east asian crisis
TRANSCRIPT
MBA 502 - Macroeconomics
EAST ASIAN FINANCIAL CRISIS
(1997)
DİLAN SÜSLÜ
GÖKHAN TUFAN
NİLÜFER SORMAZ
TANER YILDIRIM
Spring 2014 12.05.2014
Outline
1. Before the East Asia Crisis (East Asia Miracle)
2. Reasons of the East Asia Crisis
3. Countries Effected by the Crisis Most Effected Thailand
Indonesia
South Korea
Moderately Effected Singapore
China
4. East Asia Crises and IMF
5. East Asia Crises and Turkey
6. Lessons Learned
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East Asia Countries
South Korea
Indonesia
Philippines
Hong Kong
Singapore
Malaysia
Taiwan
Thailand
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Source:http://en.wikipedia.org/wiki/1997_Asian_financial_crisis
Four Asian Tigers
The Four Asian Tigers or Asian Dragons are the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan.
These regions were the first newly industrialized countries, noted for maintaining exceptionally high growth rates and rapid industrialization between 1960’s and 1990’s.
All four Asian Tigers had highly educated and skilled workforce and had specialized in areas where they had a competitive advantages.
Hong Kong and Singapore World-leading international financial centers
South Korea and TaiwanWorld leaders in manufacturing information technology
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Tiger Cub Economies
Their economic success stories have served as role models for many developing countries, especially the Tiger Cub Economies. (Indonesia, Malaysia, Philippines and Thailand)
They sustained rapid growth for decades.
Each nation was non-democratic and had relatively authoritarian political systems during the early years.
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East Asia Miracle
The success of the economic growth of the east Asia nations is called East Asia Miracle.
Many factors have been identified as the cause of East Asia's relative success but the most important key is their export oriented policy.
Each focused on exports to rich industrialized nations.
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Before East Asian Crisis (1960-
1990)
Export policy High growth rate and rapid industrialization
Decrease the number of import High tariff on import
Undervalue their currency
Increase in public and private savings
Investment in physical and human capital Investment on education and rate of literate is increased
Reached industrial countries level of development
Productivity growth
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Kept budget deficit in limit
Authoritarian political systems
Low inflation Stable and real interest rates
High interest rate Attract foreign investors for high rate of return
High rate of return Increased capital investments, high per capita income
Before East Asian Crisis (1960-
1990)
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Per Capita Gross National Product (GNP)
Growth
The growth of per capita GNP has been extraordinary high in East Asia in 1985-1995
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Avg. per capita GNP growth btw 1985-1995*
* World Bank,1997
Over this period, growth in all low-middle income economies was a mere 0.4%, while that of all high income economies was only 0.8%.
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Beginning of Crisis
At the end of 1996
0%20%40%60%80%
100%
loans with maturity <=1
loans with maturity <=1
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* World Bank,1997
Before Crisis
Decrease in bank lending caused to increase in cross border bank loans.
The rapid reversal of private capital inflows into Asia.
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Reasons of the East Asian Crisis
Panic and disorderly workout
Education
Banks
short term of liabilities of Thailand exceeded international reserves
rapid industrialization and high growth rate PA
NIC
very weak and fragile financial system and auditing system
Loans from foreign banksEast Asia Crisis
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Fixed Exchange Rate
Panic Causes to :
A lot of investors withdraw their funds from these nations.
Huge outflow was occurred.
Net private inflows dropped from $93 B to -$12.1 B.
nations cannot control their current deficit
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Triggering Events
In early 1997 in Thailand Hanbo Steel, Sammi Steel and Kia Motors collapsed.
These bankruptcies, in turn, put several merchant banks under significant pressure.
The Bank of Thailand (BOT) lent over 200 billionbaht ($8 billion) to distressed financial institutions through Financial Institutions Development Fund (FIDF).
Usable reserve levels of Central Bank fell sharply.
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Thailand
The devaluation of the Chinese renminbi, and the Japanese yen, raising of US interest rates lost competitiveness
Huge foreign debt
Wrong investments with foreign debt: large part of the capital had been put into non-productive sectors especially real estate
May 1997: Thai Baht was hit massive speculative attack. Thegovernment failed to defend the Baht against international speculators.
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Thailand
Devaluation of Baht: 1$ became 56 Baht in Jan ’98.
The Central Bank ran out of Foreign Reserves.
58 out of 91 banks were closed.
Exports declined significantly.
Lost major customers such as U.S. and Europe.
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Baht/$
Indonesia
Large number of Indonesian corporations had been borrowing in USD.
As rupiah had strenghted respective to dollar, this strategy worked well.
Companies had decrease their effective levels of debt and financial costs as local currency value rose.
In June 1997, Indonesia seemed far from crisis.
Unlike Thailand, Indonesia has
Low inflation
Trade surplus more than $900 Million
Huge foreign exchange reserves of more than $20 Billion
Causes of the crisis
The stock of private forign debt is very large and generally short term, has created conditions for instability
Weakness in the banking system
Lack of transperancy
Lack of protection and legal certainty
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Devaluation of Rupiah
Thailand floated Baht,
Indonesia widened Rupiah
band from 8% to 12%
Speculative attacks to
rupaih began
Floating exchange regime
was placed
Signed first letter with IMF
Second letter of intent with IMF
In November, crisis intensified effects
of crisis seen on balance sheets
Third letter of intent with IMF
83,2% change
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Source: www.tradingeconomics.com/indonesia/currency
Results of the Crisis – Indonesia
Short term interest rates increasedsharply.
