What Is South East Asian Currency CrisisPresentation 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
Second round began with downward pressures hitting
South Korean won
Hong Kong dollar.
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
It 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 GDP
Unemployment rose to .8 million in Indonesia, 1.5 million in Thailand, 1.35 million in Korea
Real wages dropped by 12.5% in Korea and 6% in Thailand
Chain of events
Corporate failure at Korea
Bank failure at Thailand
Political uncertainty at Korea, Thailand, Philippines
Policy mismanagement at Thailand and Korea – to defend their pegged exchange rates exhaust their Forex reserves
Contagion effect hit Malaysia, Philippines, Indonesia
International intervention – IMF & Moody
Events from microeconomic point of view
Exchange rates depreciates
Foreign lenders concerned with the repayment of loans, withdraw funds
Domestic interest rates soar up
Lack of bankruptcy laws and rising Non Performing Loans added to the stress of the banks
Banks become illiquid and decapitalized
The fall of Korean stock exchange
East Asian Countries Rounds Effects Initially secondly Majorly Thailand, Indonesia South Korea Fairly Malaysia, Philippines Hong Kong, Taiwan Mild Singapore, Laos, Japan,Chaina
Currency Exchange rate (per US$1)  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% Country GNP (US$1 billion)  Change June 1997 July 1998 Thailand 170 102 – 40.0% Indonesia 205 34 – 83.4% Philippines 75 47 – 37.3% Malaysia 90 55 – 38.9% South Korea 430 283 – 34.2%
Reasons for the crisis
Faulty macro economic policy
Demise of Industrial Policy : government used to intervene and control inflow
End to policy of government coordinated investment allowed duplicative investment in key industries leading to excessive foreign borrowings between 1993-1997
Excessive risk in govt. favoured industries
The causes and structural factors contributing to the financial crises include:
private-sector debt problems and poor loan quality,
rising external liabilities for borrowing countries,
the close alignment between the local currency and the U. S. dollar,
weakening economic performance and balance-of-payments difficulties,
technological changes in financial markets, and
a lack of confidence in the ability of the governments in question to resolve their problems successfully
Categorization of crisis
Macroeconomic policy induced – balance of payment crisis
Financial panic – sudden withdraw from solvent borrower by short term creditors
Bubble collapse – overvaluation of financial asset
Disorderly workout – impediment to efficient provision of working capital
Drastic devaluation of the rupiah from 2000 to 18000 for 1 US$
16 major commercial banks were closed
Governor, Bank Indonesia was sacked
President Suharto was forced to step down in may after 30 years in power
Drastic devaluation of the won : from 1000 to 1700 for 1 US$
Credit rating of the country (moody’s): A1 to B2
National debt-to-GDP ratio more than doubled
Major setback in automobile industry
Growth dropped to virtually zero in 1998
Peso 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 IMF
Prevent outright default on foreign obligation
Limit the currency depreciation
Rebuild foreign exchange reserves
Reform the banking sector
Why was India not affected
Full capital convertibility is not allowed
Lock in period for foreign investment in real estate
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
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 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.
The lessons from developing country crises are summarized as: