Bubble Spotting - The East Asia Currency and Debt crisis of 1997


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During the 1990s, various Eastern Asia economies grew at double-digit figures, and exports grew at well over 10% pa. in some cases.

Then the party ended with a bang as the Currency and Debt Bubble popped, the impact of which could be felt in markets around the world.

This presentation (which forms part of a larger series on Market Bubbles) gives a short overview on what happened.

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Bubble Spotting - The East Asia Currency and Debt crisis of 1997

  2. 2. This short presentation on the Asia Currency and Debt Crisis forms part of a larger series of presentations on Market Bubbles Front page graphic - own
  3. 3. BACKGROUND Between 1980’s to the mid-1990’s, Asian economies (except for japan) realised significant economic growth – This was referred to as the “East Asian Miracle” by the World Bank. flickr emilstefanov
  4. 4. 1997 1996 1995 1994 1993 1992 1991 1990 1980-89 GDP Grow th East Asia % - (1980-1977) China 9.5 3.8 9.2 14.2 13.5 12.6 10.5 9.7 8.8 Hong Kong 7.3 3.4 5.1 6.3 6.1 5.4 3.9 4.9 5.3 Indonesia 5.3 9 8.9 7.2 7.3 7.5 8.2 8 5 Japan 3.8 5.1 3.8 1 0.3 0.6 1.5 3.9 0.9 Malaysia 5.8 9.6 8.6 7.8 8.3 9.2 9.5 8.6 7.8 Phillipines 1.9 3 -0.6 0.3 2.1 4.4 4.8 5.7 5.1 Singapore 7.3 9 7.3 6.2 10.4 10.5 8.7 6.9 7.8 South Korea 7.8 9.5 9.1 5.1 5.8 8.6 8.9 7.1 5.5 Taiw an 8.1 5.4 7.6 6.8 6.3 6.5 6 5.7 6.9 Thailand 7.3 11.6 8.1 8.2 8.5 8.6 8.8 5.5 -0.4 Source IMF 1998a, Tables A2 & A6 (from ICEI W orking Papers, No. 10, Pablo Bustello) flickr emilstefanov
  5. 5. Significant capital investment flowed into the region – Between 1990-1995 inflows to the five main East Asian developing economies increased from US$ 150 billion in 1980-1989 to as much as US$ 320 billion in 1990-1995, according to IMF estimates. flickr emilstefanov
  6. 6. This inflow was due to investors perceiving the East as having high productivity, low labour costs and an environment conducive to growth.
  7. 7. AVERAGE EXPORT GROWTH 1990-1996 20% Malaysia 15% Thailand Singapore 10% hong kong 5% South Korea Indonesia 0% 1 (http://www.wright.edu/~tdung/asiancrisis-hill.htm)
  8. 8. However at the same time, some countries (Thailand and Malaysia specifically) had large current account deficits, large foreign debts (Indonesia, Thailand and South Korea), and high levels of domestic credit growth (specifically in Malaysia, The Philippines and Thailand).
  9. 9. In this period local companies made significant investments in extra manufacturing capacity (e.g. for pc memory & CPU chips), and infrastructure. These investments were frequently financed with foreign currency loans from western banks.
  10. 10. In Korea, many large conglomerates (Chaebol) over-extended themselves by building up debt equal up to 4 x equity.
  11. 11. Due to government social initiatives and pressures, many private firms invested in projects for broad social benefit and not purely on a ROI basis. Socially and politically connected “investments” were also approved.
  12. 12. Continued inflows of capital pushed up asset prices (fuelling property speculation in office and residential buildings, and thereby causing a property bubble). It also strengthened local forex rates (increases of 25%-47% for the Philippines specifically) , as well as increased domestic bank lending.
  13. 13. During the mid 90’s the Chinese and Japanese currencies devalued, the US increased interest rates and this resulted in a stronger US $. The stronger US $ made local exports less attractive. Also semi-conductor prices reduced sharply just as manufacturing capacity came online.
  14. 14. In Malaysia, Taiwan and Thailand, credit to the private sector as % of GDP increased to
  15. 15. Credit and investment control was weakly regulated, and there were many underperforming loans.
  16. 16. The regional financial industry was in a rush to deregulate and started removing restrictions on capital flows. This was done too fast, thereby exposing hitherto unknown weaknesses in the system.
  17. 17. Foreign banks were allowed to speculate with local and foreign currency, supervision was weakened and local banks loaned recklessly. No financial and regulatory control network was timeously put in place.
