Asian Financial Crisis


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Asian Financial Crisis

  1. 1. 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
  2. 2. Objectives <ul><li>THE MAJOR CAUSES OF THE CRISIS </li></ul><ul><li>SPILL OVER EFFECT ON SPECIFIC COUNTRY: United State of America </li></ul>
  3. 3. General Overview <ul><li>The most important effects of the Asian crisis on the US economy worked through international trade: </li></ul><ul><ul><li>In 1996, US trade with East Asia accounted for 30% of export, and 40% of import of goods </li></ul></ul><ul><ul><li>In 1997 export of good and service to East Asia represented 11.9% of U.S. GDP (only 4.8% in 1960) </li></ul></ul><ul><ul><li>Capital transfer, Investments </li></ul></ul><ul><li>Asian financial crisis exerted mixed effects on US employment and economic activities, depressed some sectors and stimulated other sectors </li></ul><ul><ul><li>Reduced export ( by 12% in 1998 !) </li></ul></ul><ul><ul><li>Increased Import </li></ul></ul><ul><ul><li>Domestic demand boosted (lower commodities price)! </li></ul></ul><ul><ul><li>Lower interest and inflation rates ! </li></ul></ul>
  4. 4. Access to financing in Asia <ul><li>Companies in Asia tend to rely more on bank borrowing than on issuing bonds or stocks </li></ul><ul><li>Government preferred development financial baking system with banks => can control and regulate who access to loan. </li></ul><ul><li>Well-connected with bank and government tend to have best access to financing </li></ul>
  5. 5. Private sector debt and poor loan quality <ul><li>Borrowed short-term loan for long term projects like infrastructure and real estate development. </li></ul><ul><li>Type of borrower has shifted away from the government and central banks to banks and non-bank private sector </li></ul><ul><li>Exchange rate fluctuate only within narrow band and has been aligned with dollar </li></ul>
  6. 6. Maturity Distribution <ul><li>( Proportion of loans with maturity one year or less at the end of 1996) </li></ul>62 68 84 65 50
  7. 7. Causes of the crisis (1) <ul><li>Inadequately development financial services sector </li></ul><ul><li>Lack of control and sufficient regulations in capital market </li></ul><ul><li>Close alignment between the local currency and US dollar </li></ul>
  8. 8. Causes of the crisis (2) <ul><li>Weakening Economic performance and balance of payment difficulties </li></ul><ul><li>Currency speculation </li></ul><ul><li>Technological changes financial market </li></ul><ul><li>Lack of confidence in the ability of the governments in questions to resolve their problems successfully. </li></ul>
  9. 9. Why United State ? <ul><li>American is major investor in the region </li></ul><ul><li>Financial market is interlink and U.S financial market is most efficient one </li></ul><ul><li>The currency turmoil effect the U.S. imports, exports and value of US dollar </li></ul><ul><li>US activities in IMF: Funding and legislative issues in operation </li></ul>
  10. 10. Spill over mechanism (1) <ul><li>Macroeconomic level </li></ul><ul><ul><li>Economic growth </li></ul></ul><ul><ul><li>Flows of trade </li></ul></ul><ul><ul><li>Capital flows </li></ul></ul><ul><ul><li>Exchange and interest rates </li></ul></ul>
  11. 11. Spill over mechanism (2) <ul><li>Microeconomic level on each industry </li></ul><ul><ul><li>Competition </li></ul></ul><ul><ul><li>Price </li></ul></ul><ul><ul><li>Demand </li></ul></ul><ul><ul><li>Business opportunities </li></ul></ul><ul><ul><li>Revenues and profits of firms </li></ul></ul>
  13. 13. Macro Economic performance indicators <ul><li>GDP growth rate </li></ul><ul><li>Export/Import </li></ul><ul><li>Capital flows </li></ul><ul><li>Inflation/Consumer price index </li></ul><ul><li>Interest rates </li></ul><ul><li>Exchange rates </li></ul>
  14. 14. Devaluation of currencies Malaysia Indonesia
  15. 15. Devaluation of currencies Philippines Thailand
  16. 16. Trade Balance (Billions U.S.Dollar)
  17. 17. Current Account <ul><li>Asian countries group is third trade partner of United States after EU and Japan </li></ul>
  18. 18. Trade deficit between USA- Asia Million $
  19. 19. Why steady deficit …? <ul><li>Slowdown of Asia economies => Less demand for export </li></ul><ul><li>Drop in value of Asia currencies and appreciation of U.S. Dollar => raise cost and price for export and decrease those of import. </li></ul><ul><li>High unemployment rate in many Asia countries => Very low wage for many labor intensive export </li></ul><ul><li>Surplus in capital account implied an rise in the deficit in current account </li></ul>
  20. 20. FDI in United States (Millions $)
  21. 21. Interest Rate
