Asian Financial Crisis

The 1997 – 1998 Asian Financial Crisis Spill over effect on the United States Nguyen Manh Linh Vietnam Sukkasem Lomathmanyvong Laos Wang Xiang China Andi Riza Indonesia

Objectives
THE MAJOR CAUSES OF THE CRISIS
SPILL OVER EFFECT ON SPECIFIC COUNTRY: United State of America

General Overview
The most important effects of the Asian crisis on the US economy worked through international trade:
In 1996, US trade with East Asia accounted for 30% of export, and 40% of import of goods
In 1997 export of good and service to East Asia represented 11.9% of U.S. GDP (only 4.8% in 1960)
Capital transfer, Investments
Asian financial crisis exerted mixed effects on US employment and economic activities, depressed some sectors and stimulated other sectors
Reduced export ( by 12% in 1998 !)
Increased Import
Domestic demand boosted (lower commodities price)!
Lower interest and inflation rates !

Access to financing in Asia
Companies in Asia tend to rely more on bank borrowing than on issuing bonds or stocks
Government preferred development financial baking system with banks => can control and regulate who access to loan.
Well-connected with bank and government tend to have best access to financing

Private sector debt and poor loan quality
Borrowed short-term loan for long term projects like infrastructure and real estate development.
Type of borrower has shifted away from the government and central banks to banks and non-bank private sector
Exchange rate fluctuate only within narrow band and has been aligned with dollar

Maturity Distribution
( Proportion of loans with maturity one year or less at the end of 1996)
62 68 84 65 50

Causes of the crisis (1)
Inadequately development financial services sector
Lack of control and sufficient regulations in capital market
Close alignment between the local currency and US dollar

Causes of the crisis (2)
Weakening Economic performance and balance of payment difficulties
Currency speculation
Technological changes financial market
Lack of confidence in the ability of the governments in questions to resolve their problems successfully.

Why United State ?
American is major investor in the region
Financial market is interlink and U.S financial market is most efficient one
The currency turmoil effect the U.S. imports, exports and value of US dollar
US activities in IMF: Funding and legislative issues in operation

Spill over mechanism (1)
Macroeconomic level
Economic growth
Flows of trade
Capital flows
Exchange and interest rates

Spill over mechanism (2)
Microeconomic level on each industry
Competition
Price
Demand
Business opportunities
Revenues and profits of firms

MACROECONOMIC PERSPECTIVES

Macro Economic performance indicators
GDP growth rate
Export/Import
Capital flows
Inflation/Consumer price index
Interest rates
Exchange rates

Devaluation of currencies Malaysia Indonesia

Devaluation of currencies Philippines Thailand

Trade Balance (Billions U.S.Dollar)

Current Account
Asian countries group is third trade partner of United States after EU and Japan

Trade deficit between USA- Asia Million $

Why steady deficit …?
Slowdown of Asia economies => Less demand for export
Drop in value of Asia currencies and appreciation of U.S. Dollar => raise cost and price for export and decrease those of import.
High unemployment rate in many Asia countries => Very low wage for many labor intensive export
Surplus in capital account implied an rise in the deficit in current account

FDI in United States (Millions $)

Interest Rate

Interest rate
Less demand for lending abroad
Shift liquid capital from troubled Asia to invest in United states
Encourage domestic borrowing
Steady grow of domestic home construction and vehicle sale (deposit selling)
Positive effect for economic growth !!!

Consumer Price Index

Lower inflation
Low price of goods as result of competion between domestic and export one
Low price of oil because of falling demand in Asia of oil and other commodities
Higher purchasing power

Inflation Rate

Oil Price at Crisis Period
Fallen 30% to end of 1997
Down price

United States Personal Income ( Per Capita )

Blessing… or Curse…(1)
Forecaste U.S. Economic grown with slowdown pace from 3.8% in 1997 to 2,5% in 1998:
Losess in loan and financial intrument in troubled Asia
Steady deficit in balace of trade
Bad status of U.S. subsidiaries and direct investment projects in Asia
Contribution of the States to IMF to deal with the crisis (1.8 billion of U.S. Dollar)

