asian crises final

7/31/2019 Asian Crises Final

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The Asian Miracle

$94.1 billion dollars flowed into East Asiabetween 1991 and 1997

Growth was fueled by export promotion,industrial policy, lowered trade barriers, andthe rapid accumulation of physical and human

capital

By 1992, income per capita averaged $11,100


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The causes of crisisA shortage of foreign exchange that has causedthe value of currency and quities

in Thailand, Indonesia, South Korea and other

Asian countries to fall dramatically.

-A weakness in banking, financial sector: short-

term loans for long term projects,

shift of loans from government and banks to

private sector, bad debt structure.

-Pegged exchange rate.

-Imbalances: imbalancing in current account

and trade account


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Countries involved..

Thailand Philippines

Hong Kong

Taiwan

Singapore

South Korea

Malaysia

Indonesia

China


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Growth in real GDP (%) in crisis-

affected countries

*Source: Asian Development Bank

Countries 1996 1997 1998

Thailand 5.5 -0.4 -8.0

Indonesia 7.8 4.9 -13.7

Malaysia 8.6 7.7 -6.2

SouthKorea

7.1 5.5 -5.5

Philippines 5.8 5.2 -0.4


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Booming Thai Economy ground to a halt, contracted by1.9%

Massive lay-offs in Finance, Real Estate & Construction:

unemployment rate all-time high

Huge numbers of workers returning to their villages in thecountryside and 600,000 foreign workers sent back

Stock market dropped

75%,Finance One collapsed

Baht reached 56 US$ inJan 98


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Drastic devaluation of the rupiah: from 2,000 to18,000 for 1 US$

Sharp price increase

Wake of widespread rioting:500 deaths in Jakarta alone

Governor, Bank Indonesia was sacked

President Suharto was forced to step down in May1998 after 30 years in power


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Drastic devaluation of the won: from 1,000 to 1,700for 1 US$

Credit rating of the country (Moodys): A1 to B2

National Debt-to-GDP ratio more than doubled

Major setback in Automobile industry


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Growth dropped to virtually zero in 1998

Peso fell significantly, from 26/US$ toeven 55/US$

President Joseph Estrada was forced toresign


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The Hong Kong dollar comes under speculative attack.

Hong Kong overnight interest rates rise to 280%

The Hang Seng index fall 23% in three days.

The crisis worsens when Korea's sovereign credit

rating is downgraded

The largest investment bank in Hong Kong, PeregrineSecurities, goes bankrupt


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The Malaysian ringgit was "attacked" by speculators

The overnight rate jumped from under 8% to over 40%.

The ringgit had lost 50% of its value, falling from above2.50 to under 4.10 to the dollar

The construction sector contracted 23.5%, manufacturingshrunk 9% and the agriculture sector 5.9%

Overall, the country's gross domestic product plunged 6.2%in 1998


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40% of Japans export go to Asia, so it wasaffected even if the economy was strong

Japanese Yen fall to 147 as mass selling began

GDP real growth rate slowed from 5% to 1.6%

Some companies went Bankrupt

Being worlds largest currency holder, Japancould bounce back quickly


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Markets did not collapse, but were severely hit

NYSE briefly suspended trading, for the firsttime

Dow Jones Industrial Average suffered as 3rdbiggest point losses ever

Relationship with Japan changed forever:US stopped supporting the highly artificialTrade environment and Exchange Rate


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Artificially high Interest rate to attract investors

Large quantities of available credit

Highly-Leveraged economic climate

Asset prices pushed up to unsustainable level, andeventually collapsed

Default on Debt obligation

Panic among Lenders

Large withdrawal of credit

Credit crunch and further bankruptcies


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Speculative attacks

Deficits in balance of payments

Inefficient financial systems

Lack of capital controls

Exchange Rate regimes

External debt

Depreciative pressure on credit rates

Potential Collapse of the market

Government enters..


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In Indonesia and Thailand, the currentaccount deficit was above 5% of GDP.

ASEAN countries and Korea had a combined

deficit of $33 billion from 1995-1996 thatjumped to $87 billion in 1998-1999.

Mostly driven by overvalued currency and

over lending to moral hazard borrowers.


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Financial institutions were not especiallyconcerned with over lending due to explicit andimplicit government guarantees

Mismatch of the maturities of financialinstitutions' assets and liabilities

Deterioration in the quality of banks' portfolios

Lack of ability to assess credit risk


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The majority of the East Asian economiesengaged in capital market liberalization.

Hot money flowed out of the countries

quickly when negative speculation of occurredleaving financial institutions liquiditystrapped.

Portfolio equity investment went from $12.4

billion in 1996 to an outflow of $4.3 billion in1997 in Korea, Indonesia, Malaysia,Philippines and Thailand.

Capital inflows of $73 billion turned into

outflows of $30 billion in 1997.


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Exchange Rate Regimes

Pre-Crisis: Hong Kong, Indonesia, Korea,Malaysia, Philippines, Singapore, Taiwan andThailand pegged their currencies to the USdollar.

Depreciation of the local currencies on theforeign-exchange market means anincreased burden of external debt.

Pegged exchange rates forced Asian banksto keep interest rates comparable to USrates and compete with US trade.


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External Debt

Thailand: Foreign lending expanded from$20 billion to $98 billion between 1990 and1996.

Nearly 86% went to Thai institutions

70% of loans were short term

Corporations borrowed in dollars and loans

became two or three times more expensive.


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International Monetary Fund

Provided huge amounts of money Bailout packages amounted to $95 billion

Bailout money used to repay loans of Westernbankers

IMF imposed: High interest rates, decrease in government

spending, increase in taxes, devaluation ofcurrency

Political and economic changes Major restructuring Increased transparency Other minor reforms


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Policies Policies implemented by domestic governments

varied across economies

Taiwan and Singapore basically escaped the crisis

South Korea recovered fastest

Malaysia and China did not accept IMF policies

Prime Minister Mahathir kept interest rates low

Recession shorter than other countries Who adopted IMF policies?

Thailand, Korea, Philippines & Indonesia


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GDP & Unemployment Rates

GDP Dropped significantly and led to: High rates of unemployment, under utilization of

capital, severe economic hardship

In 1998 GDP fell by 13.1% in Indonesia, 6.7% inKorea, and 10.8% in Thailand

Unemployment Rates Malaysias unemployment rose to 405,000

Hong Kongs unemployment rose to 152,000

Thailands unemployment rose to 1.1 million Indonesias unemployment rose to 13.7 million

In South Korea, urban poverty tripled

In Indonesia, poverty doubled


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Devaluation Thai authorities decided to float the

Baht in July 1997

Crisis spread across the region

Thailand, Korea, and Indonesia

devalued their currency Exchange rate movements had

consequences

East Asian financial institutions

were bankrupt Foreign lenders were uncertain of

repayment

Insolvency spread across theeconomies


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The rapidly increasing globalization without fullyappreciate the new challenges and risk was theroot cause the Asian crisis.

Globalization, if properly managed, may helppush some developing countries into modernityand affluence. The Asian crisis has shown howimportant it is to have effective state institutions.

Developing countries must have to develop theirown defense mechanism by establishing a systemof capital controls and exchange rate regime.


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The crisis has raised the awareness of thesignificance of a healthy domestic

financial system, sufficient and strongenforcement of prudential regulations andsupervision, and a proper sequence offinancial liberalization.

Since 1997, many banking reform measureshave been taken and have furtherdeveloped financial markets.

To build a sound and safe market-orientedbanking system


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asian crises final

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