ASIAN FINANCIAL CRISIS-1997

Asian Financial Crisis 1997• The financial crisis of East Asia in 1997 was largely unanticipated and

was characterized by sharp falls in asset prices and currency values in several countries simultaneously.• The financial crisis that engulfed much of East Asia in 1997 and

thereafter appeared to be largely over by the dawn of the new millennium.• The crisis was triggered in East Asia with the announcement on July 2,

1997 that the Thai baht would be allowed to float, effectively devaluing the baht by about 20%.

Asian Financial Crisis 1997• Philippines, Malaysia, Indonesia and South Korea abandoned the

defense of the currency soon thereafter.• Even Taiwan and Singapore devalued their currency in what is termed

as competitive devaluation.• Hong Kong was the only country in East Asia that successfully

defended its currency against speculative attacks and had maintained its parity with the U.S. dollar.• The stock markets in all these countries in Asia plunged as the

currency crisis engulfed most of East Asian countries.

Asian Financial Crisis 1997• Currency crises are usually but not always. preceded by a gradual

deterioration in economic fundamentals, such as a significant expansion in money supply, or some other significant events in the economy.• In the Thai case, for instance, several finance companies failed

immediately prior to the baht devaluation.• Two of the most important variables that have proven particularly

useful in anticipating currency crises are the level of international reserves and the real exchange rate.

Factors that Caused Asian Financial Crisis• High Investment and Saving rate in Asian countries two decades

before crisis; this attracted investment.• In the mid of 1990s, the currencies of these countries depreciated

due to external shocks.• Thai Baht went down significantly.• Investors also withdrew their investment from these countries as a

result of these events.• The saving rate in the economy declined.

Factors that Caused Asian Financial Crisis• The decline of stock market along with the currency.• Balance sheets of banks and their borrowers deteriorated; default

rate in the economy increased.• As a result of these events, the economic activity in those country

went down and impacted all the economies.• Excessive lending by banking sector in all those Asian countries. • The banks also lent money for risky projects such as 41% of the banks

lending belonged to the equity markets and the real estate.• It is often argued that the lending was politically forced and led to the

crisis.

Factors that Caused Asian Financial Crisis• The banks in central Asian countries were not significantly regulated

before the Asian Financial Crisis. • Philippines, Malaysia, Indonesia and South Korea abandoned the

defence of their currencies• Taiwan and Singapore devalued their currencies what is known as

competitive devaluation.• Higher international and domestic debt for the countries.

Impacts of the Asian Financial Crisis

• Banking industry was hurt significantly so it led to Defragmentation of the banking industry; For example: 77 banks were merged to form 8 big banks in the case of Malaysia.• Consolidation of Banking Sector helped economies develop their

financial markets.• Bond market was not established in these countries before the crisis.• IMF in a report states that the convergence of Islamic finance in those

countries is also one of the impacts of Asian Financial Crisis.

Impacts of the Asian Financial Crisis• Price mechanisms in the economy changed; from rigid to market

determined economy.• Gaps in financing for companies were reduced as a result of better

delivery of financial products or services.• Focus has increased towards SMEs after the crisis.• Role of IMF was criticized for its traditional approach to deal with

crises in the shape of structural reforms