  22. 22. Interest rate <ul><li>Less demand for lending abroad </li></ul><ul><li>Shift liquid capital from troubled Asia to invest in United states </li></ul><ul><li>Encourage domestic borrowing </li></ul><ul><li>Steady grow of domestic home construction and vehicle sale (deposit selling) </li></ul><ul><li>Positive effect for economic growth !!! </li></ul>
  23. 23. Consumer Price Index
  24. 24. Lower inflation <ul><li>Low price of goods as result of competion between domestic and export one </li></ul><ul><li>Low price of oil because of falling demand in Asia of oil and other commodities </li></ul><ul><li>Higher purchasing power </li></ul>
  25. 25. Inflation Rate
  26. 26. Oil Price at Crisis Period <ul><li>Fallen 30% to end of 1997 </li></ul>Down price
  27. 27. United States Personal Income ( Per Capita )
  28. 28. Blessing… or Curse…(1) <ul><li>Forecaste U.S. Economic grown with slowdown pace from 3.8% in 1997 to 2,5% in 1998: </li></ul><ul><ul><li>Losess in loan and financial intrument in troubled Asia </li></ul></ul><ul><ul><li>Steady deficit in balace of trade </li></ul></ul><ul><ul><li>Bad status of U.S. subsidiaries and direct investment projects in Asia </li></ul></ul><ul><ul><li>Contribution of the States to IMF to deal with the crisis (1.8 billion of U.S. Dollar) </li></ul></ul>
  29. 29. Real Growth Rate of GDP
  30. 30. Blessing… or Curse…(2) <ul><li>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: </li></ul><ul><ul><li>Increase capital inflow </li></ul></ul><ul><ul><li>Eased the upward pressure on U.S. interest rate </li></ul></ul><ul><ul><li>Encourage domestic business grow </li></ul></ul><ul><ul><li>Economies of Asia countries are more open </li></ul></ul><ul><ul><li>Opportunities to takeover companies with bad financial condition in Asia </li></ul></ul>
  31. 31. S & P 500 Index
  33. 33. Major sectors affected (1) <ul><li>Creditors and investors in Asia suffered loses: </li></ul><ul><ul><li>U.S. bank, pension funds, and investors suffered loses </li></ul></ul><ul><li>Exporters to Asia faced declining demand: </li></ul><ul><ul><li>U.S. makers of major export items (heavy equipment, aircraft, manufacturing machinery and agricultural commodities) </li></ul></ul><ul><li>Producers of commodities used in the manufacture of products in Asia: </li></ul><ul><ul><li>e.g. chemicals, cotton,copper, and rubber </li></ul></ul><ul><li>Businesses competing with import from Asia faced increasing competition and downward pressure on prices: </li></ul><ul><ul><li>e.g. automobiles, apparel, consumer electronics, steel, etc. </li></ul></ul>
  34. 34. Major sectors affected ( 2 ) <ul><li>Labor engaged in manufacturing competing products hurt by Asian depreciation </li></ul><ul><li>Businesses that sell import from Asia gained opportunities: </li></ul><ul><ul><li>distributors and retailers of products from trouble Asian economies (e.g. Korean automobile dealers) </li></ul></ul><ul><li>U.S. MNCs seeking market access in Asia, particularly in financial sectors gain opportunities: </li></ul><ul><ul><li>lessened entry barriers </li></ul></ul><ul><ul><li>acquisition of existing firms that needed restructuring and recapitalization at relatively low prices </li></ul></ul>
  35. 35. Major sectors affected ( 3 ) <ul><li>U.S. MNCs with manufacturing subsidiaries in Asia faced difficulties and stagnation: </li></ul><ul><ul><li>60% of their output is sold in the region, local sales stagnated </li></ul></ul><ul><ul><li>excess capacity </li></ul></ul><ul><ul><li>rising costs of import in countries with depreciated currencies </li></ul></ul><ul><ul><li>falling price of finished export to U.S. and other hard currency markets </li></ul></ul><ul><li>Industries that use components from Asia benefit on lower costs of production </li></ul>
  36. 36. Implication of The Asian crisis for the U.S Economic Sectors <ul><li>Sectors reviewed: </li></ul><ul><ul><ul><li>Financial </li></ul></ul></ul><ul><ul><ul><li>Agriculture </li></ul></ul></ul><ul><ul><ul><li>High-tech </li></ul></ul></ul><ul><ul><ul><li>Textile </li></ul></ul></ul><ul><ul><ul><li>Steel </li></ul></ul></ul><ul><ul><ul><li>Paper </li></ul></ul></ul>
  37. 37. Claims on Asian Countries by United States ailand
  38. 38. Financial sector <ul><li>Citicorp: </li></ul><ul><ul><li>Net income dropped from $224 m in 1996 to 218 m in 1997 </li></ul></ul><ul><li>J.P. Morgan: </li></ul><ul><ul><li>Reported NPL of $587 m of its total $5.4 billion in loan, swaps, and debt investment in Indonesia, Thailand and S. Korea </li></ul></ul><ul><ul><li>Considered about 60% of its allowance for creditr losses of $1.08billion to be related to exposures in these three countries </li></ul></ul>
  39. 39. Hi-Tech industry (1) <ul><li>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) </li></ul><ul><li>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. </li></ul><ul><li>U.S. high-tech merchandise exports decline first time in this decade (William T. Archey, AEA president and chief executive) </li></ul>
