The Asian Shadow Financial Regulatory Committee (ASFRC) has reminded that global debt levels have risen to US$244 trillion, an increase of US$27 trillion from 2016. Such levels have significant implications for the stability of the financial market as well as the likelihood of a crisis.
ASFRC pointed out that excessive debt levels were to blame for the regional financial crisis in 2008, and there is now less room to react to a similar debacle from both the monetary and fiscal perspective.
Indeed, the market has predicted the next crisis in 2020, as tighter fiscal and monetary policies over the next two years are poised to weigh down on the global economy.
However, Goldman Sachs economists believe that the probability for a recession within the next three years is low, with the risk level lower than historical average.
That said, ten years after the 2008 crisis, there have been signs new financial risks have been popping up one after another. The US-China trade war and drastic depreciation of the currencies of emerging economies are indeed worrisome, and risks for another financial crisis are lurking everywhere.
The biggest problem now is whether the steps taken by our government are good enough to fend off the next wave of impact.
ASFRC reminded the Malaysian government that it should focus on three main things in dealing with financial crisis, given the 1MDB experience. Firstly, the government must prevent the crisis from erupting here in Malaysia. Secondly, the government must draw up a more versatile policy to check the spread of financial crisis triggered abroad, and lastly, the capability to withstand a crisis needs to be enhanced.
To do all these, it is imperative that the government learn some lessons from past crises.
It has been pointed out that financial crisis can be prevented and more effectively dealt with through leveraging, introduction of a healthy fiscal program, strengthening of macroscopic adjustments to minimize the risk of asset bubbling, and sufficient financial capital or even the establishment of a special fund to deal with financial crisis.
Then what about regional resilience given the close correlations between the Malaysian and regional economies? Any change in regional countries are set to affect Malaysia to some extent.
According to industrial observations, the situation in Asean today is very different from back then. Moreover, many regional countries have learned some lessons after the previous crisis, and have managed to boost their foreign reserves and economic resilience.
Asean already has a mutual defense system in place to stop an isolated incident from developing into a major regional crisis. In addition, Asean countries are beginning to adopt a free-floating currency system, allowing market forces to determine the exchange rates while keeping political and economic environments transparent so that currency speculators will not get a chance to hit.
When will the next wave of financial crisis eventually arrive? Well, there are still a host of uncertainties while external environment remains highly unpredictable. Anyway, the government must be adequately prepared to deal with a crisis that may strike anytime by reinforcing our own restorative ability and stability of the national economy.