1997 ASIAN FINANCIAL CRISIS

MULTINATIONAL BUSINESS
FINANCE

KAUSHIK PAUL
INTRODUCTION

The Southeast Asian

economies
(Thailand,
Malaysia,
Indonesia,
Singapore) and
South Korea
experienced an
impressive growth
path for over a
decade before the
financial crisis in
the beginning of
July 1997
GDP per Capita Growth Rate (%)
10
9
8
7
6
5 1985-90
1990-95
4
3
2
1
0
Indonesia Thailand Malaysia Philippines Singapore
SUDDEN COLLAPSE - WHY?
PRE-CRISIS BUILD-UP
• Currencies pegged to the US $
– Stabilize return expectations of foreign inv.
– Stabilize interest payment on foreign loans
• Current account deficit increasing but
currencies not allowed to float
– Imports increasing
– Exports facing competition from China
• Foreign Debt cumulating (High Leverage)
– Allocation determined by political cronyism
• Thailand, Indonesia, Korea, Philippines
• Foreign investments (mostly into real estate
sector) causing speculative bubble
 ASEAN - Trade Balance
(in US$ Billions)
1200 911.9
1000 682.1
800
600
400
200
0
-200
-229.8
-400

Export Import Balance

PRE-CRISIS THAILAND
• Bangkok International Banking Facility (BIBF), a
government established banking entity acted as a
channel of international capital into the domestic
market
• BIBF allowed the local banks of Thailand to make
dollar loans to the domestic borrowers at much
lower rates of interest than those in Thai baht
terms
– Debt financing cheap and easily available
– Companies became highly leveraged
• Short-term loans being used to finance long-term
projects – WHY?
– Mostly to real estate sector & financial mrkts
– Cronyism dictating how loans allocated
DEBT FINANCING
LEVERAGE POSITION
DEBT DISTRIBUTION (1996)
MATURITY DISTRIBUTION
Proportion of loans with maturity one year or less at the
end of 1996
84
90
80
68
70 65
62
60
50
50
40
30
Philippines
20
10
0
Indonesia SouthKorea Thailand Taiwan
In

So

Ta
Ph

Th
do

ai
ut

i li

...
...

.. .
...
CURRENT LIAB. / TOTAL LIAB.
PRE-CRISIS BUILD-UP
• US recovering from 1991 recession, starts
to raise interest rates in 1995
– Dollar starts appreciating
– Capital inflows to ASEAN countries slows down
• China launches aggressive export-oriented
policies in 1990s
– Yuan not pegged to dollar so relatively lower
– ASEAN countries currencies pegged to dollar
to relatively higher
• Japanese Yen under pressure to devalue
– Japanese exports losing out to China
– Government states will defend Yen (May ‘97)
 HOW CRISIS HAPPNED
•Large quantities of available credit

• Highly-Leveraged economic climate

• Asset prices pushed up to unsustainable level

• Eventually start coming down and collapse

- Real Estate and Stock Market

• Default on Debt obligation (mismatch ST and LT)

• Panic among Lenders

• Large withdrawal of credit

• Credit crunch and further bankruptcies

• Potential Collapse of the market

 HOW CRISIS HAPPENED
• Government is forced to raise Domestic interest rate to exceedingly high levels to
prevent capital flight
- Economy becomes more fragile

• Government buys excess domestic currency at fixed exchange rate

- Speculators join the fray

• Hemorrhaging foreign reserves of central banks

• Tide of fleeing capital does not stop

• Authority ceases to defend fixed exchange rate

• Currency floats and depreciates

• Foreign currency-denominated liabilities grow substantially

• More bankruptcies

• Further deepening of the crisis

 CHRONOLOGY OF EVENTS
Timeline Important Events
Early May 1997 Japan hints that it might raise interest rates to defend the yen. The threat
never materializes, but it shifts the perceptions of global investors who begin
to sell Southeast Asian currencies and sets off a tumble both in currencies
and local stock markets.

July 2, 1997 After using $33 billion in foreign exchange, Thailand announces a managed
float of the baht. The Philippines intervenes to defend its peso.

July 18, 1997 IMF approves an extension of credit to the Philippines of $1.1 billion.

July 24, 1997 Asian currencies fall dramatically.

August 13-14, 1997 The Indonesian rupiah comes under severe pressure. Indonesia abolishes
its system of managing its exchange rate through the use of a band.

August 20, 1997 IMF announces $17.2 billion support package for Thailand with $3.9 billion
from the IMF.

August 28, 1997 Asian stock markets plunge. Manila is down 9.3%, Jakarta 4.5%.
 CHRONOLOGY OF EVENTS
Timeline Important Events
October 8, 1997 Rupiah hits a low; Indonesia says it will seek IMF assistance.
October 14, 1997 Thailand announces a package to strengthen its financial sector.
October 20-23, 1997 The Hong Kong dollar comes under speculative attack; Hong Kong aggressively
defends its currency. The Hong Kong stock market drops, while Wall Street and other
stock markets also take severe hits.

October 28, 1997 The value of the Korean won drops as investors sell Korean stocks.

November 5, 1997 The IMF announces a stabilization package of about $40 billion for Indonesia. The
United States pledges a standby credit of $3 billion.

November 3-24, 1997 Japanese brokerage firm (Sanyo Securities), largest securities firm (Yamaichi
Securities), and 10th largest bank (Hokkaido Takushoku) collapse.

November 21, 1997 South Korea announces that it will seek IMF support.
November 25, 1997 At the APEC Summit, leaders of the 18 Asia Pacific economies endorse a framework
to cope with financial crises
December 3, 1997 Korea and IMF agree on $57 billion support package.
December 5, 1997 Malaysia imposes tough reforms to reduce its balance of payments deficit.
 CHRONOLOGY OF EVENTS
Timeline Important Events
September 4, 1997 The peso, Malaysian ringgit, and rupiah continue to fall.

December 25, 1997 IMF and others provide $10 billion in loans to South Korea.

January 6, 1998 Indonesia unveils new budget that does not appear to meet IMF austerity
conditions. Value of rupiah drops.
January 8, 1998 IMF and S. Korea agree to a 90-day rollover of short-term debt.

January 12, 1998 Peregrine Investments Holdings of Hong Kong collapses. Japan discloses
that its banks carry about $580 billion in bad or questionable loans.

January 15, 1998 IMF and Indonesia sign an agreement strengthening economic reforms.

January 29, 1998 South Korea and 13 international banks agree to convert $24 billion in short-
term debt, due in March 1998, into government-backed loans.

January 31, 1998 South Korea orders 10 of 14 ailing merchant banks to close.

February 2, 1998 The sense of crisis in Asia ends. Stock markets continue recovery.
CURRENCY DEVALUATIONS
Exchange Rate
(Per US $1)
Currency % Change
June
July 1998
1997
Thailand 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%

GDP MELTDOWN
GDP (US $billon)
Country % 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%

 FINANCIAL SUPPORT PACKAGES

(IN BILLION US$)

 MEASURES TAKEN BY GOV’TS

• Financial sector reforms

• Transparent and improved regulations

• Strengthening corporate governance

• Opening up of markets to more competition

• Promotion of their economic advantages by

encouraging foreign trade
RECOVERY FROM CRISIS