  40. 40. Hi-tech industry ( 2 ) <ul><ul><li>For the first nine months of 1998: </li></ul></ul><ul><ul><ul><li>Electronics exports to Mexico grew nearly 10%, or 1.2 billion, the largest dollar gain. </li></ul></ul></ul><ul><ul><ul><li>China bought 40% more electronics goods from the U.S., an increase of $612 million. </li></ul></ul></ul><ul><ul><ul><li>Exports to Europe and Canada, two major U.S. high-tech export destinations, grew 2.5% and 1.8% respectively. </li></ul></ul></ul><ul><ul><ul><li>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. </li></ul></ul></ul><ul><ul><ul><li>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 . </li></ul></ul></ul>
  41. 41. AGRICULTURE (1) <ul><li>Why the Asian Crisis influence on U.S. Agriculture ? </li></ul><ul><li>Changes in exchange rates of currencies relative to the </li></ul><ul><li>U.S. dollar made U.S. agricultural products more </li></ul><ul><li>expansive </li></ul><ul><li>Dramatically slower income growth and actual drops in income lowered the purchasing power of Asian consumers </li></ul><ul><li>The international financial bailouts of some Asian countries required change in trade policies </li></ul><ul><li>Economic problems in Asia are a drag on economic growth elsewhere. this affects demand for farm goods in all markets, not just in Asia </li></ul>
  42. 42. AGRICULTURE (2) <ul><li>There are two effects in the U.S. agriculture : </li></ul><ul><li>- First, quantities shipped to Asia decline </li></ul><ul><li>- Second, the dollar prices of agricultural commodities </li></ul><ul><li>are lower than they would have been in all markets </li></ul><ul><li>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 </li></ul>
  43. 43. 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
  44. 44. TEXTILE INDUSTRY (1) <ul><li>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 </li></ul><ul><li>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. </li></ul><ul><li>The results is U.S. textile products have plummeted since 1997, U.S textile profits have evaporated, and last year, turned sharply negative </li></ul><ul><li>Textile fiber consumption is down almost 30% since the </li></ul><ul><li>Asian crisis began </li></ul>
  45. 45. TEXTILE INDUSTRY ( 2 ) <ul><li>Over the last 12 months, the U.S. textile crisis has intensified </li></ul><ul><li>as Asian currencies have continued to fall : </li></ul><ul><li>- over 100 textile plants in the U.S. have been closed </li></ul><ul><li>- textile industry employment was down nearly 60,000 , or </li></ul><ul><li>more than ten percent of the U.S. textile workforce </li></ul><ul><li>- In year 2000 was the first annual loss for the textile </li></ul><ul><li>industry in the more than 50 years </li></ul>
  46. 46. STEEL INDUSTRY (1) <ul><li>One of the most productive and cost effective in the world: </li></ul><ul><ul><li>invested more than $35 billion in new plant and equipment since 1995 – far more than any other nation. </li></ul></ul><ul><ul><li>Labor productivity has increased by 174% since 1980.  During the same time period, real wages (adjusted for inflation) for American steelworkers have remained stagnant </li></ul></ul><ul><li>Steel is still the backbone of industrial America: </li></ul><ul><ul><li>Nearly 2 million Americans are directly and indirectly employed by the steel industry. </li></ul></ul><ul><ul><li>Key steel-consuming industries employ 6 million U.S. workers, representing nearly 15% of the GNP. </li></ul></ul>
  47. 47. STEEL INDUSTRY ( 2 ) <ul><li>14 steel companies have filed for bankruptcy since the crisis began in 1997. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>Prices for steel products have fallen below their low point during the Asian crisis. </li></ul><ul><li>More than 15,000 steelworker jobs have been lost since January 1998 – 8,400 in the last six months. </li></ul><ul><li>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. </li></ul>
  48. 48. PAPER INDUSTRY <ul><li>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 </li></ul><ul><li>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 </li></ul><ul><li>Harnishfeger has lost its sales because of Asian Financial crisis </li></ul>
  49. 49. CONCLUSIONS <ul><li>Both positive and negative impacts on United State economy </li></ul><ul><li>Wider effect on specific industries at microeconomic level </li></ul><ul><li>Impact was minor on macroeconomic level </li></ul><ul><li>International trade and capital market tied the world together </li></ul>
  50. 50. Sources of Information ? <ul><li>IMF, WB, WTO, ADB websites </li></ul><ul><li>CRS Report for Congress </li></ul><ul><li>Countries Reports </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul><ul><li>……… ... </li></ul>