South East Asian Currency

Crisis
 The Asian Financial Crisis was a period of financial crisis that gripped much of Asia beginning in

July 1997, and raised fears of a worldwide economic meltdown due to financial contagion.

 The Asian financial crisis involves four basic problems or issues:

(1)A shortage of foreign exchange that has caused the value of currencies and equities in
Thailand, Indonesia, South Korea and other Asian countries to fall dramatically,

(2) Inadequately developed financial sectors and mechanisms for allocating capital in the
troubled Asian economies,

(3) Effects of the crisis on both the United States and the world, and

(4) The role, operations, and replenishment of funds of the International Monetary Fund.
Introduction of A.F.C
Asian financial crisis
 Initiated by two rounds of currency depreciation in 1997.
 First round was a precipitous drop in the value
Thai baht
Malaysian ringgit
Philippine peso
Indonesian rupiah
 Second round began with downward pressures hitting
Taiwan dollar
South Korean won
Brazilian real
Singaporean dollar
Hong Kong dollar.
Before crisis
Economies of south east Asia
 Maintained high interest rates attractive to foreign investors
looking for a high rate of return.
 Regional economies of Thailand, Malaysia, Indonesia,
Singapore, and South Korea experienced high growth rates,
8–12% GDP, in the late 1980s and early 1990s.
 Thailand, Indonesia and South Korea had large private
current account deficit
 It led to excessive exposure to foreign exchange risk in both
the financial and corporate sectors.
 In 1990’s the U.S. Economy recovered from recession
Impact
It began to raise U.S. interest rates to head off inflation.
At the same time, Southeast Asia's export growth slowed
dramatically in the spring of 1996, deteriorating their current
account position.
 At the end of 1996, the proportion of loans with maturity of one
year or less was 62% for Indonesia, 68% for South Korea, 50%
for the Philippines, 65% for Thailand, and 84% for Taiwan.
Was there a crisis ?
Over $100billion was pulled out of the region in
1997-98 which was 5 percent of the GDP
Unemployment rose to .8 million in Indonesia, 1.5
million in Thailand, 1.35 million in Korea
Real wages dropped by 12.5% in Korea and 6% in
Thailand
Chain of events
Corporate failure at Korea
Bank failure at Thailand
Political uncertainty at Korea, Thailand,
Philippines
Policy mismanagement at Thailand and Korea – to
defend their pegged exchange rates exhaust their
Forex reserves
Contagion effect hit Malaysia, Philippines,
Indonesia
International intervention – IMF & Moody
Events from microeconomic
point of view
Exchange rates depreciates
Foreign lenders concerned with the repayment of
loans, withdraw funds
Domestic interest rates soar up
Lack of bankruptcy laws and rising Non
Performing Loans added to the stress of the banks
Banks become illiquid and decapitalized
The fall of Korean stock exchange
East Asian Countries
Initially secondly
Round
s
Effec
ts
Majorly Thailand, Indonesia South Korea

Fairly Malaysia, Philippines Hong Kong, Taiwan

Mild Singapore, Laos,

Japan,Chaina
 Currency Exchange rate Change
(per US$1)[30]

June 1997 July 1998

Thai baht 24.5 41– 40.2%

Indonesian rupiah 2,380 14,150– 83.2%

Philippine peso 26.3 42– 37.4%

Malaysian ringgit 2.5 4.1– 39.0%

South Korean won 850 1,290– 34.1%

Country GNP (US$1 billion)[30] Change

June 1997 July 1998

Thailand 170 102– 40.0%

Indonesia 205 34– 83.4%

Philippines 75 47– 37.3%

Malaysia 90 55– 38.9%

South Korea 430 283– 34.2%

Reasons for the crisis
Faulty macro economic policy
Demise of Industrial Policy : government used
to intervene and control inflow
End to policy of government coordinated
investment allowed duplicative investment in
key industries leading to excessive foreign
borrowings between 1993-1997
Excessive risk in govt. favoured industries
Crony capitalism
 The causes and structural factors contributing to the financial crises
include:
 private-sector debt problems and poor loan quality,
 rising external liabilities for borrowing countries,
 the close alignment between the local currency and the U. S. dollar,
 weakening economic performance and balance-of-payments
difficulties,
 currency speculation,
 technological changes in financial markets, and
 a lack of confidence in the ability of the governments in question to
resolve their problems successfully
 Declining exports
Categorization of crisis
Macroeconomic policy induced – balance of
payment crisis
Financial panic – sudden withdraw from solvent
borrower by short term creditors
Bubble collapse – overvaluation of financial asset
Disorderly workout – impediment to efficient
provision of working capital
Impacts
Indonesia

Drastic devaluation of the rupiah from 2000 to 18000

for 1 US$
Excessive inflation
Riots
16 major commercial banks were closed
Governor, Bank Indonesia was sacked
President Suharto was forced to step down in may
after 30 years in power
South Korea

Drastic devaluation of the won: from 1000 to 1700

for 1 US$
Credit rating of the country (moody’s): A1 to B2
National debt-to-GDP ratio more than doubled
Major setback in automobile industry
Philippines

Growth dropped to virtually zero in 1998

Peso fell significantly, from 26/US$ to even 55/US$
President Joseph Estrada was forced to resign
Measures taken to
overcome crisis
 High saving and investment rate
 Strong emphasis on education
 Stable macroeconomic environment
 Free from high inflation or major economic slumps
 High share of trade in GDP
Role of IMF
Prevent outright default on foreign obligation
Limit the currency depreciation
Limit inflation
Rebuild foreign exchange reserves
Reform the banking sector
Why was India not
affected
Full capital convertibility is not allowed
Lock in period for foreign investment in real
estate
Floating exchange rate with some influence by
the RBI during periods of crisis
Strong fundamental growth with services sector
being the prime reason
External debt to GDP has been declining for the
past few years
U.S.& JAPAN U.S.
 The Dow Jones industrial plunged 554 points or 7.2%, amid ongoing
worries about the Asian economies.
 The New York Stock Exchange briefly suspended trading.
JAPAN
 Japan was affected because its economy is prominent in the region.
Asian countries usually run a trade deficit with Japan because the
latter's economy was more than twice the size of the rest of Asia
together; about 40% of Japan's exports go to Asia.
 The Japanese yen fell to 147 as mass selling began, but Japan was the
world's largest holder of currency reserves at the time, so it was easily
defended, and quickly bounced back.
 GDP real growth rate slowed dramatically in 1997, from 5% to 1.6%
and even sank into recession in 1998, due to intense competition from
cheapened rivals.
Learning's
The lessons from developing country crises are
summarized as:
Choosing the right exchange rate regime
The central importance of banking
The proper sequence of reform measures
The importance of contagion