Real Growth Rate of GDP

Blessing… or Curse…(2)
In fact, there is positive effect. The grown rate up to 4.2% in 1997 from 3.6% in 1996 and continuosly raised to 4.3% in 1998:
Increase capital inflow
Eased the upward pressure on U.S. interest rate
Encourage domestic business grow
Economies of Asia countries are more open
Opportunities to takeover companies with bad financial condition in Asia

S & P 500 Index

MICROECONOMIC PERSPECTIVES

Major sectors affected (1)
Creditors and investors in Asia suffered loses:
U.S. bank, pension funds, and investors suffered loses
Exporters to Asia faced declining demand:
U.S. makers of major export items (heavy equipment, aircraft, manufacturing machinery and agricultural commodities)
Producers of commodities used in the manufacture of products in Asia:
e.g. chemicals, cotton,copper, and rubber
Businesses competing with import from Asia faced increasing competition and downward pressure on prices:
e.g. automobiles, apparel, consumer electronics, steel, etc.

Major sectors affected ( 2 )
Labor engaged in manufacturing competing products hurt by Asian depreciation
Businesses that sell import from Asia gained opportunities:
distributors and retailers of products from trouble Asian economies (e.g. Korean automobile dealers)
U.S. MNCs seeking market access in Asia, particularly in financial sectors gain opportunities:
lessened entry barriers
acquisition of existing firms that needed restructuring and recapitalization at relatively low prices

Major sectors affected ( 3 )
U.S. MNCs with manufacturing subsidiaries in Asia faced difficulties and stagnation:
60% of their output is sold in the region, local sales stagnated
excess capacity
rising costs of import in countries with depreciated currencies
falling price of finished export to U.S. and other hard currency markets
Industries that use components from Asia benefit on lower costs of production

Implication of The Asian crisis for the U.S Economic Sectors
Sectors reviewed:
Financial
Agriculture
High-tech
Textile
Steel
Paper

Claims on Asian Countries by United States ailand

Financial sector
Citicorp:
Net income dropped from $224 m in 1996 to 218 m in 1997
J.P. Morgan:
Reported NPL of $587 m of its total $5.4 billion in loan, swaps, and debt investment in Indonesia, Thailand and S. Korea
Considered about 60% of its allowance for creditr losses of $1.08billion to be related to exposures in these three countries

Hi-Tech industry (1)
Financial crisis caused U.S. high-tech exports to decline nearly 3%, or $3.6 billion, in the first nine months of 1998 (Source: American Electronics Association, AEA)
Export activity was slowest in the third quarter, contrasted against the first half of the year, when exports were down only 0.5%. Compared to the third quarter of 1997, exports were off 8%, the AEA said.
U.S. high-tech merchandise exports decline first time in this decade (William T. Archey, AEA president and chief executive)

Hi-tech industry ( 2 )
For the first nine months of 1998:
Electronics exports to Mexico grew nearly 10%, or 1.2 billion, the largest dollar gain.
China bought 40% more electronics goods from the U.S., an increase of $612 million.
Exports to Europe and Canada, two major U.S. high-tech export destinations, grew 2.5% and 1.8% respectively.
Electronics exports to Brazil, the United States' largest South American trading partners, were down nearly $500 million in the first nine months. Exports to South America as a whole increased 1% during the period.
U.S. high-tech exports to Asia, excluding China, were off nearly 15% for the nine-month period. Electronics exports were down 70% to Indonesia; 33% to Korea; 26% to Thailand; and 13% to Japan .

AGRICULTURE (1)
Why the Asian Crisis influence on U.S. Agriculture ?
Changes in exchange rates of currencies relative to the
U.S. dollar made U.S. agricultural products more
expansive
Dramatically slower income growth and actual drops in income lowered the purchasing power of Asian consumers
The international financial bailouts of some Asian countries required change in trade policies
Economic problems in Asia are a drag on economic growth elsewhere. this affects demand for farm goods in all markets, not just in Asia

AGRICULTURE (2)
There are two effects in the U.S. agriculture :
- First, quantities shipped to Asia decline
- Second, the dollar prices of agricultural commodities
are lower than they would have been in all markets
In 1998, exports from U.S. to Canada and Mexico actually increased over this period, however, in Asian markets we see the dramatic impacts of income losses and exchange rate declines

