Asia Financial CrisisBy: Phong Van and Sandeep Kumar

HistoryBefore 1997, Asia was attractive

By developing countries

High interest rates

“Asian economic miracle”F

our Asian Tigers

IntroductionJuly 1997

Countries most affected by the Asian Financial Crisis.

IntroductionMost affected:

IndonesiaSouth KoreaThailandHong KongMalaysiaLaoPhilippines

IntroductionLeast affected

People’s Republic of China IndiaTaiwanSingaporeVietnam

IntroductionThailand

Thai bahtReal estateBurden of foreign debt

Southeast Asia and Japan Slumping currenciesDevalued stock marketSteep rise in private debt.

IMF Role$40 billion program to stabilize the

currencies of South Korea, Thailand, and Indonesia.

Bailouts (rescue packages) for the most affected economies to enable affected nations to avoid default.

Structural adjustment package

SAPcut back on government spending to

reduce deficits,

allow insolvent banks and financial institutions to fail and aggressively raise interest rates.

The reasoning was that these steps would restore confidence in the nations’ fiscal solvency, penalize insolvent companies, and protect currency values.

IMF and High Interest Rates

to attain the chain objectives of tightened money supply

discouraged currency speculation

stabilized exchange rate

curbed currency depreciation

ultimately contained inflation.

Consequencessignificant macro-level effects

including sharp reductions in values of currencies

stock markets

other asset prices of several Asian countries.

The nominal US dollar GDP of ASEAN fell by US$9.2 billion in 1997 and $218.2 billion in 1998.

The Currency exchange rate per USD

June 1997 compare to July 1998

Thai baht: 24.5 to 41

Indonesian rupiah: 2,380 to 14,150

Philippine peso: 26.3 to 42

Malaysian ringgit: 2.5 to 4.1

South Korean won: 850 to 1,290

Thailand

Thailandfrom 85-96 Thailand grew 9% per year

Highest economic growth rate

Inflation was also low (3.4%-5.7%)

Baht value was 25 to the US Dollar

ThailandMay 14-15, 1997 the baht faced very bad

speculative attacks

In June, Prime Minister Yongchaiyudh refused to devalue the baht

Thai government failed to defend the Baht, starting the crisis

Baht lost more then half it’s value

Thai stock market dropped 75%

ThailandAugust 11, 1997, IMF unveiled $17 billion rescue

package

August 20, 1997 IMF approved another $3.9 billion bailout package

Rumors that former Prime Minister profited from the devaluation

Finally recovered by 2001, paid off IMF debt in 2003

Indonesia

IndonesiaIndonesia was doing good in June 1997

Low inflation$900+ Million trade surplus$20 + Billion foreign exchange reservesGood banking sector

However, many corporations were borrowing in U.S. Dollars

In July 1997, Indonesia widened the rupiah tradin band from 8%-12%

IndonesiaOn August 14, 1997 the managed floating

exchange regime was replaced by a free-floating system, causing the rupiah to drop more

IMF created a rescue package of $23 Billion, but didn’t help

In Sept they hit a all time low, Moody’s rated Indonesia’s long-term debt to “junk bond” status

More effects were felt in Nov when the summer’s hits were felt in the corporate books

IndonesiaIn Feb, the President got rid of the governor of

the Bank of Indonesia, but this wasn’t enough and he was eventually forced to resign

EffectsRupiah was 200 to 1 USD, afterward hit 18,000 to

1 USDLost 13.5% of GDP

South Korea

South KoreaLarge corporations were funding big expansions,

however failed due to excess debt

Moody’s lowered their credit rating from A1 to B2

Seoul stock exchange dropped 4% on Nov 7, 7% on Nov 8, and 7.2% on Nov 24

In 1998 Hyundia took over Kia Motors, Samsung was dissolved, and Daewoo was sold to American GM

Currency dropped from 800 per dollar to 1,700

National debt-GDP ratio went from 13%-30%

Hong Kong

Hong KongAfter UK gave control of Hong Kong to China the

Hong Kong dollar was under speculative pressure

Authorities spent more then US $1 Billion to defend local currency

Had more then US $80 billion in foreign reserves

Stock markets became volatile

In Oct the Hang Seng Index dropped 23%

In Aug 98, interest rates jumped from 8%-23% overnight, and even 500% once

Hong KongThe Hong Kong Monetary Authority (HKMA)

setup a system to establish rates, however speculators were taking advantage of this by short selling shares.

HKMA wound up buying HK$120 billion worth of shares in various companies to combat this

Started selling those share in 2001, profiting HK$30 billion

Malaysia

MalaysiaIn July 1997, the Malaysian ringgit jumped

overnight from 8% to over 40%

Ratings had fallen from investment grade to junk

Lost 50% of value, from 2.50 to 3.80 to the dollar

Output of real economy declinedConstruction dropped 23%Manufacturing 9%Agriculture 5.9%GDP 6.2%

MalaysiaIMF aid was refused

Various task forces were formed to fix economy

By 2005 had a surplus of US$14.04 billion

Singapore

SingaporeSingapore dipped into a short recession

Government kept very active management to ensure security

Government programs were put forward

Made no attempt to help capital markets, instead allowed a 60% drop, however within a year fully recovered and continued to grow

Less Affected CountriesChina, The US, and Japan were very strong

economies and were able to survive

China held most of it’s foreign investments were in factories rather then securities

U.S. didn’t collapse, but on Oct 27,1997 the Dow Jones fell 554 points (7.2%)

Japan was affected because the economy is so prominent (yen fell to 147), but it was world’s largest holder of currency reserves so it bounced back quickly

ConclusionMany businesses collapsed and millions of

people fell below the poverty line

Indonesia, South Korea, and Thailand were most affected

Heavy U.S. investment shifted from Thailand to Europe

Many countries pushed for corporate governing to avoid problems later

Investors were reluctant to lend to developing countries

ReferencesKaufman, GG., Krueger, TH., Hunter, WC. (1999)

The Asian Financial Crisis: Origins, Implications and Solutions. Springer.

Weisbrot, Mark (August 2007). Ten Years After: The Lasting Impact of the Asian Financial Crisis

http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis

Tecson, Marcelo L. (2009), "IMF Must Renounce Its Weapon of Mass Destruction: High Interest Rates"

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