitute for bank borrowing, “established groups” have tended to shift to equity financing and long-term liability, and “other groups” are actively utilizing inter-company credits.
This article explores how financial and corporate reform has been achieved in Korea in the aftermath of the Asian financial crisis. In the financial sector remarkable reforms were achieved for several years after the crisis. First, to reduce a huge volume of bad debt in the banking sector the government injected a total of 155. 3 trillion won of public funds by the end of 2001. As a result of this action, the non-performing loan ratio of the banking sector fell from 12. 9% at the end of 1999 to 1. 9% in 2004. Second, some bank mergers and restructuring of financial institutions through financial holding companies has been accomplished. There are some arguments about how the Korean financial system should be developed. Some analysts have urged that the Korean financial system should evolve from a bank-based financial system to a capital market-based financial system. However, the underdevelopment of Korea’s capital market and problems related to transparency make such an evolution to a capital market based financial system difficult. In the corporate sector, chaebols had lowered their debt-to-equity ratios to 200% by 1999, according to Korean government requirements. The government also required chaebols to overcome the problem of overdiversification. Chaebols exchanged some specific businesses on a large scale. Business consolidation through this type of deal had been proceeding since 1998. Among the five largest chaebols, the LG Group started to restructure its group companies under the holding company system in 2001, and the SK Group began to introduce the holding company system in 2007. However, citizens’ groups monitoring the chaebols and state prosecutors have brought some lawsuits against the five largest chaebols. To elucidate these problems, drastic reform of the corporate governance structure of the chaebols is a key issue still to be addressed.
An East Asian Renaissance, World Bank, 2007 is the result of the efforts to understand the mechanism of the recent economic growth in East Asia, based on recent research developments in related fields. The Asian economic crisis in 1997 hit East Asia hard. The book tries to summarize the arguments as to how the miraculous recovery from the crisis was achieved, making full use of new theories of growth, trade and economic geography, particularly emphasizing the economies of scale and agglomeration. The recovery of East Asia resulted from regional agglomeration based on a virtuous circle of investment and growth, which, however, is likely to promote economic and social inequality. Accordingly, the book claims that East Asia needs not only to keep promoting regional agglomeration, but also simultaneously to attain social equity. There are two points the authors should take into consideration. Policy targets such as human capital formation, the labor market and social security must be pursued in their own individual development contexts, because East Asia consists of very diverse economies. Furthermore, these policy choices must be made through parallel developments of institutions, which are hard to build quickly, particularly in East Asia compared to elsewhere.