1999 U.S. Agricultural Exports Valued in 1998 Compared with 1997 7.2 Wine & beer -41.4 Malaysia +0.4 Processed fruits & vegetables -23.4 Thailand 8.1 Nursery & cut flowers -41.1 Indonesia -3.9 Tree nuts -17.9 Philippine 0.8 Fresh vegetables -4.2 United Kingdom -12.5 Fresh fruits -9.9 -5.4 Cotton -16.5 China -2.0 Dairy products -12.8 Hong Kong -4.7 Red meats (fresh/frozen) -19.8 Netherlands -34.5 -31.2 Taiwan -13.7 Feeds & fodder -22.1 Korea -16.5 Coarse Grains 18.9 Mexico 29.6 Rice 3.3 Canada -9.6 Wheat -13.7 Japan -9.5 Agriculture Total -9.5 World Total % change Commodity % change markets

TEXTILE INDUSTRY (1)
Prior to Asian crisis, the U.S. textile industry has proven itself a global competitor, developed innovative new products and dramatically expanded its export base
In 1997-1998, the currencies of almost all the major textile exporting countries in Asia collapsed, causing a shock wave of artificially low priced textile products to hit the U.S.
The results is U.S. textile products have plummeted since 1997, U.S textile profits have evaporated, and last year, turned sharply negative
Textile fiber consumption is down almost 30% since the
Asian crisis began

TEXTILE INDUSTRY ( 2 )
Over the last 12 months, the U.S. textile crisis has intensified
as Asian currencies have continued to fall :
- over 100 textile plants in the U.S. have been closed
- textile industry employment was down nearly 60,000 , or
more than ten percent of the U.S. textile workforce
- In year 2000 was the first annual loss for the textile
industry in the more than 50 years

STEEL INDUSTRY (1)
One of the most productive and cost effective in the world:
invested more than $35 billion in new plant and equipment since 1995 – far more than any other nation.
Labor productivity has increased by 174% since 1980. During the same time period, real wages (adjusted for inflation) for American steelworkers have remained stagnant
Steel is still the backbone of industrial America:
Nearly 2 million Americans are directly and indirectly employed by the steel industry.
Key steel-consuming industries employ 6 million U.S. workers, representing nearly 15% of the GNP.

STEEL INDUSTRY ( 2 )
14 steel companies have filed for bankruptcy since the crisis began in 1997.
By the end of 1998, the industry was operating at less than 65% of its capacity – the lowest operating level in more than 14 years.
Steel imports, which totaled less than 16 million tons in 1991, more than doubled in 10 years to an annual total of nearly 39 million tons in 2000.
Prices for steel products have fallen below their low point during the Asian crisis.
More than 15,000 steelworker jobs have been lost since January 1998 – 8,400 in the last six months.
Wall Street has abandoned the U.S. steel industry, driving stock values so low that 40% of our steelmaking capacity could be purchased for just over $700 million – less than 10% of the cost of building new capacity.

PAPER INDUSTRY
In 1996, Harnischfeger Industries Inc, a paper making equipment, agreed to sell $600 million of papermaking equipment to Asia Pulp and Paper Company Ltd, as part of that company’s broad expansion plan
But as the Asian Financial crisis swelled, Asia Pulp and Paper has paid for only two of those machines. And the other two units are not proceeding
Harnishfeger has lost its sales because of Asian Financial crisis

CONCLUSIONS
Both positive and negative impacts on United State economy
Wider effect on specific industries at microeconomic level
Impact was minor on macroeconomic level
International trade and capital market tied the world together

Sources of Information ?
IMF, WB, WTO, ADB websites
CRS Report for Congress
Countries Reports
www.thaieconwatch.com
www.house.gov
www.stern.nyu.edu
www.census.gov
www.usitc.com
www.mof.go.jp
www.harvard.edu
……… ...

Asian Financial Crisis

by FNian on Oct 09, 2008

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Asian Financial Crisis — Presentation Transcript