Heightened Financial Vulnerabilities

Amid Pandemic Age

COVID-19-induced economic slowdowns in the first quarter of 2020 led to a shift in investor risk appetite and increased financial volatility; this resulted in a flight to safety and tightened liquidity conditions for emerging market economies. COVID-19 unraveled global financial markets in the first quarter of 2020, testing Asia’s financial resilience. As liquidity conditions tightened and financial market stress emerged, by mid-March 2020 regional equity prices plunged by around 30% in several markets from their January values. Several of the region’s currencies also weakened, while portfolio equity flows reversed—leaving an outflow of $57 billion—in the first quarter of 2020. However, swift policy responses by authorities across the region (and globally) helped ease liquidity conditions and restored investor sentiment by June 2020. Nevertheless, the risks of tighter liquidity and waning investor risk appetite remained large in the latter half of 2020 amid the rising numbers of infections globally.

  • Asia’s cross-border asset holdings and liabilities increased in 2019, following a slight dip in 2018; the region’s investors continued to hold considerably more assets and liabilities outside the region than within Asia. Faced with common global uncertainties and concurrent policy responses, the contribution of global shocks to variations in Asia’s asset price returns rose sharply and remained larger than the share of regional shocks. Nevertheless, the extent to which external (both global and regional) shocks explain the variations of the local asset returns were relatively small compared with the 2008–2009 global financial crisis. As of the end of 2019, Asia’s investors continued to hold considerably more non-regional assets and liabilities than regional ones, with two-thirds held in economies outside the region. This highlights the region’s elevated financial market exposure to external growth prospects, investment sentiments, and liquidity conditions. Moreover, almost half of Asia’s international asset holdings are denominated in US dollar, and 25% of its external liabilities are in US dollar. Focusing on debt stocks, the share of US dollar denomination is higher at 63% of the region’s international assets and 50% of its liabilities. This reflects the dominance of the US dollar in the international financial system and the region’s reliance on the US dollar for its cross-border trade and financial transactions.
  • The pandemic has revealed several looming financial risks that policy makers in the region should guard against to safeguard regional financial stability. Although early financial market jitters were quickly quelled through swift and aggressive policy interventions, globally as well as regionally, the region’s policy makers need to remain vigilant and monitor potential economic and financial risks. Policy responses, led by aggressive fiscal support during the pandemic—although necessary and appropriate—could accelerate debt accumulation across economies. This could possibly lead to a deterioration of debt quality post-pandemic. Risks associated with credit growth and debt accumulation by households and nonfinancial institutions could also threaten regional banking stability and undermine economic recovery. Furthermore, the pandemic exposed the Asian banking sector’s structural vulnerability given the liquidity mismatches associated with increased international activity and a reliance on US dollar funding by non-US banks. These looming risks call for strengthening regional financial cooperation to safeguard the region’s financial stability and resilience. While it is important to broaden and deepen local currency capital markets, the region needs to pursue further reforms and intensify efforts to strengthen financial safety nets.


The divine scriptures are God’s beacons to the world. Surely God offered His trust to the heavens and the earth, and the hills, but they shrank from bearing it and were afraid of it. And man undertook it.


  1. Salam! You guys did it great. The figures and measures are so absolute & concluded in the deliverance.

  2. Salam! You guys did it great. The figures and measures are so absolute & concluded in the deliverance.

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