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BUBBLE SPOTTING SERIES - 2014

This short presentation on the Asia Currency and Debt Crisis forms

part of a larger series of presentations on Market Bubbles

Front page graphic - own

Between 1980’s to the mid-1990’s,

Asian economies (except for japan)

realised significant economic growth –

This was referred to as the “East Asian

Miracle” by the World Bank.

BACKGROUND

flickr emilstefanov

GDP Grow th East Asia % - ( 1980-1977)

1980

-89

1990

1991

1992

1993

1994

1995

1996

1997

China 9.5 3.8 9.2 14.2 13.5 12.6 10.5 9.7 8.8

Hong Kong 7.3 3.4 5.1 6.3 6.1 5.4 3.9 4.9 5.3

Indonesia 5.3 9 8.9 7.2 7.3 7.5 8.2 8 5

Japan 3.8 5.1 3.8 1 0.3 0.6 1.5 3.9 0.9

Malaysia 5.8 9.6 8.6 7.8 8.3 9.2 9.5 8.6 7.8

Phillipines 1.9 3 -0.6 0.3 2.1 4.4 4.8 5.7 5.1

Singapore 7.3 9 7.3 6.2 10.4 10.5 8.7 6.9 7.8

South Korea 7.8 9.5 9.1 5.1 5.8 8.6 8.9 7.1 5.5

Taiw an 8.1 5.4 7.6 6.8 6.3 6.5 6 5.7 6.9

Thailand 7.3 11.6 8.1 8.2 8.5 8.6 8.8 5.5 -0.4

Source IMF 1998a, Tables A2 & A6 (from ICEI W orking Papers, No. 10, Pablo Bustello)

flickr emilstefanov

Significant capital investment flowed

into the region – Between 1990-1995

inflows to the five main East Asian

developing economies increased from

US$ 150 billion in 1980-1989 to as

much as US$ 320 billion in 1990-1995,

according to IMF estimates.

flickr emilstefanov

This inflow was due to investors

perceiving the East as having high

productivity, low labour costs and

an environment conducive to

growth.

0%

5%

10%

15%

20%

1(http://www.wright.edu/~tdung/asiancrisis-hill.htm)

AVERAGE EXPORT GROWTH 1990-1996

Malaysia

Thailand

Singapore

hong kong

South Korea

Indonesia

However at the same time, some

countries (Thailand and Malaysia

specifically) had large current

account deficits, large foreign debts

(Indonesia, Thailand and South Korea),

and high levels of domestic credit

growth (specifically in Malaysia, The

Philippines and Thailand).

In this period local companies made

significant investments in extra

manufacturing capacity (e.g. for pc

memory & CPU chips), and

infrastructure. These investments

were frequently financed with foreign

currency loans from western banks.

In Korea, many large conglomerates

(Chaebol) over-extended themselves

by building up debt equal up to 4 x

equity.

Due to government social initiatives

and pressures, many private firms

invested in projects for broad social

benefit and not purely on a ROI basis.

Socially and politically connected

“investments” were also approved.

Continued inflows of capital pushed up

asset prices (fuelling property

speculation in office and residential

buildings, and thereby causing a

property bubble).

It also strengthened local forex rates

(increases of 25%-47% for the

Philippines specifically) , as well as

increased domestic bank lending.

During the mid 90’s the Chinese and

Japanese currencies devalued, the US

increased interest rates and this

resulted in a stronger US $.

The stronger US $ made local exports

less attractive. Also semi-conductor

prices reduced sharply just as

manufacturing capacity came online.

In Malaysia, Taiwan and Thailand,

credit to the private sector

as % of GDP increased to

Credit and investment control was

weakly regulated, and there were

many underperforming loans.

The regional financial industry was in a

rush to deregulate and started

removing restrictions on capital flows.

This was done too fast, thereby

exposing hitherto unknown weaknesses

in the system.

Foreign banks were allowed to

speculate with local and foreign

currency, supervision was weakened

and local banks loaned recklessly. No

financial and regulatory control

network was timeously put in place.

On 5 FEB 1997 Somprasong Land,

a Thai property developer,

announced that it had defaulted on a

scheduled $3.1 million

interest payment

on an $80 billion Eurobond loan.

Bad debts quickly rose, as it became

apparent the construction industry was

under water by more than

Despite government intervention, the

shares in Finance One (Thailand's

biggest Financial Institution) fell by

70% after an arranged take-over

failed, and it too was soon bankrupt.

On 14 - 15 May 1997, the Thai Baht,

which previously was pegged at 25 baht

against the US $, was hit by massive

The Thai government used up $ 5 billion

of foreign exchange but was unable to

defend the Baht. After initially

refusing, they floated the currency

within days after the attack.

The Malaysian Ringgit and Indonesian

Rupiah were “attacked” next. Indonesia

had to implement a free-floating

exchange rate on 14 August 1997.

The Hong Kong Dollar was targeted in

October 2007, but due to Hong Kong

having sufficient foreign reserves,

they successfully managed to defend

their currency.

South Korea Won

Indonesian Rupiah

Thai Baht

Source: www.tradingeconomics.com

Us $ 1 vs local currency

The sharp currency devaluations lead

to credit ratings being lowered. Many

foreign investors called in or revoked

their loans and withdrew investments

e.g. Japan (further negatively affecting

the currency in the process).

-150.00

-100.00

-50.00

0.00

50.00

100.00

150.00

200.00

1994-1995 1996 1997

BILL

ION

US$

Source: Bank of International Settlements (http://www.ifg.org/khor.html)

NET PRIVATE CAPITAL FLOWS

INFLOW

OUTFLOW

The crisis wave spilled from one

market to the next. Foreign debts sky-

rocketed with near catastrophic

consequences as local firms’ debt

repayment had become much more

expensive now.

Some tried selling assets and

inventories to generate cash, resulting

in lower prices for their assets, whilst

increasing the demand and cost of

foreign currency.

Non-performing companies faltered.

Financial institutions collapsed.

Massive lay-offs followed and the

economies grinded to a halt. Thailand

e.g. sent 600 000 foreign workers back

to their home countries. Ministers

stepped down in the wake of the crisis.

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Asia Debt and Currency Crisis – Sources and

further reading

http://www.ifg.org/khor.html

http://www.tradingeconomics.com

http://internationalinvest.about.com/od/getti

ngstarted/a/What-Was-The-Asian-Financial-

Crisis.htm

http://www.wright.edu/~tdung/asiancrisis-

hill.htm

http://www.fes.de/ipg/ipg2_98/debschulmeis

ter.html

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

cial_crisis

http://pendientedemigracion.ucm.es/info/eid

/pb/ICEIwp10.pdf

http://www.uv.es/~mperezs/intpoleco/Lectu

rcomp/Geoeconomia%20y%20Globalizacion/A

sian%20crisis%20de%20King.pdf

http://www.imf.org/external/np/pp/eng/201

2/031312.pdf

http://www.ucm.es/info/icei/asia/Bustweb1.h

tm

HTtp://www.newyorkfed.org/research/econo

mists/pesenti/whatjapwor.pdf

http://www.twnside.org.sg/title/fire-cn.htm

https://www.mtholyoke.edu/courses/sgabriel

/ilene_grabel.htm

http://www.imf.org/external/np/seminars/en

g/2006/cpem/pdf/kihwan.pdf

This presentation is provided in the sake of public interest, and has been compiled based on

publically available information sources on the web.

While great care has been taken in the preparation and compilation of information indicated here,

the author does not accept any legal or other liability for any inaccuracy, mistake, misstatement or

any other error of whatsoever nature contained herein.

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