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East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
East asian crisis
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East asian crisis


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East Asian Crisis Diagnosis and its effects

East Asian Crisis Diagnosis and its effects

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  • Non-convertibility can generally be defined with reference to transaction for which foreign exchange cannot be legally purchased (e.g. import of consumer goods etc), or transactions which are controlled and approved on a case by case basis (like regulated imports etc). A move towards free convertibility implies a reduction in the number / volume of the above types of transaction.
  • Transcript

      Main Reference:
      The Onset of the East Asian Financial Crisis
      Steven Radelet and Jeffrey Sachs
      Harvard Institute for International Development
      March 30,1998
    • 2. Introduction
      East Asian Miracle
      Types of Crisis
      Beginning of Crisis
      the role of financial panic as an essential element of the Asian crisis.
      Impact of Crisis
      Role of IMF
    • 3. East Asia Miracle
    • 4. East Asian Countries
      South Korea
      Hong kong
      Source : Google Images
    • 5. Four Asian Tigers
      The Four Asian Tigers or Asian Dragons are the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan (Republic of China)
      These regions were the first newly industrialized countries, noted for maintaining exceptionally high growth rates and rapid industrialization between the early 1960s and 1990s.
      All four Asian Tigers have a highly educated and skilled workforce and have specialized in areas where they had a competitive advantage
    • 6. Four Asian Tigers
      Their economic success stories became known as the Miracle on the Han River and the Taiwan Miracle and have served as role models for many developing countries, especially the Tiger Cub Economies.
      They sustained rate of double-digit growth for decades.
      Each nation was non-democratic and relatively authoritarian political systems during the early years.
    • 7. East Asia Miracle
      Many factors have been identified as the cause of East Asia's relative success - outward orientation, high saving and investment rates, macroeconomic discipline, and other good public policies
      Each focused on exports to rich industrialized nations.
      Each of the Asian Tigers had high tariffs on imports and undervalued currencies.
      They had high interest rates attractive to foreign investors looking for high rate of return.
    • 8. GDP growth rate of Asian Countries
    • 9. East Asian Crisis
      Financial crisis is a situation in which some financial institutions or assets suddenly lose a large part of their value.
      It is a testament to the shortcomings of the international capital markets and their vulnerability to sudden reversals of market confidence.
    • 10. Diagnosing Financial Crises
      Five Type of Crisis
      Macroeconomic policy-induced crisis:
      Balance of payment crisis
      currency depreciation;
      loss of foreign exchange reserves;
      Financial panic:
      case of multiple equilibria in the financial markets
      short-term creditors suddenly withdraw their loans from a solvent borrower
    • 11. Diagnosing Financial Crises
      3. Bubble collapse:
      occurs when speculators purchase a financial asset at a price above its fundamental value
      In each period, the bubble may continue to grow, or may collapse
      4. Moral-hazard crisis:
      arises because banks are able to borrow funds on the basis of implicit or explicit public guarantees of bank liabilities.
      undercapitalized or under-regulated banks may use these funds in overly risky or even criminal ventures
      5. Disorderly workout:
      occurs when an illiquid or insolvent borrower provokes a creditor grab race
      a forced liquidation even though the borrower is worth more as an ongoing enterprise.
    • 12. Before Crisis
      Received large inflow of money
      High growth rate (8-12%GDP)
      Dramatic run up in asset prices
      Increase capital investment
      High per Capita Income
      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.
    • 13. Beginning of Crisis
      The rapid reversal of private capital inflows into Asia.
      Net private inflows dropped from $93 billion to
      -$12.1 billion.
      The sudden drop in bank lending followed a sustained period of large increases in cross border bank loans.
      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.
    • 14. Estimated breakdown of the reversal of flows
    • 15. Per Capita GDP
      Source : The onset of East Asia Crisis
    • 16. 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 lent over Bt 200 billion ($8 billion) to distressed financial institutions through Financial Institutions Development Fund (FIDF).
      The BOT committed almost all of its liquid foreign exchange reserves in forward contracts,
      usable reserve levels of Central Bank fell sharply
    • 17. Other Events
      In late June 1997, the Thai Government removed support from a major finance company, Finance One.
      This shock accelerated the withdrawal of foreign funds, and prompted the currency depreciation on July 2, 1997.
      The Thai baht devaluation triggered the capital outflows from the rest of East Asia.
    • 18. Causes of withdrawl
      Bank failure. In Thailand, the failures of finance companies helped set off the exodus.
      Corporate failure. In Korea, the withdrawal of funds was based on concerns over the health of the corporate sector.
      Political uncertainty: hastened the credit withdrawals, since each country faced the potential for a change in government.
      Contagion. Many creditors appeared to treat the region as a whole, and assumed that if Thailand was in trouble, the other countries in the region probably had similar difficulties.
      International Interventions. the IMF recommended immediate suspensions or closures of financial institutions, measures which actually helped to incite panic.
    • 19. Add a title
      The withdrawal of foreign funds triggered a chain reaction which quickly developed into a financial panic.
      The withdrawal of funds also set off a liquidity squeeze and a sharp rise in interest rates
      Offshore creditors grew reluctant to roll over short-term loans.
      The lack of clear bankruptcy laws and workout mechanisms
      The losses on foreign exchange exposure and the rise in non-performing loans eroded the capital base of the banks
