1.1 From a macro perspective, the strong momentum of current account deficits or savings-investment gap in Southeast Asia in the mid-1990’s was largely spurred by excessive investment funded by capital inflows. A crucial factor that contributed to the surge in capital inflows to emerging markets in the early to mid-1990’s was the decline in asset yields in industrial countries. Weak economic performances of many industrial countries in that period led to accommodative monetary policies, abundant liquidity, and low interest rates. These in turn depressed dividend yields as well as ratios of corporate earnings to equity values. Declines in asset yields in industrial countries made the emerging countries an increasingly attractive investment opportunity. Moreover, exchange rates of ASEAN-4, Hong Kong, and Taiwan were closely linked to the U.S. dollar, entailing little exchange risks to investment flows from industrial countries. In addition, international wealth-holders were impressed by Asian robust momentum of economic growth and high interest rates throughout the first half of 1990’s (Table 1).
1.2 The unusually successful performances of Asian economies attracted rapid growth of net capital inflows to the region during the early to mid-1990’s. At that time, Indonesia, Malaysia, and Thailand experienced average real GDP growth above 7% p.a. The Philippines was the only laggard among ASEAN-4, yet its growth gradually rose to above 5% by 1995-96. These swift Asian growth paths were heavily fuelled by external trade. Quick and outward-oriented growth was not the only feature that attracted foreign investors. Macroeconomic stability played an important role as well.
1.3 By developing country standard, inflation was moderate or below 10%, except ht Philippines in 1989-91. And the absence of significant fiscal imbalances in most cases confirmed the discipline of macroeconomic policies. Among the ASEAN-4, only the Philippines incurred persistent general government deficits in the late 1980’s and 1990’s. Thailand, in contrast, recorded general government surpluses every year between 1988 and 1996. Given such healthy fiscal positions, the sizable external current account deficits were not due to public disserving but shortfalls of private saving relative to private investment. Moreover, those shortfalls were not associated with low savings but rather with extraordinarily high investment, which was linked to these countries’ growth records. In other words, a sizable part of this investment was financed by foreign capital attracted by relatively high returns.