Corporations went bankrupcy.
Some corporations are forced stop production and forced to lay off.
For banks, lending moneydecreased, borrowing moneyincreased.
Lose more than 1/3 foreign reserves.
Stock prices decline more than 66%.
At the end of the year foreign cashflow nearly stopped.
From 239 banks 16 closed.
Reforms in banking system.
-15
-10
-5
0
5
10
15
199
0
199
1
199
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
GDP Growth of Indonesia
Indonesia
Years
Growth Percentage
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Source: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG
South Korea
Less productivity and increments in wages
High interest rates increased foreign borrowing
In 1994: 14%
In 1997: 25%
Weaknesses in the balance sheet of banks and corporations
Government related
Won pegged to US dollar
Financial institutional inadequacies (Implicit government guarantees and forcing excessive lending)
Political uncertainties (coming elections in Dec 1997)
Open economy policy (price shocks and global trade volatility)
Loss of competitiveness to other countries Slowdown of exports and economic growth
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Results of the Crisis – South Korea
Jan 1997 - Corporate bankruptcies:
Hanbo Steel, Sammi Group, Dainong Corp, Ssangyoung group, Kia Motors
Drastic devaluation of the Won from 1,000 to 1,700 for 1$
The Stock Exchange Rate index fell from 1000 to 450
National debt to GDP ratio became more than doubled
Major setback in automobile industry
Credit rating of the country: A1 to B2
Unemployment rate: Increase from 2% (1995) to 7% (1998)
Decrease in Gross National Product) GNP per capita: $9,511 to $6,823
GDP Growth % of South Korea
FX Rate and Reserves in South KoreaEast Asia Crisis
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Source: http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG
China
• Not affected too much because;
o high growth
o unconvertible currency
o huge amount of reserves
• Growth rate decreased because;
o Capital/Product coefficient of China had increased
o Transferring resources from seaside (where productivity and efficiency are high )
o Administrative and production costs increased
o Expected slowdown in direct foreign capital inflow via technological inflow
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Singapore
• decrease of the demand from other Asia countries
o income effect
o increase of the Singapore Dollar against other Asia currencies
• 70% rise of the labor cost
o 2/3 of the demand is foreign based
Growth rate of Singapore - decreased from 7.8% to 1.5% in 1998
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Singapore cont’d
• Government;
o Bailout packet
Long term
Short term
decreasing labor cost by 15%.
shortening the deductions from labor costs
removing variable costs
• Ministry of Finance;
o took precautionary measures
increase internal consumption
stopping the slowing down in the economy
Government expenditure had increased 6%
tax rates had been decreased
various funds are transferred to local enterprises
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IMF and The Asian Financial Crisis
Bailout packages amounted to $95 billion.
High interest rates, decrease in government spending, increase
in taxes, devaluation of currency.
Allow insolvent banks and financial institutions to fail.
Major restructuring in banking system.
Increased transparency.
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IMF Criticism on Asian Crisis
Recession
Could not manage to roll over of short term loans to long term loans
World Bank Chief Economist Joseph Stiglitz:
“Most of the policies were mistake. The problem was not government, as in Latin America; the problem was an private sector--all those bankers and borrowers, for instance, who'd gambled on the real estate bubble.”
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East Asian Crisis & Current Situation of Turkey
EAST ASIAN ECONOMIES
Rapid Growth Rate
Foreign Loan Credits – ShortTerm
Fixing Exchange Rate Policy
Weakness In Financial System
(Banking Sector, Regulations)
No Credit Risk Management
TURKEY
Rapid Growth Rate
Foreign Loan Credits – LongTerm
Floating Exchange Rate Policy
After 2001 crisis, financial systemstronger
Well Managed Credit Risk
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GDP GROWTH RATE COMPARISON
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-15
-10
-5
0
5
10
15
1990 1991 1992 1993 1994 1995 1996 1997 1998
GDP Growth (annual %)
Indonesia
Korea, Rep.
Thailand
-6
-4
-2
0
2
4
6
8
10
12
2004 2005 2006 2007 2008 2009 2010 2011 2012
Turkey GDP Growth (annual %)
Lessons Learned
Superiority of a pure floating exchange rate system over a managed floating system. Maintanence of fixed exchange rates encouraged external borrowing and led to
excessive exposure to foreign exchange risk.
As economies pegged to USD, in valuation in USD caused countries’ exports to become more expensive and less competitive.
Well functioning financial system
Importance of foreign investors’ confidence. Transparency on business and goverment level is critical.
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References
http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG
www.tradingeconomics.com/indonesia/currency
http://emlak.kanald.com.tr/haber/Sektorden_Haberler/Prof_
Dr_Erinc_Yeldan_Turkiyeyi_emlak_krizi_bekliyor/54593.as
px
http://www.nber.org/chapters/c11011.pdf
http://www.un.org/esa/analysis/pastmeetings/rude.pdf
http://www.research.stlouisfed.org
http://en.wikipedia.org/wiki/1997_Asian_financial_crisis
World Bank,1997
IMF, 1998 East Asia Crisis
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