As the world ushers in 2017, the reverberation from the global financial crisis nearly a decade ago continues to have an influence on financial markets. Thus far, its impact on the developing markets has been in sharp relief to the troubles that have engulfed the West.

 

The past twelve months saw the effects of the unorthodox measures following the 2008 crisis spread into the political realm with Brexit in the UK, the surprise election of Donald Trump in the US and the referendum defeat of Matteo Renzi in Italy. Emerging markets, especially in Asia, have weathered what were unthinkable developments in the West with surprising equanimity.

 

To be sure, Asia saw volatility return during each of these episodes, a by-product of an increasingly interconnected world. But just as quickly, markets in this region have bounced back brushing off the surprise outcomes that in earlier times could have escalated into something far more consequential. Have Asia’s financial markets reached an inflection point of long-term stability? Are the macroeconomic conditions in the region now able to withstand ‘Black Swans’ whether of the financial or political variety? Should emerging market investors apply the same strategy in 2017 and continue to buy on dips?

 

The coming twelve months are likely to test further the resiliency of this region and its ability to cope with the heightened uncertainty emanating from the developed markets of the West. As Asia marks the 20th year since its own financial crisis in 1997, here are five indicators to watch for.

 

1. Liquidity – By far, it has been the single most cited factor that has driven markets globally. When the central bank in the US unleashed the flood of money to stave off the collapse of its banking system, it triggered a series of unintended consequences. With the UK, Europe and Japan following suit, many of these economies entered uncharted waters including introducing negative interest rates.

 

In Asia, the liquidity is most pronounced in the domestic banking system. From Japan to Taiwan and banks in Southeast Asia, they are now meaningful participants in deals beyond their home markets. One way to look at it is to view it as a sign of these banks’ growing sophistication. Another is a tell-tale sign of the lack of opportunity at home pushing these banks to take a punt elsewhere to meet their financial return objectives.

 

2. Leverage – With ample liquidity over a prolonged period, the attractive cost of credit has encouraged activity in the debt market. Asia’s bond markets attracted a growing number of issuers. As 2016 came to close, Asia’s G3 market posted another solid outcome and should cross the US$200 billion mark once more. Meanwhile, banks are expanding consumer banking with offers from credit cards to consumer loans.

 

One way to view it is how it reflects the growing sophistication of companies in this region that now can access finance beyond the banking market. Growing affluence is similarly making it possible for banks to be able to offer more lending products.

 

Another is a tell-tale sign that liquidity has distorted the cost of finance. With stiff competition to maintain market share, eroding underwriting standards have begun to emerge. Banks are recording a deterioration in ratio of non-performing loans to total loans.

 

3. China I – Twenty years ago, the country was nowhere as economic merry-making got underway in Southeast Asia. As the double mismatch of currency and tenor got out of hand, seared were the companies that borrowed heavily and the banks that participated. Several of these large business groups such as in Thailand, the epicentre of the crisis, and Indonesia are now back in business.

 

China has transformed itself to become the region’s largest economy. In the international capital markets, Chinese state-owned enterprise issuers are now joined by local government financing vehicles (LGFVs). In terms of importance, China now accounts for half or more of international bond issues from the region.

 

One way to look at it is to view borrowings by LGFVs as a sign of their growing sophistication and part of the Going Out strategy. Another is a tell-tale sign of domestic borrowing constraints that is forcing some of them, which resemble the ITICs (international trust and investment companies) of the 1990s, to raise financing in US dollars at a time when it has strengthened relative to the renminbi and rates are set to rise further.

 

4. China II – As part of the Going Out strategy, Chinese companies have been at the forefront of M&A activity. From commodity to resources, the preference these days is for consumer brands, new economy and technology. The pace with which Chinese companies have gone out to acquire targets in 2016 has been breathtaking.

 

One way to view it is Chinese companies’ coming of age and growing sophistication. But it also has become a source of concern not just for the price paid, which tend to be on the higher end, but also the ability of the Chinese buyers to merge their management style. The challenges faced by companies such as CNOOC, China’s third largest national oil company, which took over Canada’s Nexen in a US$15 billion deal in 2013, provide tell-tale signs of the difficult task ahead.

 

5. From monetary to fiscal – With the inability of monetary policy to arrest a global economic slowdown, the new mantra is government expenditure. Twenty years since the Asian crisis, the balance sheet of governments in the region have improved markedly with robust foreign exchange reserves and conservative debt-to-GDP levels.

 

Countries from India to Thailand, Indonesia and the Philippines have outlined ambitious programmes to support investment in infrastructure in the next five years. China is pursuing an additional stream with its One Belt, One Road initiative that is making a difference in countries such as Pakistan.

 

One way to view it is the growing sophistication of the public sector with the promise that the efforts by Asian governments to loosen the purse string should boost much needed domestic economic activity at a time of tepid global demand. It is too early to say how successful these undertakings will be.

 

As governments become the engine to boost growth, issues such as graft, special interest, effective implementation, revenue collection and budget deficits will test public institutions. It will provide the tell-tale signs of how much the region has learned the lessons from the Asian crisis in 1997 and whether history repeats itself in 2017.