what is south east asian currency crisis
TRANSCRIPT
South East Asian Currency Crisis The Asian Financial Crisis was a period of financial crisis that gripped much of Asia beginning in July
1997, and raised fears of a worldwide economic meltdown due to financial contagion.
The Asian financial crisis involves four basic problems or issues:
(1)A shortage of foreign exchange that has caused the value of currencies and equities
in Thailand, Indonesia, South Korea and other Asian countries to fall dramatically,
(2) Inadequately developed financial sectors and mechanisms for allocating capital in
the troubled Asian economies,
(3) Effects of the crisis on both the United States and the world, and
(4) The role, operations, and replenishment of funds of the International Monetary Fund.
Introduction of A.F.C Asian financial crisis Initiated by two rounds of currency depreciation in 1997. First round was a precipitous drop in the value
Thai baht
Malaysian ringgit
Philippine peso
Indonesian rupiah Second round began with downward pressures hitting
Taiwan dollar
South Korean won
Brazilian real
Singaporean dollar
Hong Kong dollar.
Before crisis Economies of south east Asia Maintained high interest rates attractive to foreign investors looking
for a high rate of return. Regional economies of Thailand, Malaysia, Indonesia, Singapore, and
South Korea experienced high growth rates, 8–12% GDP, in the late 1980s and early 1990s.
Thailand, Indonesia and South Korea had large private current account deficit
It led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.
In 1990’s the U.S. Economy recovered from recession
ImpactIt began to raise U.S. interest rates to head off inflation.
At the same time, Southeast Asia's export growth slowed dramatically in the spring of 1996, deteriorating their current account position.
At the end of 1996, the proportion of loans with maturity of one year or less was 62% for Indonesia, 68% for South Korea, 50% for the Philippines, 65% for Thailand, and 84% for Taiwan.
Was there a crisis ?Over $100billion was pulled out of the region in 1997-98
which was 5 percent of the GDPUnemployment rose to .8 million in Indonesia, 1.5 million
in Thailand, 1.35 million in KoreaReal wages dropped by 12.5% in Korea and 6% in Thailand
Chain of eventsCorporate failure at KoreaBank failure at ThailandPolitical uncertainty at Korea, Thailand, PhilippinesPolicy mismanagement at Thailand and Korea – to defend
their pegged exchange rates exhaust their Forex reservesContagion effect hit Malaysia, Philippines, IndonesiaInternational intervention – IMF & Moody
Events from microeconomic point of viewExchange rates depreciatesForeign lenders concerned with the repayment of loans,
withdraw fundsDomestic interest rates soar upLack of bankruptcy laws and rising Non Performing Loans
added to the stress of the banksBanks become illiquid and decapitalizedThe fall of Korean stock exchange
East Asian Countries Initially secondly
Majorly Thailand, Indonesia South Korea
Fairly Malaysia, Philippines Hong Kong, Taiwan
Mild Singapore, Laos, Japan,Chaina
Rounds
Effects
Currency
Exchange rate(per US$1)[30] Change
June 1997 July 1998
Thai baht 24.5 41 – 40.2%
Indonesian rupiah 2,380 14,150 – 83.2%
Philippine peso 26.3 42 – 37.4%
Malaysian ringgit 2.5 4.1 – 39.0%
South Korean won 850 1,290 – 34.1%
CountryGNP (US$1 billion)[30]
ChangeJune 1997 July 1998
Thailand 170 102 – 40.0%
Indonesia 205 34 – 83.4%
Philippines 75 47 – 37.3%
Malaysia 90 55 – 38.9%
South Korea 430 283 – 34.2%
Reasons for the crisisFaulty macro economic policy
Demise of Industrial Policy : government used to intervene and control inflow
End to policy of government coordinated investment allowed duplicative investment in key industries leading to excessive foreign borrowings between 1993-1997
Excessive risk in govt. favoured industriesCrony capitalism
The causes and structural factors contributing to the financial crises include: private-sector debt problems and poor loan quality, rising external liabilities for borrowing countries, the close alignment between the local currency and the U. S. dollar, weakening economic performance and balance-of-payments difficulties, currency speculation, technological changes in financial markets, and a lack of confidence in the ability of the governments in question to resolve
their problems successfully Declining exports
Categorization of crisisMacroeconomic policy induced – balance of payment crisisFinancial panic – sudden withdraw from solvent borrower
by short term creditorsBubble collapse – overvaluation of financial assetDisorderly workout – impediment to efficient provision of
working capital
Impacts Indonesia
Drastic devaluation of the rupiah from 2000 to 18000 for 1 US$
Excessive inflationRiots 16 major commercial banks were closedGovernor, Bank Indonesia was sackedPresident Suharto was forced to step down in may after 30
years in power
South Korea
Drastic devaluation of the won: from 1000 to 1700 for 1 US$
Credit rating of the country (moody’s): A1 to B2National debt-to-GDP ratio more than doubledMajor setback in automobile industry
Philippines
Growth dropped to virtually zero in 1998Peso fell significantly, from 26/US$ to even 55/US$President Joseph Estrada was forced to resign
Measures taken to overcome crisis
High saving and investment rate Strong emphasis on education Stable macroeconomic environment Free from high inflation or major economic slumps High share of trade in GDP
Role of IMFPrevent outright default on foreign obligationLimit the currency depreciationLimit inflationRebuild foreign exchange reservesReform the banking sector
Why was India not affected Full capital convertibility is not allowedLock in period for foreign investment in real estateFloating exchange rate with some influence by the RBI
during periods of crisisStrong fundamental growth with services sector being the
prime reasonExternal debt to GDP has been declining for the past few
years
U.S.& JAPAN U.S. The Dow Jones industrial plunged 554 points or 7.2%, amid ongoing
worries about the Asian economies. The New York Stock Exchange briefly suspended trading.
JAPAN Japan was affected because its economy is prominent in the region. Asian
countries usually run a trade deficit with Japan because the latter's economy was more than twice the size of the rest of Asia together; about 40% of Japan's exports go to Asia.
The Japanese yen fell to 147 as mass selling began, but Japan was the world's largest holder of currency reserves at the time, so it was easily defended, and quickly bounced back.
GDP real growth rate slowed dramatically in 1997, from 5% to 1.6% and even sank into recession in 1998, due to intense competition from cheapened rivals.
Learning'sThe lessons from developing country crises are
summarized as:Choosing the right exchange rate regimeThe central importance of bankingThe proper sequence of reform measuresThe importance of contagion