    • 20. Mistakes in Policies
      Rapid evolution into panic was aided by policy misjudgements and mistakes across the region.
      Thailand and Korea, to defend their exchange rate peg, exhausted a substantial proportion of their foreign exchange reserves.
      Malaysia and Thailand introduced mild controls on foreign exchange transactions.
      Inflammatory statements by government officials and market participants added to the panicked withdrawal of funds
    • 21. Element of Panic
      The Asian financial crisis had substantial elements of panic and disorderly workout.
      The crisis was largely unanticipated.
      The crisis involved considerable lending to debtors that were not protected by state guarantees
      The sudden withdrawal of investor funds to the region, rather than simply a deflation of asset values
    • 22. Effects on Countries
      • What happened in Indonesia : 
      Drastic devaluation of the rupiah: from 2,000 to 18000 for 1 us$
      Sharp price increase
      widespread rioting.
      • What happened in S. Korea : 
      Drastic devaluation of the won: from 1,000 to 1,700 per us$
      National debt to GDP ratio more than doubled.
      Major setback in automobile industry.
    • 23. Effects on Countries
      • What happened in Philippines : 
      Growth dropped to virtually zero in 1998.
      Peso fell significantly, from 26/us$ to 55/us$ .
      • What happened in Japan : 
      40% of Japan’s export go to Asia, so it was affected even if the economy was strong
      GDP real growth rate slowed from 5% to 1.6% .
      Some companies went bankrupt
      The Japanese yen fell to 147
      Japan was the world's largest holder of currency reserves at the time, so it was easily defended, and quickly bounced back.
    • 24. Effects on Countries
      What happened in Hong Kong : 
      Hong Kong dollar came under attack in November as a result of currency depreciations.
      Hong Kong banks faced steeply rising interest rates on liabilities
      What happened in Taiwan: 
      New Taiwan dollar also came under pressure and fell sharply, despite Taiwan's huge stock of reserves.
    • 25. Effects on Countries
      • What happened in US… : 
      Markets did not collapse, NYSE severely hit
      Dow Jones industrial average suffered as 3rd biggest point losses
      Relationship with JAPAN changed forever:
    • 26. Source : The Onset of East Asia Crisis
    • 27. Source : The Onset of East Asia Crisis
    • 28. Effect on China
      The Chinese currency, the renminbi (RMB), had been pegged to the US dollar at a ratio of 8.3 RMB to the dollar, in 1994.
      Heavy speculation that China would soon be forced to devalue its currency to protect the competitiveness of its exports.
      RMB's non-convertibility protected its value from currency speculators, and the decision was made to maintain the peg of the currency, thereby improving the country's standing within Asia.
      China was unaffected by the crisis compared to Southeast Asia and South Korea.
    • 29. Effect on GDP of India and East Asia
    • 30. Effect on India
      India was two large countries where GDP growth was relatively unaffected by the East Asian crisis
      India’s balance of payments (BoP) was also spared the effects of the East Asian turmoil.
      Indian rupee depreciated by 15% against the US dollar, compared to declines of between 25 and 35% in the Thai, Malaysian, and South Korean currencies and a 70% fall in the Indonesian rupiah
    • 31. Why was India not affected much?
      Floating exchange rate with some influence by the RBI during periods of crisis
      Strong fundamental growth with services sector being the prime reason
      External debt to GDP has been declining for the past few years
      India does not have capital account convertibility so capital outflows through a contagion effect could not destabilize the economy.
      Banks in India are discouraged from making investments in real estate and the stock markets, while corporate exposure to external debt has been controlled.
    • 32. IMF role
      Provided $120 billion as bailout package. Imposed restrictive condition
      IMF programs up till the end of 1997 apparently added to the panic.
      The IMF programs generally called for six key actions:
      immediate bank closures;
      quick restoration of minimum capital adequacy standards;
      tight domestic credit;
      high interest rates on central bank discount facilities;
      fiscal contraction;
      non-financial sector structural changes.
      Domestic bank lending stopped abruptly in countries with Fund programs.
    • 33. IMF role
      The de-capitalized banks restricted their lending in order to move towards capital-adequacy ratios required by bank supervisors and by the IMF.
      Currency depreciation and stock market collapse continued long after the programs were signed
      More bankruptcies
      Local called the financial crisis “the IMF crisis” due to its controversial role.
    • 34. Why the Asian Crisis was not Predicted
      The Countries maintained good budgetary positions
      Domestic savings and investment rates were very high throughout the region
      Interest rates were usually less in rest of the world (US and Japan).
      Massive capital inflows were attracted into the region during the 1990s.
      Healthy Forex reserves – Thailand reached $38.6 billion in 1996 equivalent to over 7 months of imports
    • 35. CONCLUSION
      East Asian crisis resulted from financial panic that arose from certain emerging weaknesses in these economies
      It could have been largely avoided with relatively moderate adjustments and appropriate policy changes.
      There were macroeconomic imbalances, weak financial institutions, widespread corruption, and inadequate legal foundations.
      Abrupt actions by domestic and international policy makers can worsen an incipient crisis, by helping to trigger the capital outflow
    • 36. References
      Main Reference: The Onset of the East Asian Financial Crisis by Steven Radelet and Jeffrey Sachs
      IMF's Role in the Asian Financial Crisis by Walden Bello.
      India, the Washington Consensus and the East Asian crisis by C. RammanoharReddy
      Google images
    • 37. of Crisis
      Thailand's economy developed into a bubble fueled by "hot money“
      The short-term capital flow was expensive and often highly conditioned for quick profit.
      The crisis started with the financial collapse of the Thai baht caused by the decision of the Thai government to float the baht, cutting its peg to the USD.
      As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.