  18. 18. On 5 FEB 1997 Somprasong Land, a Thai property developer, announced that it had defaulted on a scheduled $3.1 million interest payment on an $80 billion Eurobond loan.
  19. 19. Bad debts quickly rose, as it became apparent the construction industry was under water by more than Despite government intervention, the shares in Finance One (Thailand's biggest Financial Institution) fell by 70% after an arranged take-over failed, and it too was soon bankrupt.
  20. 20. On 14 - 15 May 1997, the Thai Baht, which previously was pegged at 25 baht against the US $, was hit by massive
  21. 21. The Thai government used up $ 5 billion of foreign exchange but was unable to defend the Baht. After initially refusing, they floated the currency within days after the attack.
  22. 22. The Malaysian Ringgit and Indonesian Rupiah were “attacked” next. Indonesia had to implement a free-floating exchange rate on 14 August 1997.
  23. 23. The Hong Kong Dollar was targeted in October 2007, but due to Hong Kong having sufficient foreign reserves, they successfully managed to defend their currency.
  24. 24. South Korea Won Us $ 1 vs local currency Indonesian Rupiah Thai Baht Source: www.tradingeconomics.com
  25. 25. The sharp currency devaluations lead to credit ratings being lowered. Many foreign investors called in or revoked their loans and withdrew investments e.g. Japan (further negatively affecting the currency in the process).
  26. 26. 200.00 NET PRIVATE CAPITAL FLOWS 150.00 BILLION US$ 100.00 50.00 INFLOW OUTFLOW 0.00 1994-1995 1996 1997 -50.00 -100.00 -150.00 Source: Bank of International Settlements (http://www.ifg.org/khor.html)
  27. 27. The crisis wave spilled from one market to the next. Foreign debts skyrocketed with near catastrophic consequences as local firms’ debt repayment had become much more expensive now.
  28. 28. Some tried selling assets and inventories to generate cash, resulting in lower prices for their assets, whilst increasing the demand and cost of foreign currency.
  29. 29. Non-performing companies faltered. Financial institutions collapsed. Massive lay-offs followed and the economies grinded to a halt. Thailand e.g. sent 600 000 foreign workers back to their home countries. Ministers stepped down in the wake of the crisis.
  30. 30. LIKED THIS PRESENTATION? Tell a friend - ”Like” or “tweet” this presentation now
  31. 31. Asia Debt and Currency Crisis – Sources and further reading http://www.ifg.org/khor.html http://www.tradingeconomics.com http://internationalinvest.about.com/od/getti ngstarted/a/What-Was-The-Asian-FinancialCrisis.htm http://www.wright.edu/~tdung/asiancrisishill.htm http://www.fes.de/ipg/ipg2_98/debschulmeis ter.html http://en.wikipedia.org/wiki/1997_Asian_finan cial_crisis http://pendientedemigracion.ucm.es/info/eid /pb/ICEIwp10.pdf http://www.uv.es/~mperezs/intpoleco/Lectu rcomp/Geoeconomia%20y%20Globalizacion/A sian%20crisis%20de%20King.pdf http://www.imf.org/external/np/pp/eng/201 2/031312.pdf http://www.ucm.es/info/icei/asia/Bustweb1.h tm HTtp://www.newyorkfed.org/research/econo mists/pesenti/whatjapwor.pdf http://www.twnside.org.sg/title/fire-cn.htm https://www.mtholyoke.edu/courses/sgabriel /ilene_grabel.htm http://www.imf.org/external/np/seminars/en g/2006/cpem/pdf/kihwan.pdf
  32. 32. This presentation is provided in the sake of public interest, and has been compiled based on publically available information sources on the web. While great care has been taken in the preparation and compilation of information indicated here, the author does not accept any legal or other liability for any inaccuracy, mistake, misstatement or any other error of whatsoever nature contained herein. This presentation is not investment advice, not a solicitation for any type of investment, financial or otherwise, nor is this presentation an opinion expressed on, nor endorsement of markets, commodities or investments. Any names, trademarks and images are copyright their respective owners and rights in the graphic artwork and photos used in this presentation belongs to, and are courtesy of the respective owners thereof. Unless where otherwise indicated, I don’t claim to have any rights therein.